<PAGE>
Annual Report June 30, 1998
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The
Montgomery
Funds
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[ARTWORK APPEARS HERE]
Invest wisely.(R)
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The Montgomery Funds
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Annual Report
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June 30, 1998
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C O N T E N T S
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Portfolio Highlights and Investments
Montgomery U.S. Equity Punds
- ---------------------------------------------------
Growth Fund .................................... 5
Small Cap Opportunities Fund ................... 9
Small Cap Fund ................................. 12
U.S. Emerging Growth Fund ...................... 16
Equity Income Fund ............................. 20
Montgomery International
and Global Equity Funds
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International Growth Fund ...................... 23
International Small Cap Fund ................... 27
Emerging Markets Fund .......................... 31
Emerging Asia Fund ............................. 37
Latin America Fund ............................. 40
Global Opportunities Fund ...................... 43
Global Communications Fund ..................... 47
Montgomery Multi-Strategy Funds
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Select 50 Fund ................................. 51
U.S. Asset Allocation Fund ..................... 54
Montgomery U.S. Fixed-Income
and Money Market Funds
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Total Return Bond Fund ......................... 56
Short Duration Government Bond Fund ............ 60
California Tax-Free Intermediate Bond Fund ..... 64
Government Reserve Fund ........................ 69
California Tax-Free Money Fund ................. 69
Federal Tax-Free Money Fund .................... 69
Financial Statements
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Statements of Assets and Liabilities............ 80
Statements of Operations ....................... 86
Statements of Changes in Net Assets............. 90
Statements of Cash Flows ....................... 94
Financial Highlights ........................... 96
Notes to Financial Statements ..................104
Independent Auditors' Report ...................118
Tax Information ................................119
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 $5 billion in the Funds on behalf of over 300,000
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
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(800) 572-FUND [3863]
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www.montgomeryfunds.com
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The Montgomery Funds
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Annual Report
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June 30, 1998
CHAIRMAN'S LETTER
Dear Fellow Shareholder:
I frequently take the opportunity during my semiannual letter to remind
shareholders of the need to take a long-term view toward their investments,
particularly when it comes to mutual funds. This time I'd like to touch on
diversification, an equally important topic that is particularly pertinent right
now.
We currently find ourselves at an interesting junction on the global investment
highway. Financial markets, such as those in the emerging markets and the United
States, that were speeding upward at a seemingly unstoppable pace just a few
years ago have either crashed or are beginning to stall. In contrast, markets
that appeared to have been left at the starting line, such as many of those in
Europe, began to pick up pace in the 1996/97 financial year and now appear to be
accelerating.
It is almost impossible for an individual investor to have anticipated the exact
timing of the dips and curves in the road of each market, which is why
diversification is so important. How many of us remember the early 1990s, when
returns in the developed markets were relatively meager and if you weren't
invested in emerging markets you were not on the winning team? For now, the
emerging markets are out of favor, but how long will it be until the tables are
turned once again? The point I want to make here is that, over the long term,
diversification helps smooth out the rough spots.
I realize that most investors are already familiar with the concept of
diversification, but the practice of looking at your investments as a whole
rather than individually can be difficult to follow. After large-cap stocks
outperform, it is tempting--and natural--to want to buy more. But do we make our
future investment decisions while constantly looking in the rearview mirror, or
do we retain a forward-looking focus?
At Montgomery we understand that diversification plays an important role both
within and across our portfolio of Funds. For example, by diversifying our
investments in the Montgomery developed International Funds, our overweight
position in the buoyant European markets more than compensated for the poor
performance of Japan. As a result, Funds such as Montgomery Global Opportunities
and Montgomery International Growth have turned in strong results over the year.
Both of these Funds outperformed their benchmarks and earned five-star ratings
from Morningstar for the three-year period ended June 30, 1998, for their
risk/return profile./1/ The Montgomery Global Opportunities Fund and Montgomery
International Growth Fund were ranked among 778 international equity funds over
the three-year period. Similarly, investors who have remained prudently
diversified through the peaks and valleys of the 1990s have maintained good
overall returns while at the same time affording themselves protection against
more-turbulent times.
I realize that the tenets of successful investing run counter to human nature. I
would urge you, however, to keep focused on your portfolio's performance as a
whole in order to achieve the goals you had when you started your investment
program. This is the key to investing wisely.
Sincerely,
/s/ R. Stephen Doyle
R. Stephen Doyle
Chairman
July 1998
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"It is almost impossible for an individual investor to have anticipated the
exact timing of the dips and curves in the road of each market, which is why
diversification is so important."
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[LOGO OF THE MONTGOMERY FUNDS APPEARS HERE]
/1/ Past performance is no guarantee of future results. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of
6/30/98. The ratings are subject to change every month. The ratings
are calculated from the fund's three-, five- and 10-year average
annual returns (if available) in excess of 90-day Treasury bill
returns with appropriate fee adjustments and a risk factor that
reflects fund performance below 90-day T-bill returns. Ten percent of
funds in a rating universe receive five stars. Ratings are for the
Class R shares only. The International Growth Fund also offers Class P
shares whose ratings may be different.
1
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The Montgomery Funds
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Annual Report
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June 30, 1998
STOCK AND BOND MARKET OVERVIEW
The U.S. Stock Market
Looking at the performance figures for the broad U.S. market indices for the
past 12 months, it would be easy to assume that investors had enjoyed another
banner year. Nonetheless, a deeper analysis reveals that this has not been the
case. Over the course of the financial year, the breadth of the market was quite
limited. The performance of small-cap stocks, in particular, significantly
lagged that of large-cap stocks. The Russell 2000 Growth Index, a leading
benchmark for small-cap growth investing, returned 13.19%, less than half of the
30.20% return for the S&P 500. This suggests that a two-tiered market has
developed. Even characterizing the market as two-tiered doesn't tell the whole
story, however. Investor focus became so narrow that even the majority of
large-cap stocks struggled to keep pace with a handful of the largest stocks.
During the first half of 1998, the S&P 500 Index was up 17.14%, but more than
25% of index performance was driven by just six stocks--Microsoft, GE, Lucent,
Wal-Mart, Coca Cola and Pfizer. As further evidence of this trend, 18 stocks
represented more than 50% of S&P 500 performance year-to-date through June 30,
1998; and from April 1998 through June 30, more stocks actually declined in
price than advanced.
In addition to being concentrated in a handful of companies, activity was
confined to a small number of sectors. The strongest sectors were those with
direct exposure to the U.S. consumer. There were good reasons for this, as
strong consumer expenditures continue to power the economy. Consumer confidence
has remained buoyant on the back of a strong employment market, low inflation
and interest rates, and the "wealth effect" created by the rising stock market.
In contrast, performance was decidedly mixed in other market sectors, in
particular those sectors vulnerable to falling commodity prices, despite the
fact that they also benefited from the healthy U.S. economy and still have
attractive long-term earnings potential. This poses the inevitable question:
THE S&P 500 INDEX
PERFORMANCE:
July 1, 1997, to June 30, 1998
<TABLE>
<CAPTION>
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DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
F F 6/12 1098.84 528MLN F 5/22 1110.47 370MLN
T T 6/11 1094.58 498MLN T 5/21 1114.64 449MLN
W W 6/10 1112.28 481MLN W 5/20 1119.06 486MLN
T 6/30 1133.84 558MLN T 6/ 9 1118.41 424MLN T 5/19 1109.52 457MLN
M 6/29 H1138.49 436MLN M 6/ 8 1115.72 420MLN M 5/18 1105.82 424MLN
F 6/26 1133.20 426MLN F 6/ 5 1113.86 495MLN F 5/15 1108.73 521MLN
T 6/25 1129.28 586MLN T 6/ 4 1094.83 506MLN T 5/14 1117.37 469MLN
W 6/24 1132/88 647MLN W 6/ 3 1082.73 497MLN W 5/13 1118.86 513MLN
T 6/23 1119/49 635MLN T 6/ 2 1093.22 522MLN T 5/12 1115.79 489MLN
M 6/22 1103/22 451MLN M 6/ 1 1090.98 495MLN M 5/11 1106.64 469MLN
F 6/19 1100.65 590MLN F 5/29 1090.82 443MLN F 5/ 8 1108.14 448MLN
T 6/18 1106.37 497MLN T 5/28 1097.59 462MLN T 5/ 7 1095.14 469MLN
W 6/17 1107.10 616MLN W 5/27 1092.23 538MLN W 5/ 6 1104.92 468MLN
T 6/16 1087.59 567MLN T 5/26 1094.02 426MLN T 5/ 5 1115.50 420MLN
M 6/15 1077.01 498MLN M 5/25 M 5/ 4 1122.07 423MLN
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<CAPTION>
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DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
F 5/ 1 1121.00 428MLN F 4/10 F 3/20 1099.16 572MLN
T 4/30 1111.75 533MLN T 4/ 9 1110.67 412MLN T 3/19 1089.74 444MLN
W 4/29 1094.63 479MLN W 4/ 8 1101.65 492MLN W 3/18 1085.52 491MLN
T 4/28 1085.11 526MLN T 4/ 7 1109.55 567MLN T 3/17 1080.45 539MLN
M 4/27 1086.54 554MLN M 4/ 6 1121.39 523MLN M 3/16 1079.27 435MLN
F 4/24 1107.90 485MLN F 4/ 3 1122.70 516MLN F 3/13 1068.61 484MLN
T 4/23 1119.58 524MLN T 4/ 2 1120.01 523MLN T 3/12 1069.92 479MLN
W 4/22 1130.54 564MLN W 4/ 1 1108.15 527MLN W 3/11 1068.47 520MLN
T 4/21 1126.67 534MLN T 3/31 1101.75 489MLN T 3/10 1064.25 545MLN
M 4/20 1123.65 464MLN M 3/30 1093.55 380MLN M 3/ 9 1052.31 553MLN
F 4/17 1122.72 533MLN F 3/27 1095.44 477MLN F 3/ 6 1055.69 560MLN
T 4/16 1108.17 581MLN T 3/26 1100.80 459MLN T 3/ 5 1035.04 623MLN
W 4/15 1119.32 558MLN W 3/25 1101.93 582MLN W 3/ 4 1047.33 525MLN
T 4/14 1115.75 491MLN T 2/24 1105.65 482MLN T 3/ 3 1052.02 519MLN
M 4/13 1109.69 479MLN M 3/23 1095.55 498MLN M 3/ 2 1047.70 477MLN
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DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
F 2/27 1049.34 502MLN F 2/ 6 1012.46 465MLN F 1/16 961.51 552MLN
T 2/26 1048.67 522MLN T 2/ 5 1003.54 570MLN T 1/15 950.73 483MLN
W 2/25 1042.90 491MLN W 2/ 4 1006.90 555MLN W 1/14 957.94 521MLN
T 2/24 1030.56 482MLN T 2/ 3 1005.99 556MLN T 1/13 952.12 548MLN
M 2/23 1038.14 456MLN M 2/ 2 1001.27 568MLN M 1/12 939.21 599MLN
F 2/20 1034.21 498MLN F 1/30 980.28 482MLN F 1/ 9 L927.69 640MLN
T 2/19 1028.28 495MLN T 1/29 985.49 629MLN T 1/ 8 956.04 517MLN
W 2/18 1032.06 458MLN W 1/28 977.46 598MLN W 1/ 7 964.00 528MLN
T 2/17 1022.76 457MLN T 1/27 969.02 533MLN T 1/ 6 966.58 501MLN
M 2/16 M 1/26 956.95 441MLN M 1/ 5 977.07 450MLN
F 2/13 1020.09 388MLN F 1/23 957.59 492MLN F 1/ 2 975.04 312MLN
T 2/12 1024.14 497MLN T 1/22 963.04 512MLN
W 2/11 1020.01 472MLN W 1/21 970.81 530MLN
T 2/10 1019.01 518MLN T 1/20 978.60 516MLN
M 2/ 9 1010.74 422MLN M 1/19
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DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
F F 12/12 953.39 503MLN F 11/21 963.09 498MLN
T T 12/11 954.94 558MLN T 11/20 958.98 478MLN
W 12/31 970.43 345MLN W 12/10 969.79 556MLN W 11/19 944.59 401MLN
T 12/30 970.84 366MLN T 12/ 9 975.78 600MLN T 11/18 938.23 420MLN
M 12/29 953.36 327MLN M 12/ 8 982.37 384MLN M 11/17 946.20 485MLN
F 12/26 936.46 121MLN F 12/ 5 H983.79 447MLN F 11/14 928.35 526MLN
T 12/25 T 12/ 4 973.10 480MLN T 11/13 916.66 557MLN
W 12/24 932.70 214MLN W 12/ 3 976.77 513MLN W 11/12 905.96 531MLN
T 12/23 939.12 375MLN T 12/ 2 971.68 467MLN T 11/11 923.78 390MLN
M 12/22 953.70 410MLN M 12/ 1 974.77 474MLN M 11/10 921.13 440MLN
F 12/19 946.78 715MLN F 11/28 955.44 145MLN F 11/ 7 927.51 500MLN
T 12/18 955.30 515MLN T 11/27 T 11/ 6 938.03 418MLN
W 12/17 965.54 489MLN W 11/26 951.64 369MLN W 11/ 5 942.76 456MLN
T 12/16 968.04 489MLN T 11/25 950.82 469MLN T 11/ 4 940.76 435MLN
M 12/15 963.39 529MLN M 11/24 946.67 405MLN M 11/ 3 938.99 456MLN
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DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
F 10/31 914.62 515MLN F 10/10 966.98 336MLN F 9/19 950.51 521MLN
T 10/30 903.68 505MLN T 10/ 9 970.62 393MLN T 9/18 947.29 456MLN
W 10/29 919.16 568MLN W 10/ 8 973.84 443MLN W 9/17 943.00 485MLN
T 10/28 921.85 L404MLN T 10/ 7 983.12 451MLN T 9/16 945.64 522MLN
M 10/27 L876.98 508MLN M 10/ 6 972.69 393MLN M 9/15 919.77 371MLN
F 10/24 941.64 536MLN F 10/ 3 965.03 521MLN F 9/12 923.91 421MLN
T 10/23 950.69 556MLN T 10/ 2 960.46 427MLN T 9/11 912.59 481MLN
W 10/22 968.49 485MLN W 10/ 1 955.41 592MLN W 9/10 919.03 436MLN
T 10/21 972.28 490MLN T 9/30 947.28 430MLN T 9/ 9 933.62 427MLN
M 10/20 955.61 438MLN M 9/29 953.34 351MLN M 9/ 8 931.20 359MLN
F 10/17 944.16 606MLN F 9/26 945.22 391MLN F 9/ 5 929.05 420MLN
T 10/16 955.25 547MLN T 9/25 937.91 425MLN T 9/ 4 930.87 420MLN
W 10/15 965.72 509MLN W 9/24 944.48 502MLN W 9/ 3 927.86 437MLN
T 10/14 970.28 398MLN T 9/23 951.93 419MLN T 9/ 2 927.58 387MLN
M 10/13 968.10 258MLN M 9/22 955.43 387MLN M 9/ 1
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DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
F 8/29 899.47 312MLN F 8/ 8 933.54 491MLN F 7/18 915.30 513MLN
T 8/28 903.67 417MLN T 8/ 7 951.19 479MLN T 7/17 931.61 531MLN
W 0/27 913.70 416MLN W 8/ 6 960.32 479MLN W 7/16 936.59
T 8/26 913.02 397MLN T 8/ 5 952.37 405MLN T 7/15 925.76 494MLN
M 8/25 920.16 322MLN M 8/ 4 950.30 362MLN M 7/14 918.38 400MLN
F 8/22 923.54 441MLN F 8/ 1 947.14 410MLN F 7/11 916.68 410MLN
T 8/21 925.05 459MLN T 7/31 954.29 440MLN T 7/10 913.78 441MLN
W 8/20 939.35 435MLN W 7/30 952.29 433MLN W 7/ 9 907.54 491MLN
T 8/19 926.01 478MLN T 7/29 942.29 426MLN T 7/ 8 918.75 386MLN
M 8/18 912.49 451MLN M 7/28 936.45 357MLN M 7/ 7 912.20 393MLN
F 8/15 900.81 434MLN F 7/25 938.79 419MLN F 7/ 4
T 8/14 924.77 421MLN T 7/24 940.28 461MLN T 7/ 3 916.92 288MLN
W 8/13 922.02 521MLN W 7/23 936.56 494MLN W 7/ 2 904.03 414MLN
T 8/12 926.53 434MLN T 7/22 933.98 457MLN T 7/ 1 891.03 411MLN
M 8/11 937.00 440MLN M 7/21 912.94 390MLN
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</TABLE>
The S&P 500 recorded new highs by the end of the year. The apparently stellar
performance of the index disguised how narrowly based the bull market had
become. From January 1, 1998, to June 30, 1998, just six stocks accounted for
more than 25% of performance.
What was driving investors to concentrate their holdings to such a degree? Also,
what implications does this have for the broader market?
While the strength of the U.S. economy, a low inflation rate and a strong dollar
remained the driving forces behind investor interest in the market, the
exuberance generated by such good times was tempered by the situation in Asia.
The impact of the Asian currency crisis and subsequent economic slowdown clouded
the earnings outlook for companies with exposure to the region. It was this
latter factor that was a major contributor to the market's narrowing focus.
Domestic investors continued their strong preference for large-cap, recognized
brand names, as these companies were perceived to be more immune to global
uncertainty. An influx of foreign capital enhanced this trend. The buoyant
market, a strong U.S. dollar and a "flight to quality" triggered by the currency
crisis in Asia attracted global capital at a rapid rate. Foreign investors
pumped some $29 billion into the market in the first quarter of 1998 alone. Many
of these investors chose to either match the large-cap market indices or invest
in well-known companies, duplicating domestic investors' preferences.
In our view the concentration on the Asian situation at the expense of other
offsetting fundamentals has left the few top-performing stocks overvalued. In
contrast, the remainder of the market offers some very strong companies with
attractive growth prospects that are currently undervalued. As more and more
investors become nervous of the high valuations currently enjoyed by the most
popular large-cap stocks, we expect there to be a noticeable shift toward the
more attractively valued issues, which exhibit far better long-term earnings
prospects. In particular, there are now some interesting opportunities in the
small-cap arena. Small-cap stocks are currently trading at their lowest
valuations relative to large-cap stocks in at least 15 years. While larger
companies have had their earnings projections pared back in recent months, many
smaller companies, and particularly those with a largely domestic focus, still
have earnings-growth projections of greater than 20%.
International Equities
Over the past 12 months, the best-performing international markets were in
Europe. Indeed, many European markets registered better returns than those of
the U.S. domestic markets. An environment of low interest rates, moderate
economic growth and a burgeoning European equity culture, coupled with the
business opportunities being created by the coming Economic and Monetary Union
(EMU), continued to attract investors to the region. The deregulation of the
pension fund system and an increase in corporate restructuring also contributed
to solid overall returns. Investment activity was strong across the board.
2
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The Montgomery Funds
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Annual Report
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June 30, 1998
In contrast to Europe, Japan continued to be a disappointment in the eyes of
investors. The market received a boost in April, when Japanese officials
announced a $115 billion economic stimulation package, and again in June, when
the government unveiled its plan to form a "bridge bank," modeled after the U.S.
Resolution Trust Corporation, to take over bad loans from troubled lenders.
These and other announced policy changes aimed at lifting the economy out of
recession, however, have fallen short of expectations thus far. Most investors
agree that a greater degree of restructuring and financial deregulation is
needed to cure the country's economic ills.
On the whole, the emerging markets have also faired poorly over the past 12
months. The devaluation of the Thai baht at the beginning of the financial year
started a chain reaction throughout Southeast Asia, resulting in the devaluation
of regional currencies and selling pressure in regional stock markets. These
financial difficulties were further aggravated by noneconomic events, including
rioting in Indonesia and nuclear testing in India and Pakistan. A huge bailout
package by the International Monetary Fund (IMF) announced at the beginning of
1998 offered some respite, but the positive effect of the rescue package on the
financial markets was offset by a decline in the value of the Japanese yen,
which sparked investor fears of another round of Southeast Asian currency
devaluations. As investment capital left Asia for safer havens during the year,
negative sentiment proved infectious. Emerging markets in other regions also
began to experience capital flight. Capital-dependent countries from Brazil to
South Africa were forced to raise short-term interest rates, risking future
growth prospects in order to stabilize their currencies and continue to attract
investors. This resulted in short-term market volatility across the asset class.
There were some bright spots in the emerging markets picture, however. With the
exception of Russia, European emerging markets suffered far less volatility than
their counterparts in Asia, Latin America and Africa, and some continued to
achieve good returns. Greece was the standout, benefiting from the positive
investor sentiment currently enveloping European Union countries ahead of the
introduction of the EMU. Poland and Hungary, which are candidates for accession
to the European Union, also gained from the association. Moreover, in spite of a
difficult year, we remain optimistic about the prospects of this asset class not
only in Europe but as a whole. Many countries whose markets have experienced
downturns have accelerated structural changes designed to improve long-term
economic growth. This combined with positive valuations suggests that although
emerging markets will be volatile in the short term, they are still attractive
over the longer term.
U.S. TREASURY 30-YEAR
BOND YIELD:
July 1, 1997, to June 30, 1998
US TREASURY BOND
YIELDS
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Date Yield Date Yield Date Yield
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<S> <C> <C> <C> <C> <C>
F F 6/12 5.66 F 5/22 5.90
T T 6/11 5.65 T 5/21 5.92
W W 6/10 5.70 W 5/20 5.89
T 6/30 5.63 T 6/ 9 5.79 T 5/19 5.93
M 6/29 5.64 M 6/ 8 5.78 M 5/18 5.92
F 6/26 5.63 F 6/ 5 5.79 F 5/15 5.97
T 6/25 5.66 T 6/ 4 5.82 T 5/14 5.98
W 6/24 5.66 W 6/ 3 5.78 W 5/13 5.94
T 6/23 5.64 T 6/ 2 5.79 T 5/12 5.97
M 6/22 5.67 M 6/ 1 5.78 M 5/11 6.03
F 6/19 5.67 F 5/29 5.80 F 5/ 8 5.98
T 6/18 5.70 T 5/28 5.83 T 5/ 7 5.95
W 6/17 5.75 W 5/27 5.85 W 5/ 6 5.94
T 6/16 5.65 T 5/26 5.84 T 5/ 5 5.99
M 6/15 L 5.57 M 5/25 5.90 M 5/ 4 5.94
F 5/ 1 5.93 F 4/10 5.88 F 3/20 5.88
T 4/30 5.95 T 4/ 9 5.88 T 3/19 5.90
W 4/29 H 6.07 W 4/ 8 5.90 W 3/18 5.91
T 4/28 6.07 T 4/ 7 5.84 T 3/17 5.89
M 4/27 6.05 M 4/ 6 5.82 M 3/16 5.86
F 4/24 5.95 F 4/ 3 5.79 F 3/13 5.89
T 4/23 5.98 T 4/ 2 5.84 T 3/12 5.87
W 4/22 5.96 W 4/ 1 5.88 W 3/11 5.94
T 4/21 5.95 T 3/31 5.93 T 3/10 5.96
M 4/20 5.92 M 3/30 5.98 M 3/ 9 5.96
F 4/17 5.88 F 3/27 5.96 F 3/ 6 6.02
T 4/16 5.87 T 3/26 5.97 T 3/ 5 6.06
W 4/15 5.88 W 3/25 5.94 W 3/ 4 6.02
T 4/14 5.90 T 3/24 5.88 T 3/ 3 6.07
M 4/13 5.93 M 3/23 5.88 M 3/ 2 6.01
F 2/27 5.92 F 2/ 6 5.92 F 1/16 5.81
T 2/26 5.95 T 2/ 5 5.93 T 1/15 5.74
W 2/25 5.92 W 2/ 4 5.86 W 1/14 5.73
T 2/24 5.96 T 2/ 3 5.86 T 1/13 5.74
M 2/23 5.90 M 2/ 2 5.88 M 1/12 5.69
F 2/20 5.87 F 1/30 5.80 F 1/ 9 5.73
T 2/19 5.85 T 1/29 5.84 T 1/ 8 5.75
W 2/18 5.84 W 1/28 5.94 W 1/ 7 5.79
T 2/17 5.80 T 1/27 5.94 T 1/ 6 5.72
M 2/16 5.85 M 1/26 5.90 M 1/ 5 5.74
F 2/13 5.85 F 1/23 5.97 F 1/ 2 5.84
T 2/12 5.87 T 1/22 5.87 T 1/ 1 5.92
W 2/11 5.85 W 1/21 5.81
T 2/10 5.92 T 1/20 5.84
M 2/ 9 5.94 M 1/19 5.81
F F 12/12 5.92 F 11/21 6.03
T T 12/11 5.99 T 11/20 6.06
W 12/31 5.92 W 12/10 6.07 W 11/19 6.04
T 12/30 5.97 T 12/ 9 6.12 T 11/18 6.07
M 12/29 5.92 M 12/ 8 6.14 M 11/17 6.07
F 12/26 5.90 F 12/ 5 6.08 F 11/14 6.11
T 12/25 5.91 T 12/ 4 6.05 T 11/13 6.10
W 12/24 5.91 W 12/ 3 6.01 W 11/12 6.10
T 12/23 L 5.87 T 12/ 2 6.04 T 11/11 6.14
M 12/22 5.89 M 12/ 1 6.04 M 11/10 6.14
F 12/19 5.92 F 11/28 6.05 F 11/ 7 6.16
T 12/18 5.93 T 11/27 6.05 T 11/ 6 6.18
W 12/17 6.00 W 11/26 6.05 W 11/ 5 6.22
T 12/16 5.96 T 11/25 6.06 T 11/ 4 6.25
M 12/15 5.97 M 11/24 6.07 M 11/ 3 6.21
F 10/31 6.15 F 10/10 6.43 F 9/19 6.38
T 10/30 6.14 T 10/ 9 6.35 T 9/18 6.40
W 10/29 6.20 W 10/ 8 6.37 W 9/17 6.40
T 10/28 6.29 T 10/ 7 6.23 T 9/16 6.41
M 10/27 6.13 M 10/ 6 6.26 M 9/15 6.57
F 10/24 6.27 F 10/ 3 6.29 F 9/12 6.59
T 10/23 6.31 T 10/ 2 6.29 T 9/11 6.69
W 10/22 6.42 W 10/ 1 6.32 W 9/10 6.66
T 10/21 6.41 T 9/30 6.40 T 9/ 9 6.63
M 10/20 6.42 M 9/29 6.38 M 9/ 8 6.61
F 10/17 6.44 F 9/26 6.37 F 9/ 5 6.64
T 10/16 6.39 T 9/25 6.40 T 9/ 4 6.61
W 10/15 6.40 W 9/24 6.32 W 9/ 3 6.60
T 10/14 6.36 T 9/23 6.38 T 9/ 2 6.56
M 10/13 6.43 M 9/22 6.35 M 9/ 1 6.61
F 8/29 6.61 F 8/ 8 6.63 F 7/18 6.53
T 8/28 6.57 T 8/ 7 6.53 T 7/17 6.49
W 8/27 6.65 W 8/ 6 6.48 W 7/16 6.48
T 8/26 6.64 T 8/ 5 6.49 T 7/15 6.54
M 8/25 6.67 M 8/ 4 6.48 M 7/14 6.56
F 8/22 6.65 F 8/ 1 6.45 F 7/11 6.53
T 8/21 6.62 T 7/31 6.30 T 7/10 6.56
W 8/20 6.54 W 7/30 6.32 W 7/ 9 6.56
T 8/19 6.51 T 7/29 6.38 T 7/ 8 6.58
M 8/18 6.52 M 7/28 6.40 M 7/ 7 6.58
F 8/15 6.55 F 7/25 6.45 F 7/ 4 6.63
T 8/14 6.55 F 7/24 6.44 T 7/ 3 6.63
M 8/13 6.63 W 7/23 6.44 W 7/ 2 6.71
T 8/12 6.67 T 7/22 6.42 T 7/ 1 H 6.74
M 8/11 6.64 M 7/21 6.54
- ------------ -------------------------------------------------------------------------------------
</TABLE>
The bond mar ket rallied strongly over the year, pushing the yield on the
bellwether 3 0-year Treasury bond (which moves inversely to its price) down to
around 5.7% by financial year end. This reflected concerns about deflationary
pressures in the economy among bond investors.
The U.S. Bond Market
The U.S. bond market has rallied over the past year, driven by an inflow of
foreign capital and inflationary trends. While the flight to quality helped
boost household-name stocks in the equity markets, the bond market also
benefited. With the strong U.S. dollar acting as an additional incentive, the
U.S. Treasury bond market, in particular, offered a safe haven for more
risk-averse foreign capital. The trend was so strong that it was argued in some
quarters that U.S. Treasuries have taken over the traditional role of gold as a
hedge against economic uncertainty for many international investors. The
resulting inflow of capital, against a shortage of issuance, contributed to a
strong rally in the market.
Capital inflows were not the main driving force behind the bond market rally,
however. Despite the historically low unemployment rate and strong consumer
demand, inflation continued the rapid descent begun at the start of 1997. The
Federal Reserve continued to lean toward a tightening in monetary policy, even
as inflation has remained well below 2% during 1998. This combination of tight
monetary policy and falling inflation led to a "flattening" of the yield curve.
Bond investors bought long-term bonds to lock in these high real rates, and
shorter-term bonds did not participate nearly as much in the yield decline.
Moving forward into the new financial year, we expect little change in the
factors affecting the market. The short-term focus is expected to remain on the
rate of inflation. The Federal Reserve has indicated that it will continue to
closely monitor wage pressures, but we expect that the countervailing
deflationary forces will prove to be more powerful. In view of this, we
anticipate that the Fed will ease rates in 1999.
3
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Performance Summary
- --------------------
June 30, 1998
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/98
<TABLE>
<CAPTION>
Fund name (Fund number) Inception date One year Three years Five years Since inception
<S> <C> <C> <C> <C> <C>
Montgomery U.S. Equity Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Growth Fund (284) 9/30/93 17.31% 20.83% -- 24.74%
- ----------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund (645) 12/29/95 11.86% -- -- 21.68%
- ----------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund (276)* 7/13/90 23.23% 22.39% 16.73% 20.82%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Emerging Growth Fund (294)* 12/30/94 21.76% 22.31% -- 23.57%
- ----------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund (293) 9/30/94 15.83% 22.05% -- 21.54%
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery International and Global Equity Funds
- ----------------------------------------------------------------------------------------------------------------------------------
International Growth Fund (296) 7/3/95 23.27% 23.30% -- 23.35%
- ----------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund (283) 9/30/93 4.46% 15.18% -- 8.86%
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund (277) 3/1/92 (39.20%) (7.88%) (0.01%) 1.63%
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging Asia Fund (648) 9/30/96 (63.45%) -- -- (27.01%)
- ----------------------------------------------------------------------------------------------------------------------------------
Latin America Fund (652) 6/30/97 (25.42%) -- -- (25.42%)
- ----------------------------------------------------------------------------------------------------------------------------------
Global Opportunities Fund (285) 9/30/93 27.12% 24.74% -- 18.34%
- ----------------------------------------------------------------------------------------------------------------------------------
Global Communications Fund (280) 6/1/93 45.45% 24.90% 19.32% 19.85%
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Multi-Strategy Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund (295) 10/2/95 15.44% -- -- 28.94%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund (291) 3/31/94 14.67% 17.67% -- 21.15%
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery U.S. Fixed-Income and Money Market Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return Bond Fund (650) 6/30/97 10.92% -- -- 10.92%
- ----------------------------------------------------------------------------------------------------------------------------------
Short Duration Government
Bond Fund (279) 12/18/92 7.56% 6.70% 6.15% 6.60%
- ----------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate
Bond Fund (281) 7/1/93 6.85% 6.62% -- 5.51%
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As of 6/30/98 One-day yield Seven-day yield
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Reserve Fund (278) 9/14/92 5.46% 5.21%
- ----------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund (292) 9/30/94 2.83% 2.97%
- ----------------------------------------------------------------------------------------------------------------------------------
Federal Tax-Free Money Fund (647) 7/15/96 3.29% 3.28%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Closed to new investors.
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.
Performance information is for Class R (Retail) shares only. The performance
figures provided do not reflect the effect of (i) any securities purchased or
sold by the Funds after June 30 but that were effective on June 30 or (ii) any
purchases or redemptions of Fund shares completed after June 30 that were
effective on June 30. The performance figures for the Class R shares shown above
do not reflect the 0.25% Rule 12b-1 fees paid by the Class P shares that would
reduce performance.
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 fluctuations 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.
4
<PAGE>
--------------------
The Montgomery Funds
--------------------
Growth Fund
--------------------
Portfolio Highlights
Growth Fund
INVESTMENT REVIEW
Q: How did the Fund perform during the year ended June 30, 1998?
A: For the year ended June 30, 1998, the Fund gained 17.31%. Although this
performance was strong in absolute terms, it lagged the Standard & Poor's 500
Index. Market breadth has continued to narrow, with the largest companies in the
stock market generating the majority of returns. A significant portion of S&P
500 returns were driven by a few of the biggest large-capitalization stocks.
Just six stocks--Microsoft, GE, Lucent, Wal-Mart, Coca Cola and
Pfizer--accounted for more than 25% of the performance of the index year-to-date
through June 30. More than half of year-to-date index performance was driven by
only 18 stocks. Although people have been willing to pay high prices for the
perception of high-quality, predictable earnings, we believe that over the long
term it is unwise to overpay for a company, and thus valuation continues to be
central to our analysis.
Because we focus on buying stocks of companies with the best forward growth
potential and the most reasonable valuations, our discipline directed us away
from many of the year's top-performing stocks, which have very high
price-to-earnings ratios but low growth rates. Although this put us at a
disadvantage relative to the S&P 500 over the past 12 months, we believe that in
the long run our approach will serve investors well.
Q: How would you characterize the Fund's position going forward?
A: Our investments have been most successful where we have identified companies
or industries in the early stages of positive fundamental change. The retailers
in 1995 are a good example. Retailing stocks were trading at low valuations, and
market participants were generally pessimistic about the sector. America had too
many stores, and consumer indebtedness was high. Despite this backdrop many
retailers had new management and were committed to maximizing shareholder
returns. The companies were rationalizing their underperforming assets, spending
to grow their profitable divisions, initiating mergers and buying back stock. We
saw this as a positive fundamental change and invested in companies such as
Dayton Hudson and TJX. Now, three years later, the stocks are up meaningfully,
with the consumer still heavily in debt and no decline in excess capacity.
Our process continues to focus on the early identification of companies with
attractive fundamentals that are reasonably valued. As with retailers in 1995,
we have identified opportunities in sectors out of favor with investors in
recent months, such as chemicals, autos, paper and aluminum. The stocks that
currently comprise the portfolio were purchased at attractive valuations
relative to their growth rates. In many cases, these companies also have new
management and a commitment to increasing shareholder returns. Many of our
portfolio companies are buying back shares, initiating mergers and acquisitions,
reducing costs and focusing on executing profitable expansion plans. The market
is largely ignoring these facts and is focusing only on near-term events in
Asia. The result is a widening of the chasm between those stocks participating
in the market rally and those that are
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger Honour............................................Senior Portfolio Manager
Kathryn Peters.................................................Portfolio Manager
Andrew Pratt, CFA..............................................Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Growth Fund
Since inception (9/30/93)................................................24.74%
One year.................................................................17.31%
Three years..............................................................20.83%
- --------------------------------------------------------------------------------
S&P 500 Index
Since 9/30/93............................................................23.74%
One year.................................................................30.20%
Three years..............................................................30.23%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS Page 1
07/10/98
MONTGOMERY GROWTH(R)
Initial Investment: $10,000 Period: 09/30/93 - 06/98
This is no load fund.
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distribution Distributions Reinvested
09/30/93 12.00 $10,000 $0 $10,000
09/93 12.00 $10,000 $0 $10,000
10/93 12.48 $10,400 $0 $10,400
11/93 13.18 $10,983 $0 $10,983
12/93 14.12 $11,767 $67 $11,834
01/94 14.90 $12,417 $71 $12,488
02/94 15.09 $12,575 $72 $12,647
03/94 14.95 $12,458 $72 $12,530
04/94 15.49 $12,908 $74 $12,982
05/94 15.65 $13,042 $74 $13,116
06/94 15.27 $12,725 $73 $12,798
07/94 15.82 $13,183 $76 $13,259
08/94 16.62 $13,850 $79 $13,929
09/94 16.52 $13,767 $79 $13,846
10/94 17.12 $14,267 $81 $14,348
11/94 16.48 $13,733 $186 $13,919
12/94 16.93 $14,108 $201 $14,309
01/95 16.56 $13,800 $196 $13,996
02/95 17.20 $14,333 $204 $14,537
03/95 17.90 $14,917 $211 $15,128
04/95 18.02 $15,017 $213 $15,230
05/95 18.42 $15,350 $218 $15,568
06/95 19.16 $15,967 $226 $16,193
07/95 19.96 $16,633 $236 $16,869
08/95 20.02 $16,683 $237 $16,920
09/95 20.54 $17,117 $243 $17,360
10/95 20.21 $16,842 $239 $17,081
11/95 19.17 $15,975 $1,689 $17,664
12/95 19.20 $16,000 $1,692 $17,692
01/96 19.46 $16,217 $1,715 $17,932
02/96 20.23 $16,858 $1,783 $18,641
03/96 20.79 $17,325 $1,832 $19,157
04/96 21.60 $18,000 $1,904 $19,904
05/96 22.43 $18,692 $1,976 $20,668
06/96 21.94 $18,283 $1,934 $20,217
07/96 20.94 $17,450 $1,845 $19,295
08/96 21.75 $18,125 $1,917 $20,042
09/96 22.37 $18,642 $1,971 $20,613
10/96 20.51 $17,092 $3,885 $20,977
11/96 21.39 $17,825 $4,053 $21,878
12/96 20.15 $16,792 $4,475 $21,267
01/97 20.70 $17,250 $4,597 $21,847
02/97 20.50 $17,083 $4,553 $21,636
03/97 19.94 $16,617 $4,428 $21,045
04/97 20.77 $17,308 $4,613 $21,921
05/97 22.46 $18,717 $4,987 $23,704
06/97 23.07 $19,225 $5,123 $24,348
07/97 25.50 $21,250 $5,663 $26,913
08/97 25.19 $20,992 $5,594 $26,586
09/97 26.55 $22,125 $5,896 $28,021
10/97 25.34 $21,117 $5,627 $26,744
11/97 25.38 $21,150 $5,636 $26,786
12/97 21.89 $18,242 $8,163 $26,405
01/98 21.41 $17,842 $7,984 $25,826
02/98 23.29 $19,408 $8,686 $28,094
03/98 24.30 $20,250 $9,062 $29,312
04/98 24.67 $20,558 $9,200 $29,758
05/98 23.88 $19,900 $8,905 $28,805
06/98 23.68 $19,733 $8,831 $28,564
Prepared by the Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
LIPPER
S&P 500 GROWTH FUND AVG
AVE AVE
9/93-6/98 9/93-6/98
DATE RETURN VALUE DATE RETURN VALUE
Sep-93 $10,000 Sep-93 $10,000
Oct-93 10206.72 Oct-93 10139.48
Nov-93 10109.44 Nov-93 9956.75
Dec-93 10231.66 Dec-93 10237.16
Jan-94 10579.18 Jan-94 10565.58
Feb-94 10292.19 Feb-94 10394.38
Mar-94 9844.34 Mar-94 9909.28
Apr-94 9970.46 Apr-94 9947.79
May-94 10133.45 May-94 10000.00.26
Jun-94 9885.47 Jun-94 9664.45
Jul-94 10209.85 Jul-94 9919.79
Aug-94 10627.48 Aug-94 10385.43
Sep-94 10367.81 Sep-94 10182.45
Oct-94 10600.40 Oct-94 10348.05
Nov-94 10214.83 Nov-94 9964.20
Dec-94 10366.06 Dec-94 10055.16
Jan-95 10634.70 Jan-95 10134.64
Feb-95 11048.74 Feb-95 10524.56
Mar-95 11374.25 Mar-95 10822.02
Apr-95 11708.93 Apr-95 11060.43
May-95 12176.21 May-95 11402.74
Jun-95 12458.54 Jun-95 11882.38
Jul-95 12871.51 Jul-95 12441.50
Aug-95 12903.64 Aug-95 12530.64
Sep-95 13447.89 Sep-95 12904.88
Oct-95 13399.84 Oct-95 12728.24
Nov-95 13987.41 Nov-95 13178.71
Dec-95 14255.84 Dec-95 13226.92
Jan-96 14744.51 Jan-96 13532.71
Feb-96 14878.65 Feb-96 13836.01
Mar-96 15021.90 Mar-96 13947.67
Apr-96 15243.17 Apr-96 14369.72
May-96 15635.61 May-96 14731.76
Jun-96 15695.22 Jun-96 14543.58
Jul-96 15002.19 Jul-96 13705.31
Aug-96 15319.11 Aug-96 14164.02
Sep-96 16?80.54 Sep-96 14969.74
Oct-96 16626.63 Oct-96 15114.93
Nov-96 17882.30 Nov-96 16056.31
Dec-96 17528.07 Dec-96 15812.43
Jan-97 18622.55 Jan-97 16646.56
Feb-97 18768.75 Feb-97 16458.67
Mar-97 17999.01 Mar-97 15724.09
Apr-97 19072.57 Apr-97 16352.02
May-97 20238.62 May-97 17512.28
Jun-97 21138.35 Jun-97 18194.01
Jul-97 22819.67 Jul-97 19713.52
Aug-97 21542.42 Aug-97 19034.61
Sep-97 22721.56 Sep-97 20092.58
Oct-97 21963.58 Oct-97 19329.96
Nov-97 22979.49 Nov-97 19690.85
Dec-97 23373.85 Dec-97 19910.20
Jan-98 23632.12 Jan-98 20037.14
Feb-98 25335.58 Feb-98 21552.17
Mar-98 25531.94 Mar-98 22495.28
Apr-98 26904.65 Apr-98 22735.06
May-98 26442.84 May-98 22095.25
Jun-98 27516.15 Jun-98 22938.93
Growth of a $10,000 Investment
Montgomery S&P 500 Lipper Growth
Date Growth Fund Index/1/ Funds Average/2/
9/93 $10,000 $10,000 $10,000
6/98 $28,564 $27,516 $22,939
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.
/2/ The Lipper Growth Funds Average universe consists of 367 funds.
5
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Growth Fund
- --------------------
Portfolio Highlights
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Nordstrom, Inc. ..........................................................3.9%
Golden West Financial Corporation ........................................3.5%
Avid Technology Inc. .....................................................3.4%
Synder Communications ....................................................2.9%
Donnelley (R.R.) & Sons Company ..........................................2.6%
Comverse Technology ......................................................2.6%
Canadian National Railway Company ........................................2.5%
Ericsson (L.M.) Telephone Company,
Class B, ADR .............................................................2.5%
Boise Cascade Corporation ................................................2.3%
International Paper Company ..............................................2.3%
================================================================================
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Telecommunications Equipment .............................................8.1%
Retail Trade .............................................................6.1%
Paper/Forest Products/Packaging ..........................................6.7%
Software Systems .........................................................6.4%
Banks/Savings and Loans ..................................................6.3%
not. We expect that investors will return to sectors of the market that
demonstrate earnings growth at reasonable prices, and our portfolio will
benefit.
Q: Can you discuss a portfolio company that is an example of your investment
process?
A: Dow Chemical is a good example of a stock that has not participated in this
year's market growth. Dow is a $20 billion global company that has made
meaningful changes in its business to improve shareholder returns. Dow has
divested businesses that don't fit its core focus and is successfully
repositioning itself to provide stronger, more consistent results across
economic cycles. In the previous cycle, following the 1989 peak, commodity
prices dropped 6% and Dow's earnings declined by 63%. In this cycle, since the
1995 peak, commodity prices have dropped 11% and Dow's earnings are down only
modestly. To date, Dow's progress is unrecognized by the market. Dow's stock has
a 6% annualized return over the past four years, compared with 28% for the S&P
500. The company continues to improve its business mix, make strategic
acquisitions and divestitures, and buy back shares. Dow's senior management have
most of their net worth invested in Dow stock, which provides them with
meaningful motivation to improve shareholder returns.
Q: For newer shareholders, would you briefly discuss your investment process?
A: We use proprietary, quantitative screening techniques to help identify
long-term, positive fundamental change in a company's business and its expected
earnings. We then conduct fundamental analysis to determine the validity and
sustainability of the change. Finally, we apply our valuation criteria to
determine the future potential for the share price. Our goal is to build
portfolios of companies that have sustainable growth prospects and are
attractively valued.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
---------------------
The Montgomery Funds
---------------------
Growth Fund
---------------------
Investments
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS -- 88.5%
<S> <C>
Shares Value (Note 1)
Apparel and Textiles -- 0.9%
240,000 VF Corporation ............................... $12,360,000
Auto/Auto Parts -- 1.4%
300,000 General Motors Corporation ................... 20,043,750
Banks/Savings and Loans -- 6.3%
190,000 BankAmerica Corporation ...................... 16,423,125
150,000 Citicorp ..................................... 22,387,500
450,000 Golden West Financial Corporation ............ 47,840,625
----------
86,651,250
Building Materials -- 1.6%
375,000 Masco Corporation ............................ 22,687,500
Business Services -- 5.7%
250,000 Computer Sciences Corporation ................ 16,000,000
600,000 Electronic Data Systems Corporation .......... 24,000,000
900,000 Snyder Communications Inc. ................... 39,600,000
----------
79,600,000
Chemicals -- 4.3%
270,000 Dow Chemical Company ......................... 26,105,625
225,000 Eastman Chemical Company ..................... 14,006,250
550,000 Nalco Chemical Company ....................... 19,318,750
----------
59,430,625
Computers and Office Equipment -- 1.6%
900,000 Data General Corporation ..................... 13,443,750
700,000 Sequent Computer Systems ..................... 8,553,125
----------
21,996,875
Conglomerates -- 2.1%
500,000 Canadian Pacific, Ltd ........................ 14,187,500
225,000 Tyco International Ltd ....................... 14,175,000
----------
28,362,500
Consumer Services -- 1.0%
650,000 Cendant Corporation .......................... 13,568,750
Diversified Energy -- 0.8%
215,000 Enron Corporation ............................ 11,623,438
Diversified Financial Services -- 1.8%
471,600 FirstPlus Financial Group(**) ................ 17,802,900
250,000 Heller Financial Inc.+ ....................... 7,500,000
----------
25,302,900
Electrical Equipment -- 1.2%
100,000 Matsushita Electric Industrial
Company, Ltd., ADR ........................... 16,075,000
Electronics -- 1.1%
525,000 Raychem Corporation .......................... 15,520,313
Food and Beverage -- 3.5%
540,000 Dole Food Company, Inc ....................... 26,831,250
1,250,000 Fleming Companies, Inc ....................... 21,953,125
----------
48,784,375
Freight and Courier -- 1.5%
330,000 FDX Corporation .............................. 20,707,496
Health Care -- 1.4%
700,000 First Health Group Corporation+ .............. 20,037,500
Home Appliance -- 1.2%
250,000 Whirlpool Corporation ........................ 17,187,500
Household Products -- 1.0%
175,000 Unilever N.V., ADR ........................... 13,814,063
Insurance -- 1.1%
170,000 Loews Corporation ............................ 14,811,250
Media and Entertainment -- 1.1%
170,000 Time Warner, Inc ............................. 14,524,375
Medical Products -- 1.0%
271,300 Bausch & Lomb Inc ............................ 13,598,913
Metals and Mining -- 1.4%
300,000 Aluminum Company of America (Alcoa) .......... 19,781,250
Newspapers/Publishing -- 3.7%
800,000 Donnelley (R.R.) & Sons Company .............. 36,600,000
400,000 World Color Press Inc ........................ 14,000,000
----------
50,600,000
Oil and Gas -- 4.0%
530,600 Amerada Hess Corporation ..................... 28,818,213
1,500,000 Union Pacific Resources Group, Inc ........... 26,343,750
----------
55,161,963
Oilfield Equipment -- 1.5%
300,000 Schlumberger Ltd ............................. 20,493,750
Paper/Forest Products/Packaging -- 6.7%
975,000 Boise Cascade Corporation .................... 31,931,250
275,000 Champion International Corporation ........... 13,526,563
420,000 Chesapeake Corporation ....................... 16,353,750
725,000 International Paper Company .................. 31,175,000
----------
92,986,563
Railroad -- 3.9%
650,000 Canadian National Railway Company ............ 34,531,250
450,000 Union Pacific Corporation .................... 19,856,250
----------
54,387,500
</TABLE>
7
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Growth Fund
- --------------------
Investments
COMMON STOCKS -- continued
Shares Value (Note 1)
Real Estate Investment Trust -- 2.6%
500,000 Meditrust Companies**.....................$ 13,937,500
900,000 Patriot American Hospitality, Inc. ....... 21,543,750
----------
35,481,250
Retail Trade -- 6.1%
300,000 Dayton/Hudson Corporation. ............... 14,550,000
690,000 Nordstrom, Inc. .......................... 53,280,938
700,000 TJX Companies, Inc. ...................... 16,887,500
----------
84,718,438
Semiconductors -- 0.8%
200,000 Texas Instruments, Inc. .................. 11,662,500
Software Systems -- 6.4%
1,400,000 Avid Technology Inc. ..................... 46,943,750
1,222,100 Structural Dynamics Research Corporation.. 28,146,490
1,850,000 Sybase, Inc. ............................. 12,892,188
----------
87,982,428
Steel -- 1.0%
260,000 Carpenter Technology Corporation.......... 13,065,000
Telecommunications Equipment -- 8.1%
970,000 Aspect Telecommunications Corporation**... 26,614,375
700,000 Comverse Technology**..................... 36,334,374
1,200,000 Ericsson (L.M.) Telephone Company,
Class B, ADR ............................. 34,425,000
285,000 Motorola, Inc. ........................... 14,980,313
----------
112,354,062
Truck/Truck Parts -- 0.7%
176,900 PACCAR, Inc.**............................ 9,226,441
TOTAL COMMON STOCKS
(Cost $958,309,542).................................... 1,224,589,518
-------------
REPURCHASE AGREEMENTS -- 11.4%
Principal Amount
$18,250,000 Agreement with Bear Stearns, Tri-Party,
6.35% dated 06/30/98, to be repurchased at
$18,253,219 on 07/01/98, collateralized by
$18,615,000 market value of U.S. government
securities, having various maturities and
various interest rates..................... 18,250,000
80,516,500 Agreement with Paine Webber Group,
Tri-Party, 6.10% dated 06/30/98, to be
repurchased at $80,530,143 on 07/01/98,
collateralized by $82,126,830 market value
of U.S. government securities, having various
maturities and various interest rates...... 80,516,500
33,888,000 Agreement with Greenwich Capital Markets,
Tri-Party, 6.30% dated 06/30/98, to be
repurchased at $33,893,930 on 07/01/98,
collateralized by $34,565,760 market value
of U.S. government securities, having various
maturities and various interest rates......$ 33,888,000
25,157,500 Agreement with UBS, Tri-Party, 6.30%
dated 06/30/98, to be repurchased at
$25,161,903 on 07/01/98, collateralized
by $25,660,650 market value of U.S.
government securities, having various
maturities and various interest rates...... 25,157,500
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $157,812,000).................................... 157,812,000
-----------
TOTAL INVESTMENTS -- 99.9%
(Cost $1,116,121,542*).................................. 1,382,401,518
OTHER ASSETS AND LIABILITIES -- 0.1%
(Net)................................................... 670,224
-------
NET ASSETS -- 100.0%....................................$1,383,071,742
=============
* Aggregate cost for federal tax purposes was $1,131,859,406.
** Securities on loan at June 30, 1998, which have an aggregate market value
of $24,414,288, represent 1.8% of the total net assets of the Fund (see note
4 to Financial Statements).
+ Non-income producing security.
Abbreviation:
ADR American Depositary Receipt
8
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Small Cap
Opportunities Fund
--------------------
Portfolio Highlights
INVESTMENT REVIEW
Q: How did the Fund perform during the year ended June 30, 1998?
A: The Montgomery Small Cap Opportunities Fund was up 11.86% for the 12-month
period; the Russell 2000 Index returned 16.51%, and the Russell 2000 Growth
Index returned 13.19%.
Q: Describe the investment environment for small-cap stocks over the
past year.
A: The past 12 months have been frustrating for U.S. small-cap investors, as
large-cap companies represented by the Standard & Poor's 500 Index outperformed
the Russell 2000 Index of small-cap stocks. This trend continued through the
second quarter of 1998, as Asia's economic crisis took its toll on the U.S.
economy. Although many small-cap companies are domestically focused and are less
exposed to Asia, investors generally favored large, brand-name stocks. The
market awarded high valuations to large-cap companies relative to their growth
potential, while ignoring smaller companies with higher earnings-growth
potential. In the Small Cap Opportunities Fund, our positions in energy services
and technology hurt our relative performance against small-cap benchmarks.
Q: What strategies did you use to manage the Fund?
A: Our basic investment strategy has not changed. We manage the Fund using a
bottom-up selection process that emphasizes companies with improving business
fundamentals that we believe are not reflected in their stock prices. Our sell
discipline involves exposing portfolio holdings to the same criteria that made
them attractive investments. Sales are made on the basis of excessive valuation
or a deterioration in fundamentals.
Q: Can you give some examples of purchases or sales?
A: One example of a company whose stock was sold due to deteriorating business
fundamentals was St. John Knits. The company produces a very popular line of
high-end women's apparel. St. John introduced a lower-priced (bridge) line of
clothing to complement its growth rate without hurting sales of the
higher-priced line. Our research indicated that the new line seemed to appeal
most to existing customers of St. John Knits, which was not the intended effect.
We felt that Wall Street expectations did not reflect this, and we sold out of
our position as a result.
On the positive side, our strategy has identified several small-cap companies
with improving fundamentals that we believe are not reflected in their
valuations, such as TJ International, Inc. TJ International manufactures
engineered wood products designed to replace traditional lumber in residential
construction. Manufactured wood products offer many benefits over traditional
lumber, including less waste, better performance and easier handling. The
company's products are made using scrap lumber and have become increasingly
popular with contractors.
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger Honoour...........................................Senior Portfolio Manager
Kathryn Peters.................................................Portfolio Manager
Andrew Pratt, CFA..............................................Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery
Small Cap Opportunities Fund
Since inception (12/29/95).............................................. 21.68%
One year................................................................ 11.86%
- --------------------------------------------------------------------------------
Russell 2000 Index
Since 12/29/95.......................................................... 17.47%
One year................................................................ 16.51%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a 10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SMALL CAP OPP(R)
Initial Investment: $10,000 Period 12/29/95 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/29/95 12.00 $10,000 $0 $10,000
12/95 12.00 $10,000 $0 $10,000
01/96 13.19 $10,992 $0 $10,992
02/96 14.03 $11,692 $0 $11,692
03/96 14.75 $12,292 $0 $12,292
04/96 15.72 $13,100 $0 $13,100
05/96 16.47 $13,725 $0 $13,725
06/96 15.80 $13,167 $0 $13,167
07/96 14.35 $11,958 $0 $11,958
08/96 15.30 $12,750 $0 $12,750
09/96 16.41 $13,675 $0 $13,675
10/96 15.13 $12,608 $0 $12,608
11/96 15.41 $12,842 $0 $12,842
12/96 16.47 $13,725 $3 $13,728
01/97 16.94 $14,117 $3 $14,120
02/97 16.08 $13,400 $3 $13,403
03/97 14.77 $12,308 $3 $12,311
04/97 14.56 $12,133 $3 $12,136
05/97 16.56 $13,800 $3 $13,803
06/97 17.53 $14,608 $4 $14,612
07/97 18.43 $15,358 $4 $15,362
08/97 18.56 $15,467 $3 $15,470
09/97 28.27 $16,892 $3 $16,895
10/97 19.34 $16,117 $3 $16,120
11/97 19.00 $15,833 $4 $15,837
12/97 18.74 $15,617 $370 $15,987
01/98 18.23 $15,192 $360 $15,552
02/98 19.77 $16,475 $390 $16,865
03/98 20.31 $16,925 $401 $17,326
04/98 19.93 $16,608 $394 $17,002
05/98 18.75 $15,625 $370 $15,995
06/98 19.16 $15,967 $378 $16,345
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
RUSSELL 2000
AVE
12/95-6/98
DATE RETURN VALUE
<S> <C>
Dec-95 $10,000
Jan-96 9989.25
Mar-96 10300.62
Apr-96 10510.29
May-96 11072.29
Jun-96 11508.66
Jul-96 11036.08
Jul-96 10072.19
Aug-96 10656.98
Sep-96 11073.46
Oct-96 10902.81
Nov-96 11352.05
Dec-96 11649.58
Jan-97 11882.34
Feb-97 11594.23
Mar-97 11047.15
Apr-97 11078.08
May-97 12310.51
Jun-97 12838.08
Jul-97 13435.46
Aug-97 13742.88
Sep-97 14748.77
Oct-97 14100.87
Nov-97 14009.67
Dec-97 14254.88
Jan-98 14029.65
Feb-98 15067.04
Mar-98 15688.45
Apr-98 15775.25
May-98 14925.64
Jun-98 14957.04
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
SM CO GROWTH
AVE
12/95-6/98
DATE RETURN VALUE
<S> <C>
Dec-95 $10,000
Jan-96 9965.25
Mar-96 10380.34
Apr-96 10662.72
May-96 11476.38
Jun-96 11960.57
Jul-96 11488.21
Jul-96 10502.52
Aug-96 11133.73
Sep-96 11702.02
Oct-96 11483.78
Nov-96 11829.97
Dec-96 12002.06
Jan-97 12301.94
Feb-97 11797.02
Mar-97 11212.33
Apr-97 11136.45
May-97 12442.62
Jun-97 13094.21
Jul-97 13928.51
Aug-97 14176.20
Sep-97 15241.12
Oct-97 14574.97
Nov-97 14351.48
Dec-97 14447.33
Jan-98 14198.51
Feb-98 15301.00
Mar-98 16019.45
Apr-98 16148.47
May-98 15227.94
Jun-98 15341.96
</TABLE>
Montgomery Small Cap Lipper Small Cap
Date Opportunities Fund Russell 2000 Index/1/ Funds Average/2/
- ---- -------------------- --------------------- ----------------
12/95 $10,000 $10,000 $10,000
6/98 16,345 15,342 14,957
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
includes the smallest 2,000 companies within the Russell 3000 Index.
/2/ The Lipper Small Cap Funds Average universe consists of 365 funds.
9
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Small Cap
Opportunities Fund
- --------------------
Investments
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Axciom Corporation ...................................................... 3.0%
Cooper Companies, Inc ................................................... 3.0%
Waters Corporation ...................................................... 2.4%
Boole and Babbage, Inc .................................................. 2.4%
SBS Technologies, Inc ................................................... 2.3%
Structural Dynamics Research
Corporation ............................................................. 2.3%
Orthodontics Centers of America, Inc. ................................... 2.3%
PMT Services, Inc. ...................................................... 2.3%
The Men's Warehouse ..................................................... 2.3%
Catalina Marketing Corporation .......................................... 2.3%
================================================================================
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Software Systems ........................................................ 13.1%
Business Services ....................................................... 13.1%
Retail Trade ............................................................ 9.1%
Medical Products ........................................................ 8.6%
Diversified Financial Services .......................................... 5.4%
Q: What's your outlook for small-cap stocks and for the Small Cap
Opportunities Fund?
A: Our outlook for the small-cap sector remains positive. When we look for indi-
vidual stocks for our portfolio, we look for undervalued growth. The small-cap
market now offers a very fertile hunting ground for what we consider to be
inexpensive growth stocks. The holdings in the Small Cap Opportunities Fund
currently trade at a price-to-earnings ratio based on expected forward earnings
that is similar to that of the Russell 2000, whereas expected earnings growth
from our holdings is greater than that of the Russell 2000. We are hopeful that
this relationship will be ultimately recognized by investors, as many mispriced
situations have been.
Stock picking is the most important driver in our performance. We have had some
disappointments in the past 12 months, mostly in areas that were directly
impacted by the Asian crisis. It is important to remember that we are taking a
long-term view when making our investments and are riding through some rough
periods in the name of this philosophy. The one thing we won't do right now is
change the way we do things. That means sticking with the investment process and
the long-term view. We are confident that we will be rewarded for doing so.
There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risk of price fluctuations.
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 100.5%
Shares Value (Note 1)
Apparel and Textiles - 2.6%
125,000 Interface Inc ...............................$ 2,523,437
72,000 Jones Apparel Group, Inc.+ ................... 2,632,500
---------
5,155,937
Banks - 1.6%
102,550 Commercial Federal Corporation ............... 3,243,143
Broadcasting/Advertising - 4.9%
88,000 Catalina Marketing Corporation+ .............. 4,570,500
120,000 HA-LO Industries+ ............................ 3,735,000
45,000 TMP Worldwide, Inc ........................... 1,567,968
---------
9,873,468
Building Materials - 1.0%
66,000 TJ International, Inc ........................ 1,984,125
Business Services - 13.1%
97,050 Analysts International Corporation ........... 2,759,859
85,800 Applied Graphics Technologies, Inc.+ ......... 3,922,669
245,000 Axciom Corporation+ .......................... 6,132,656
188,000 Caribiner International Inc.+ ................ 3,290,000
118,000 Computer Task Group, Inc ..................... $3,953,000
58,400 Fair Isaac & Company, Inc .................... 2,219,200
130,100 Interim Services, Inc.+ ...................... 4,179,463
---------
26,456,847
Chemicals - 1.6%
123,800 Ferro Corporation ............................ 3,133,688
Consumer Services - 3.1%
94,200 Budget Group, Inc.+ .......................... 3,008,513
100,000 Education Management Corporation+ ............ 3,300,000
---------
6,308,513
Containers and Packaging - 1.3%
117,400 Ivex Packaging Corporation+ .................. 2,729,550
Diversified Financial Services - 5.4%
192,400 BA Merchant Services, Inc.+ .................. 3,884,075
99,000 Imperial Credit Industries ................... 2,301,750
182,000 PMT Services, Inc.**+ ........................ 4,629,625
---------
10,815,450
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
----------------------
The Montgomery Funds
----------------------
Small Cap
Opportunities Fund
----------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Electronics - 2.3%
153,500 SBS Technologies, Inc.+ ..................... $ 4,595,406
Environmental Services - 1.2%
100,000 Tetra Tech, Inc.+ ........................... 2,450,000
Food and Beverage - 1.5%
48,900 Whole Foods Market, Inc.+ ................... 2,961,506
Health Care - 5.0%
226,000 Orthodontic Centers of America, Inc.+ ....... 4,731,875
180,000 Pharmerica, Inc.+ ........................... 2,171,250
129,000 Sierra Health Services+ ..................... 3,249,188
---------
10,152,313
Heavy Construction - 2.0%
130,000 Kaufman & Broad Home Corporation ............ 4,127,500
Insurance - 1.4%
71,500 Berkley (W.R.) Corporation .................. 2,866,703
Lodging - 2.0%
226,000 Prime Hospitality Corporation+ .............. 3,940,875
Medical Products - 8.6%
166,400 Cooper Companies, Inc.+ ..................... 6,063,200
132,600 ESC Medical Systems, Ltd.+ .................. 4,487,681
55,800 Sola International, Inc.+ ................... 1,823,963
82,800 Waters Corporation+ ......................... 4,880,025
---------
17,254,869
Newspapers/Publishing - 3.4%
115,000 Big Flower Holdings, Inc.**+ ................ 3,450,000
100,000 World Color Press Inc.+ ..................... 3,500,000
---------
6,950,000
Oilfield Equipment and Services - 1.9%
55,500 Cliffs Drilling Company+ .................... 1,821,094
125,200 Marine Drilling Companies, Inc.+ ............ 1,999,288
---------
3,820,382
Pharmacy/Drugs - 3.0%
77,500 Jones Pharma, Inc. .......................... 2,564,766
149,000 Roberts Pharmaceutical Corporation+ ......... 3,427,000
---------
5,991,766
Retail Trade - 9.1%
90,000 Borders Group Inc.+ ......................... 3,330,000
105,000 Coldwater Creek Inc.+ ....................... 2,874,375
148,000 Eagle Hardware & Garden, Inc.**+ ............ 3,427,125
139,500 The Men's Wearhouse Inc.+ ................... 4,607,858
104,000 Proffitt's, Inc.+ ........................... 4,199,000
---------
18,438,358
Semiconductors - 0.9%
163,000 Actel Corporation+ .......................... 1,762,438
Software Systems - 13.1%
58,500 Aspen Technology, Inc.+ ..................... $ 2,965,219
204,450 Boole and Babbage, Inc.+ .................... 4,894,022
113,000 Henry (Jack) & Associates** ................. 3,891,438
93,100 Kronos, Inc.+ ............................... 3,418,516
64,650 National Instruments Corporation+ ........... 2,313,258
201,900 Structural Dynamics Research
Corporation+ ................................ 4,650,009
45,000 Symantec Corporation+ ....................... 1,172,813
70,200 Synopsis, Inc.+ ............................. 3,213,844
---------
26,519,119
Steel - 2.1%
83,000 Carpenter Technology Corporation ............ 4,170,750
Telecommunications Equipment - 4.7%
80,000 Comverse Technology Inc.+ ................... 4,152,500
65,000 Dialogic Corporation+ ....................... 1,925,625
85,100 MRV Communications Inc.**+ .................. 1,773,803
103,000 Natural Microsystems**+ ..................... 1,657,656
---------
9,509,584
Toys - 2.0%
123,700 Action Performance Companies, Inc.**+ ....... 3,985,459
Trucking - 1.7%
107,000 U.S. Freightways Corporation ................ 3,514,280
TOTAL COMMON STOCKS
(Cost $159,912,393) .......................................... 202,712,029
-----------
TOTAL INVESTMENTS - 100.5%
(Cost $159,912,393*) ......................................... 202,712,029
OTHER ASSETS AND LIABILITIES - (0.5%)
(Net) ........................................................ (964,302)
-----------
NET ASSETS - 100.0% $ ........................................ 201,747,727
===========
* Aggregate cost for federal tax purposes was $160,623,415.
** Securities on loan at June 30, 1998, which have an aggregate market value
of $20,309,976, represent 10.07% of the total net assets of the Fund (see
note 4 to Financial Statements).
+ Non-income producing security.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Small Cap Fund
- ---------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Stuart Roberts ........................................ Senior Portfolio Manager
Brad Kidwell ................................................. Portfolio Manager
Cam Philpott, CFA ............................................ Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Small Cap Fund
Since inception (7/13/90) ............................................. 20.82%
One year .............................................................. 23.23%
Five years ............................................................ 16.73%
- --------------------------------------------------------------------------------
Russell 2000 Index
Since 6/30/90 ......................................................... 15.07%
One year .............................................................. 16.51%
Five years ............................................................ 16.05%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a $10,000 investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
07/10/98
MONTGOMERY SMALL CAP(R)
Initial Investment: $10,000 Period: 07/13/90 - 06/98
This is a no Load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/13/90 10.62 $10,000 $ 0 $10,000
07/90 10.13 $ 9,539 $ 0 $ 9,539
08/90 9.10 $ 8,569 $ 0 $ 8,569
09/90 8.34 $ 7,853 $ 0 $ 7,853
10/90 8.02 $ 7,552 $ 0 $ 7,552
11/90 8.66 $ 8,154 $ 0 $ 8,154
12/90 9.35 $ 8,804 $ 16 $ 8,820
01/91 10.66 $10,038 $ 17 $10,055
02/91 12.00 $11,299 $ 20 $11,319
03/91 13.05 $12,288 $ 22 $12,310
04/91 12.81 $12,062 $ 21 $12,083
05/91 13.76 $12,957 $ 22 $12,979
06/91 13.24 $12,467 $ 22 $12,489
07/91 11.82 $11,130 $2,634 $13,764
08/91 12.81 $12,062 $2,855 $14,917
09/91 13.20 $12,429 $2,942 $15,371
10/91 14.07 $13,249 $3,135 $16,384
11/91 13.15 $12,382 $2,931 $15,313
12/91 14.18 $13,352 $4,177 $17,529
01/92 14.89 $14,021 $4,386 $18,407
02/92 14.86 $13,992 $4,378 $18,370
03/92 14.19 $13,362 $4,179 $17,541
04/92 13.43 $12,646 $3,956 $16,602
05/92 13.41 $12,627 $3,950 $16,577
06/92 12.90 $12,147 $3,800 $15,947
07/92 13.25 $12,476 $3,903 $16,379
08/92 12.74 $11,996 $3,753 $15,749
09/92 13.13 $12,363 $3,868 $16,231
10/92 13.58 $12,787 $4,000 $16,787
11/92 15.16 $14,275 $4,465 $18,740
12/92 15.54 $14,633 $4,577 $19,210
01/93 15.77 $14,849 $4,646 $19,495
02/93 15.01 $14,134 $4,421 $18,555
03/93 15.69 $14,774 $4,622 $19,396
04/93 15.27 $14,379 $4,497 $18,876
05/93 16.44 $15,480 $ 4,843 $20,323
06/93 16.83 $15,847 $ 4,958 $20,805
07/93 16.94 $15,951 $ 4,990 $20,941
08/93 17.67 $16,638 $ 5,755 $22,393
09/93 18.49 $17,411 $ 6,021 $23,432
10/93 19.23 $18,107 $ 6,262 $24,369
11/93 16.74 $15,763 $ 6,861 $22,624
12/93 17.67 $16,638 $ 7,243 $23,881
01/94 18.24 $17,175 $ 7,476 $24,651
02/94 17.99 $16,940 $ 7,373 $24,313
03/94 16.87 $15,885 $ 6,915 $22,800
04/94 16.87 $15,885 $ 6,915 $22,800
05/94 16.02 $15,085 $ 6,566 $21,651
06/94 15.15 $14,266 $ 6,209 $20,475
07/94 15.61 $14,699 $ 6,398 $21,097
08/94 17.02 $16,026 $ 6,976 $23,002
09/94 16.81 $15,829 $ 6,889 $22,718
10/94 16.64 $15,669 $ 6,820 $22,489
11/94 14.94 $14,068 $ 7,407 $21,475
12/94 14.96 $14,087 $ 7,416 $21,503
01/95 14.94 $14,068 $ 7,407 $21,475
02/95 15.47 $14,567 $ 7,669 $22,236
03/95 15.87 $14,944 $ 7,867 $22,811
04/95 15.84 $14,915 $ 7,853 $22,768
05/95 16.15 $15,207 $ 8,007 $23,214
06/95 17.11 $16,111 $ 8,483 $24,594
07/95 18.16 $17,100 $ 9,003 $26,103
08/95 19.00 $17,891 $ 9,419 $27,310
09/95 19.36 $18,230 $ 9,598 $27,828
10/95 18.37 $17,298 $ 9,107 $26,405
11/95 17.16 $16,158 $11,118 $27,276
12/95 18.28 $17,213 $11,843 $29,056
01/96 18.25 $17,185 $11,823 $29,008
02/96 18.96 $17,853 $12,284 $30,137
03/96 19.83 $18,672 $12,847 $31,519
04/96 21.05 $19,821 $13,638 $33,459
05/96 22.26 $20,960 $14,422 $35,382
06/96 21.55 $20,292 $13,961 $34,253
07/96 20.03 $18,861 $12,976 $31,837
08/96 20.79 $19,576 $13,469 $33,045
09/96 21.89 $20,612 $14,182 $34,794
10/96 19.07 $17,957 $16,079 $34,036
11/96 19.57 $18,427 $16,502 $34,929
12/96 18.40 $17,326 $17,161 $34,487
01/97 18.75 $17,655 $17,488 $35,143
12/97 17.68 $16,648 $16,490 $33,138
03/97 16.25 $15,301 $15,156 $30,457
04/97 15.85 $14,925 $14,783 $29,708
05/97 18.31 $17,241 $17,077 $34,318
06/97 19.52 $18,380 $18,206 $36,586
07/97 20.61 $19,407 $19,222 $38,629
08/97 20.74 $19,529 $19,344 $38,873
09/97 22.89 $21,554 $21,349 $42,903
10/97 22.21 $20,913 $20,715 $41,628
11/97 22.06 $20,772 $20,575 $41,347
12/97 19.64 $18,493 $24,223 $42,716
01/98 18.74 $17,646 $23,113 $40,759
02/98 20.78 $19,567 $25,628 $45,195
03/98 21.95 $20,669 $27,071 $47,740
04/98 21.69 $20,424 $26,751 $47,175
05/98 20.16 $18,983 $24,864 $43,847
06/98 20.73 $19,520 $25,567 $45,087
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
RUSSELL 2000 SM CO GROWTH
AVE AVE
6/90-6/98 6/90-6/98
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Jun-90 $ 10,000 Jun-90 $ 10,000
Jul-90 9560.16 Jul-90 9635.39
Aug-90 8286.94 Aug-90 8423.14
Sep-90 7553.63 Sep-90 7713.44
Oct-90 7092.50 Oct-90 7411.90
Nov-90 7633.30 Nov-90 7995.09
Dec-90 7936.17 Dec-90 8425.87
Jan-91 8653.87 Jan-91 9160.19
Feb-91 9618.90 Feb-91 9957.45
Mar-91 10295.96 Mar-91 10587.44
Apr-91 10270.06 Apr-91 10511.60
May-91 10759.58 May-91 10996.74
Jun-91 10132.55 Jun-91 10405.66
Jul-91 10488.12 Jul-91 11011.57
Aug-91 10876.33 Aug-91 11482.50
Sep-91 10961.50 Sep-91 11543.07
Oct-91 11251.42 Oct-91 11924.78
Nov-91 10731.02 Nov-91 11434.39
Dec-91 11590.30 Dec-91 12751.92
Jan-92 12529.43 Jan-92 13381.12
Feb-92 12894.93 Feb-92 13630.22
Mar-92 12458.46 Mar-92 13059.46
Apr-92 12021.99 Apr-92 12478.63
May-92 12181.85 May-92 12472.67
Jun-92 11605.74 Jun-92 11909.23
Jul-92 12009.57 Jul-92 12317.13
Aug-92 11670.68 Aug-92 12056.83
Sep-92 11939.84 Sep-92 12330.70
Oct-92 12319.36 Oct-92 12849.24
Nov-92 13262.04 Nov-92 13890.39
Dec-92 13724.06 Dec-92 14361.99
Jan-93 14188.57 Jan-93 14674.91
Feb-93 13860.86 Feb-93 14120.75
Mar-93 14310.64 Mar-93 14618.87
Apr-93 13917.81 Apr-93 14159.90
May-93 14533.66 May-93 14952.40
Jun-93 14624.33 Jun-93 15069.66
Jul-93 14826.24 Jul-93 15174.72
Aug-93 15466.76 Aug-93 15944.28
Sep-93 15903.23 Sep-93 16493.28
Oct-93 16312.56 Oct-93 16750.93
Nov-93 15775.66 Nov-93 16165.99
Dec-93 16315.04 Dec-93 16856.47
Jan-94 16826.57 Jan-94 17294.83
Feb-94 16765.71 Feb-94 17290.50
Mar-94 15880.52 Mar-94 16352.66
Apr-94 15974.91 Apr-94 16373.46
May-94 15795.53 May-94 16077.55
Jun-94 15259.17 Jun-94 15497.64
Jul-94 15509.88 Jul-94 15756.58
Aug-94 16374.13 Aug-94 16721.11
Sep-94 16319.30 Sep-94 16840.72
Oct-94 16254.89 Oct-94 17097.61
Nov-94 15598.41 Nov-94 16484.95
Dec-94 16017.50 Dec-94 16832.65
Jan-95 15815.41 Jan-95 16664.47
Feb-95 16473.31 Feb-95 17350.31
Mar-95 16757.02 Mar-95 17823.56
Apr-95 17129.62 Apr-95 18053.74
May-95 17424.15 May-95 18340.25
Jun-95 18328.04 Jun-95 19473.10
Jul-95 19383.77 Jul-95 20943.20
Aug-95 19784.76 Aug-95 21295.45
Sep-95 20138.09 Sep-95 21882.24
Oct-95 19327.46 Oct-95 21236.25
Nov-95 20045.70 Nov-95 22011.54
Dec-95 20574.60 Dec-95 22270.30
Jan-96 20552.47 Jan-96 22061.45
Feb-96 21193.09 Feb-96 22973.52
Mar-96 21624.47 Mar-96 23466.60
Apr-96 22780.75 Apr-96 25291.47
May-96 23678.55 May-96 26304.49
Jun-96 22706.24 Jun-96 25255.71
Jul-96 20723.07 Jul-96 22946.29
Aug-96 21926.24 Aug-96 24357.44
Sep-96 22783.13 Sep-96 25675.43
Oct-96 22432.04 Oct-96 25061.96
Nov-96 23356.33 Nov-96 25778.51
Dec-96 23968.49 Dec-96 26091.46
Jan-97 24447.39 Jan-97 26800.30
Feb-97 23854.62 Feb-97 25616.58
Mar-97 22729.02 Mar-97 24243.33
Apr-97 22792.66 Apr-97 24089.15
May-97 25328.34 May-97 26895.36
Jun-97 26413.79 Jun-97 28240.79
Jul-97 27642.87 Jul-97 29964.45
Aug-97 28275.38 Aug-97 30415.31
Sep-97 30344.95 Sep-97 32689.64
Oct-97 29011.93 Oct-97 31241.51
Nov-97 28824.28 Nov-97 30841.08
Dec-97 29328.80 Dec-97 31102.64
Jan-98 28865.39 Jan-98 30621.71
Feb-98 30999.78 Feb-98 32966.43
Mar-98 32278.30 Mar-98 34469.13
Apr-98 32456.90 Apr-98 34711.16
May-98 30708.87 May-98 32817.76
Jun-98 30773.47 Jun-98 33275.22
</TABLE>
Montgomery Small Russell Lipper Small
Date Cap Fund 2000 Index/1/ Cap Funds Average/2/
- -------------------------------------------------------------------------
7/90 $10,000 $10,000 $10,000
6/98 $45,087 $30,773 $33,752
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
includes the smallest 2,000 companies within the Russell 3000 Index. Fund
performance presented is for Class R shares.
/2/ The Lipper Small Cap Funds Average universe consists of 77 funds.
INVESTMENT REVIEW
Q: How did the Small Cap Fund perform for the year ended June 30, 1998?
A: For the 12 months ended June 30, 1998, the Small Cap Fund was up 23.23%, out-
performing its benchmark, the Russell 2000 Index, which returned 16.51%. Since
January 1, 1998, however, the returns have been lower, with the Fund up by 5.55%
over the six-month period. Although we still achieved a strong performance in
relation to the Fund's benchmark, this return is well below that of the market
as a whole and reflects investor sentiment, which has increasingly favored
large-cap stocks. As the financial crisis in Asia developed in the summer of
1997, there was a "flight to quality" as investors looked for a relatively safe
place to invest. U.S. large-caps stocks benefited from this trend, which was
partially at the expense of small-cap growth stocks. Small-cap stocks are
perceived to be more risky, more volatile and less liquid than large-cap stocks.
This perception has made them less attractive in a period of economic
uncertainty.
Q: In view of the recent lower returns in this sector, why do you think
small-cap growth stocks are still a good investment?
A: We believe that small-cap stocks are definitely a good investment at current
valuations. Market observers have pointed out that the recent underperformance
of this market sector has resulted in the lowest relative valuation to large
stocks in the past 15 years. Expectations for earnings growth of the S&P 500
have declined from 8% growth to 6%. The economic crisis in Asia is beginning to
have an impact on U.S. growth, with a particular dampening effect on the
earnings of many large-cap companies with exposure to Asian markets. In
contrast, the estimated growth prospects for our portfolio of small-cap growth
stocks remains steady at 25%, which is an important indication but not the sole
factor in investment potential. This is partially due to the reasoning that
small-cap growth companies can maintain their secular growth rates independent
of the broader economy. Other signs that we are at a low point in the valuation
of small stocks include the severe reduction in the initial public offering
(IPO) market and the sharp increase in the short interest in over-the-counter
stocks.
Q: How has the composition of the Fund changed recently?
A: We have added several new positions to the portfolio. They are ESC Medical
Systems, a global leader in the fast-growing aesthetic laser market for the
removal of hair, wrinkles and vascular lesions; Nova Corp Georgia, a leading
provider of credit card transaction processing services to small and
medium-sized businesses; and Trans World Entertainment Corporation, a retailer
of prerecorded music and videos. In line with our investment strategy to seek
out companies that we think offer the potential for long-term growth and are
trading at attractive valuations, all three of these companies are currently
growing earnings by 25 to 30% per year and are valued at 18 times earnings or
less. (Again, these are important financial indicators but do not necessarily
correlate to expected investment performance.)
12
<PAGE>
---------------------
The Montgomery Funds
---------------------
Small Cap Fund
---------------------
Portfolio Highlights
In terms of disposals of assets, we took profits on Amerisource Health, Legato
Systems, Falcon Corp. and LCI International when the companies reached our price
target. ETEC Systems, Grey Wolf, Midway Games and Remec, Inc., were all sold as
a result of negative business outlook.
Q: What is the largest position in the Fund and how did it perform during the
first half of 1998?
A: Our largest investment is currently ICG Communications, a provider of local
telephone service in California, Colorado, Ohio and the Southeast. The stock has
been very active this year and has appreciated nicely. We are more enthused
about ICG's prospects now than we have been at any previous time. There are a
number of reasons for our enthusiasm. ICG has industry-leading fundamentals,
accounting for 10% of all new phone customers in the industry, and as a result
profitability is increasing rapidly; the company will have its state-of-the-art
industry automation system for billing and provisioning new customers in service
by the end of 1998. In addition, ICG sells at a 20 to 25% discount to other
publicly traded companies, and we feel that this discount will diminish as ICG
shows its strong fundamentals over the coming quarters. Furthermore, merger and
acquisition activity in the telecommunications industry continues with the
recently announced merger of AT&T and TCI, indicating increased interest in
facilities-based telecommunications companies like ICG.
Q: Do you think that the Small Cap Fund is well positioned to reap the
benefits of a small-cap market turnaround?
A: The companies in the Fund have all met our rigorous screening process, and we
believe we are well positioned to participate in a market rally. During the
final quarter of the financial year, 91% of portfolio companies reported
earnings in line with or better than our expectations, and we are confident that
this trend will continue over the coming year. We believe that, over time,
earnings growth is what determines stock prices. During the past six years, the
S&P 500 earnings grew at close to 14% per year, which is 50% above the S&P 500
historic growth rate. Small stocks, as represented by our composite portfolio,
grew earnings at 24% per year. The Russell 2000 grew earnings at 18% per year
during this same time period. By comparison, the Fund and the Russell 2000 have
sold at significantly lower valuations than the S&P 500 over the past six years.
Although this valuation premium may be warranted given the predictability and
liquidity of large stocks, we question whether investors will pay such a premium
if the earnings growth rate for large-cap stocks begins to drop significantly.
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
ICG Communications, Inc ................................................ 7.6%
Smithfield Foods, Inc .................................................. 3.4%
AmeriCredit Corporation ................................................ 3.4%
USA Networks Inc ....................................................... 3.4%
Trigon Healthcare Inc .................................................. 2.7%
Tele-Communications TCI
Ventures Group, Class A ................................................ 2.6%
Intermedia Communications
of Florida, Inc ........................................................ 2.4%
Renters Choice, Inc .................................................... 2.3%
Steris Corporation ..................................................... 2.1%
Billing Information Concepts ........................................... 2.1%
================================================================================
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Telephone .............................................................. 12.8%
Diversified Financial Services ......................................... 8.8%
Health Care ............................................................ 8.1%
Business Services ...................................................... 7.7%
Medical Products ....................................................... 7.5%
There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risk of price fluctuations.
13
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Small Cap Fund
- ---------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 97.1%
Shares Value (Note 1)
Airfreight Couriers - 0.9%
56,000 Eagle USA Airfreight, Inc .......................$ 1,944,250
Apparel and Textiles - 2.1%
74,000 Novel Denim Holdings Ltd ......................... 1,924,000
72,000 Pillowtex Corporation ............................ 2,889,000
---------
4,813,000
Banks - 2.4%
46,704 Bank United Corporation, Class A ................. 2,238,680
103,000 Commercial Federal Corporation ................... 3,257,374
---------
5,496,054
Biotechnology - 0.7%
64,000 IDEC Pharmaceuticals Corporation ................. 1,500,000
Broadcasting/Advertising - 6.7%
34,000 Jacor Communications Inc.** ...................... 2,008,125
36,000 Snyder Communications, Inc.+ ..................... 1,584,000
96,000 Telecommunications Liberty Media
Group, Class A+ .................................. 3,729,000
304,000 USA Networks Inc ................................. 7,647,500
---------
14,968,625
Building Materials - 4.3%
160,000 Champion Enterprises, Inc.+ ...................... 4,680,000
156,000 Interface, Inc ................................... 3,149,250
64,000 Oakwood Homes Corporation ........................ 1,920,000
---------
9,749,250
Business Services - 7.7%
312,000 Billing Information Concepts+ .................... 4,777,500
36,000 DST Systems, Inc.+ ............................... 2,016,000
40,000 Envoy Corporation**+ ............................. 1,901,250
80,000 National Data Corporation ........................ 3,500,000
65,000 Nova Corp Georgia** .............................. 2,323,750
136,000 Personnel Group of America Inc.+ ................. 2,720,000
---------
17,238,500
Chemicals - 1.1%
144,000 Tetra Technologies Inc.+ ......................... 2,376,000
Consumer Services - 1.7%
68,000 Metamor Worldwide, Inc ........................... 2,394,875
104,000 SmarTalk TeleServices Inc.** ..................... 1,475,500
---------
3,870,375
Diversified Financial Services - 8.8%
216,000 AmeriCredit Corporation+ ......................... 7,708,500
46,300 ContiFinancial Corporation**+ .................... 1,070,688
56,000 FirstPlus Financial Group, Inc.**+ ............... 2,114,000
104,000 Franchise Mortgage Acceptance
Company LLC+ ..................................... 2,704,000
56,000 Heller Financial, Inc ............................ 1,680,000
94,300 Imperial Credit Industries+ ...................... 2,192,475
89,500 Sirrom Capital Corporation** ..................... 2,327,000
---------
19,796,663
Electronics - 2.3%
36,100 Flextronics International Ltd ................... 1,569,222
83,400 Genrad, Inc.+ .................................... 1,647,150
50,000 Nice Systems Ltd., ADR+ .......................... 1,873,438
---------
5,089,810
Food and Beverage - 5.1%
77,000 Canandaigua Wine Company, Inc., Class A+ ......... 3,787,438
256,000 Smithfield Foods, Inc.+ .......................... 7,760,000
---------
11,547,438
Footwear - 0.8%
64,000 Just for Feet, Inc ............................... 1,824,000
Furniture - 0.9%
73,200 Knoll, Inc.+ ..................................... 2,141,100
Health Care - 8.1%
320,000 Coventry Health Care Inc ......................... 4,720,000
42,000 Medical Manager Corporation ...................... 1,165,500
80,000 PMR Corporation .................................. 805,000
128,000 Quorum Health Group, Inc.+ ....................... 3,388,000
168,000 Trigon Healthcare Inc.+ .......................... 6,079,500
87,000 United Payors & United Providers, Inc ............ 1,957,500
---------
18,115,500
Insurance - 2.4%
54,000 CMAC Investment Corporation ...................... 3,321,000
24,000 Life RE Corporation .............................. 1,989,000
---------
5,310,000
Investment Management - 3.7%
63,100 Affiliated Managers Group, Inc.+ ................. 2,362,306
296,000 Tele-Communications TCI Ventures
Group, Class A+ .................................. 5,929,250
---------
8,291,556
Leisure Time - 2.1%
120,000 K2, Inc .......................................... 2,115,000
144,000 Royal Olympic Cruise Lines ....................... 1,444,500
72,000 Servico, Inc.** .................................. 1,080,000
---------
4,639,500
Lodging - 0.6%
162,904 ShoLodge, Inc.+ .................................. 1,293,051
Medical Products - 7.5%
44,000 A T L Ultrasound Inc.+ ........................... 1,996,500
34,000 Cooper Companies, Inc ............................ 1,238,875
82,400 Cyberonics ....................................... 878,075
56,000 ESC Medical Systems, Ltd ......................... 1,895,250
97,700 I-Stat Corporation**+ ............................ 1,105,231
117,000 Mentor Corporation ............................... 2,829,938
72,000 Neurex Corporation ............................... 2,191,500
76,000 Steris Corporation+ .............................. 4,833,125
---------
16,968,494
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
---------------------
The Montgomery Funds
---------------------
Small Cap Fund
---------------------
I n v e s t m e n t s
COMMON STOCKS - continued
Shares Value (Note 1)
Newspapers/Publishing - 0.8%
74,000 Petersen Companies, Inc., Class A+ ...........$ 1,896,250
Oil - 1.7%
56,000 BJ Services Company+ ......................... 1,627,500
72,000 Petroleum Geo-Services, ADR+ ................. 2,196,000
---------
3,823,500
Oilfield Equipment - 1.5%
56,000 EVI Weatherford Inc.** ....................... 2,079,000
80,000 Pride International, Inc.** .................. 1,355,000
---------
3,434,000
Pharmacy/Drugs - 0.5%
72,000 North American Vaccine Inc.**+ ............... 1,116,000
Retail Trade - 3.4%
178,200 Renters Choice, Inc.+ ........................ 5,078,700
61,300 Trans World Entertainment Corporation ........ 2,632,069
---------
7,710,769
Software Systems - 4.1%
53,200 CSG Systems International, Inc.+ ............. 2,490,425
64,000 Electronic Arts, Inc.+ ....................... 3,460,000
112,000 Platinum Technology .......................... 3,202,500
---------
9,152,925
Telecommunications - 0.9%
88,000 Echostar Communications ...................... 2,117,500
Telephone - 12.8%
465,000 ICG Communications, Inc.**+ .................. 16,987,031
128,000 Intermedia Communications of
Florida, Inc.**+ ............................. 5,364,000
78,800 McLeod USA, Inc.+ ............................ 3,065,813
80,000 Winstar Communications, Inc.** ............... 3,437,500
---------
28,854,344
Telephone/Long Distance - 1.5%
80,000 E. Spire Communications Inc.** ............... 1,807,500
80,000 RCN Corporation+ ............................. 1,552,500
---------
3,360,000
TOTAL COMMON STOCKS
(Cost $165,998,178)............................................ 218,438,454
-----------
REPURCHASE AGREEMENTS - 3.0%
Principal Amount Value (Note 1)
$3,372,000 Agreement with Greenwich Capital Markets,
6.30% dated 06/30/98, to be repurchased
at $3,372,590 on 07/01/98, collateralized by
$3,439,440 market value of U.S. government
securities, having various maturities and
various interest rates............................ $ 3,372,000
3,372,000 Agreement with UBS, 6.30% dated 06/30/98,
to be repurchased at $3,372,590 on 07/01/98,
collateralized by $3,439,440 market value of
U.S. government securities, having various
maturities and various interest rates............. 3,372,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $6,744,000).............................................. 6,744,000
---------
TOTAL INVESTMENTS - 100.1%
(Cost $172,742,178*)........................................... 225,182,454
OTHER ASSETS AND LIABILITIES - (0.1)%
(Net).......................................................... (197,497)
-------
NET ASSETS - 100.0%............................................ $ 224,984,957
===========
* Aggregate cost for federal tax purposes was $172,933,682.
** Securities on loan at June 30, 1998, which have an aggregate market value
of $26,409,363, represent 11.74% of the total net assets of the Fund (see
note 4 to Financial Statements).
+ Non-income producing security.
Abbreviation:
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
U.S. Emerging
Growth Fund
- --------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger Honour ......................................... Senior Portfolio Manager
Kathryn Peters ....................................... Portfolio Manager
Andrew Pratt, CFA .................................... Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery U.S.
Emerging Growth Fund
Since inception (12/30/94) ............................................. 23.57%
One year ............................................................... 21.76%
Three years ............................................................ 22.31%
- --------------------------------------------------------------------------------
Russell 2000 Index
Since 12/30/94 ......................................................... 20.51%
One year ............................................................... 16.51%
Three years ............................................................ 18.86%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY US EMERGING GROWTH(R)
Initial Investment: $10,000 Period: 12/30/94 - 06/98
This is no Load fund.
<TABLE>
<CAPTION>
Growth Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/30/94 12.00 $10,000 $0 $10,000
12/94 12.00 $10,000 $0 $10,000
01/95 12.10 $10,083 $0 $10,083
02/95 12.25 $10,208 $0 $10,208
03/95 12.67 $10,558 $0 $10,558
04/95 12.82 $10,683 $0 $10,683
05/95 12.95 $10,792 $0 $10,792
06/95 13.75 $11,458 $0 $11,458
07/95 14.50 $12,083 $0 $12,083
08/95 14.75 $12,292 $0 $12,292
09/95 14.97 $12,475 $0 $12,475
10/95 14.47 $12,058 $0 $12,058
11/95 14.93 $12,442 $129 $12,571
12/95 15.28 $12,733 $133 $12,866
01/96 15.19 $12,658 $132 $12,790
02/96 15.63 $13,025 $136 $13,161
03/96 16.14 $13,450 $140 $13,590
04/96 17.52 $14,600 $152 $14,752
05/96 18.81 $15,675 $163 $15,838
06/96 17.82 $14,850 $155 $15,005
07/96 15.99 $13,325 $139 $13,464
08/96 16.72 $13,933 $146 $14,079
09/96 17.32 $14,433 $151 $14,584
10/96 16.26 $13,550 $994 $14,544
11/96 16.62 $13,850 $1,016 $14,866
12/96 16.91 $14,092 $1,234 $15,326
01/97 17.67 $14,725 $1,290 $16,015
02/97 16.64 $13,867 $1,215 $15,082
03/97 15.99 $13,325 $1,168 $14,493
04/97 15.93 $13,275 $1,163 $14,438
05/97 17.73 $14,775 $1,295 $16,070
06/97 19.00 $15,833 $1,388 $17,221
07/97 20.06 $16,717 $1,464 $18,181
08/97 21.04 $17,533 $1,537 $19,070
09/97 22.53 $18,775 $1,645 $20,420
10/97 21.80 $18,167 $1,591 $19,758
11/97 21.42 $17,850 $1,564 $19,414
12/97 20.31 $16,925 $2,547 $19,472
01/98 20.37 $16,975 $2,555 $19,530
02/98 21.95 $18,292 $2,753 $21,045
03/98 22.88 $19,067 $2,869 $21,936
04/98 22.87 $19,058 $2,869 $21,927
05/98 21.97 $18,308 $2,756 $21,064
06/98 21.87 $18,225 $2,743 $20,968
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
<TABLE>
<CAPTION>
RUSSELL 2000 LIPPER HYPOTHETICAL FOR U.S.
AVE EMERGING GROWTH FUND
12/94-6/98 12/31/94-6/30/98
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <S> <C> <C>
Dec-94 $ 10,000 12/31/94 $ 10,000.00
Jan-95 9873.83 01/31/95 $ 9,891.88
Feb-95 10284,57 02/28/95 $ 10,295.84
Mar-95 10461.69 03/31/95 $ 10,580.33
Apr-95 10694.31 04/30/95 $ 10,725.63
May-95 10878.19 05/31/95 $ 10,899.96
Jun-95 11442.50 06/30/95 $ 11,549.04
Jul-95 12101.61 07/31/95 $ 12,415.61
Aug-95 12351.95 08/31/95 $ 12,609.76
Sep-95 12572.54 09/30/95 $ 12,936.40
Oct-95 12010.26 10/31/95 $ 12,520.55
Nov-95 12514.86 11/30/95 $ 13,011.65
Dec-95 12845.86 12/31/95 $ 13,207.92
Jan-96 12831.25 01/31/96 $ 13,106.14
Feb-96 13231.20 02/29/96 $ 13,642.59
Mar-96 13500.52 03/31/96 $ 14,000.80
Apr-96 14222.41 04/30/96 $ 15,056.64
May-96 14782.92 05/31/96 $ 15,668.41
Jun-96 14175.89 06/30/96 $ 15,040.40
Jul-96 12937.77 07/31/96 $ 13,724.55
Aug-96 13688.93 08/31/96 $ 14,560.71
Sep-96 14223.90 09/30/96 $ 15,316.60
Oct-96 14004.71 10/31/96 $ 14,987.92
Nov-96 1458?.76 11/30/96 $ 15,434.81
Dec-96 14963.94 12/31/96 $ 15,638.83
Jan-97 15262.92 01/31/97 $ 16,016.17
Feb-97 14892.84 02/28/97 $ 15,299.33
Mar-97 14190.11 03/31/97 $ 14,501.39
Apr-97 14229.84 04/30/97 $ 14,409.25
May-97 15812.91 05/31/97 $ 16,120.13
Jun-97 16490.58 06/30/97 $ 16,945.32
Jul-97 17257.92 07/31/97 $ 17,995.11
Aug-97 17652.81 08/31/97 $ 18,308.67
Sep-97 18944.88 09/30/97 $ 19,686.03
Oct-97 18112.65 10/31/97 $ 18,786.64
Nov-97 17995.50 11/30/97 $ 18,513.56
Dec-97 18310.48 12/31/97 $ 18,645.18
Jan-98 18021.17 01/31/98 $ 18,318.41
Feb-98 19353.71 02/28/98 $ 19,743.51
Mar-98 20151.91 03/31/98 $ 20,640.06
Apr-98 20263.41 04/30/98 $ 20,787.35
May-98 19172.08 05/31/98 $ 19,587.18
Jun-98 19212.41 06/30/98 $ 19,755.72
</TABLE>
Montgomery U.S. Russell Lipper Small-Cap
Date Emerging Growth Fund 2000 Index/1/ Funds Average/2/
- --------------------------------------------------------------------------------
12/94 $10,000 $10,000 $10,000
6/98 $20,968 $19,212 $19,756
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
includes the smallest 2,000 companies within the Russell 3000 Index.
/2/ The Lipper Small-Cap Funds Average universe consists of 284 funds.
INVESTMENT REVIEW
Q: Why did the Funds name change from the Micro Cap Fund to the
U.S. Emerging Growth Fund?
A: When we started the Fund, there was no commonly accepted definition of micro
cap, so we defined micro cap in the prospectus as companies with market
capitalizations in the bottom decile of the Wilshire 5000 Index. Over the last
few years, the definition of micro-cap has evolved in the market place, and
micro-cap companies are now commonly defined as companies with market
capitalizations of less than $300 million. We have always managed the Fund in
accordance with our definition as defined in the prospectus, which although
small companies, contains some companies with market caps greater than $300
million. We will continue to manage the fund in accordance with the prospectus
definition of investing in companies in the bottom decile of the Wilshire 5000.
Therefore the change is in the name only, and not in how we manage the Fund or
in the size of companies in which we invest.
Q: How did the U.S. Emerging Growth Fund perform for the fiscal year ended
June 30, 1998, and for the first six months of calendar 1998?
A: For the fiscal year ended June 30, 1998, the Fund was up 21.76%, surpassing
both the Russell 2000 Index and the Russell 2000 Growth Index, which were up
16.51% and 13.19% respectively. For the first six months of 1998, the U.S.
Emerging Growth Fund was up 7.68%, while the Russell 2000 Index was up 4.93% and
the Russell 2000 Growth Index was up 5.46%. This relative performance is
particularly favorable given that we have been in a market environment where the
larger-capitalization stocks have assumed a leadership position and the weighted
average market cap of the Russell 2000 is much higher than that of the U.S.
Emerging Growth Fund.
Q: What holdings performed especially well in the past six months and why?
A: Holdings that performed well were those benefiting from healthy consumer
demand, low interest rates and little exposure to Asia or falling commodity
prices. Two examples are Triangle Pacific Corporation and Duane Reade, Inc.
Triangle Pacific is the leading manufacturer of hardwood flooring products (best
known for Bruce hardwood floors) and a manufacturer of kitchen and bathroom
cabinets. We initiated our position in Triangle Pacific in March 1995. The stock
has climbed as investors bought stocks which would benefit from the strength of
the housing market. On June 13, 1998, Armstrong World Industries announced that
it would acquire Triangle Pacific for a nice premium.
Duane Reade is the largest drugstore chain in the metropolitan New York City
area, operating almost twice as many stores in Manhattan as its next largest
competitor. New York City has very low chain drug store penetration in
comparison with other markets in the United States. Duane Reade is the proven
leader in this region and has the highest sales per square foot and the highest
EBITDA (earnings before interest, tax, depreciation and amortization) margins of
any U.S. drugstore chain. We initiated our position in Duane Reade on the
initial public offering (IPO) in February 1998,
16
<PAGE>
--------------------
The Montgomery Funds
--------------------
U.S. Emerging
Growth Fund
--------------------
Portfolio Highlights
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Duane Reade, Inc.......................................................... 3.6%
On Assignment, Inc........................................................ 3.6%
Manitowoc Company ........................................................ 3.5%
HA-LO Industries, Inc..................................................... 3.4%
Life RE Corporation ...................................................... 3.3%
Triangle Pacific Corporation ............................................. 3.1%
Moog, Inc., Class A ...................................................... 3.0%
Cooper Companies, Inc..................................................... 2.9%
Elcor Corporation ........................................................ 2.9%
Suiza Foods Corporation .................................................. 2.8%
================================================================================
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Business Services ........................................................ 11.0%
Food and Beverage ........................................................ 8.2%
Broadcasting/Advertising ................................................. 7.8%
Building Materials ....................................................... 6.5%
Machinery and Tools ...................................................... 5.7%
but we had to buy the majority of our position in the aftermarket at a higher
price. Duane Reade is the type of stock investors were attracted to during the
first half of 1998, because it has good growth prospects and has no Asian
exposure nor any commodity price risk. The stock closed even higher on June 30.
Q: Were there holdings that underperformed the market during the first
six months of 1998?
A: Stocks that had a lot of exposure to Asia or falling commodity prices, such
as the oil services stocks, underperformed the market during the last six months
of the period. The oil services stocks had tremendous price appreciation from
June through October 1997 and then corrected sharply at year end and during the
first six months of 1998. The stocks we own in this sector include Varco
International, Inc., and R&B Falcon Corporation (formerly Falcon Drilling, prior
to merging with Reading & Bates).
These stocks have corrected sharply as the price of crude oil has dropped
precipitously to well below normal levels. The fear is that with lower crude
prices, it will be less economical for the large oil companies, the customers of
the oil services companies, to drill for as much oil as expected and therefore
they will reduce capital spending. Also, with the slowdown in Asia, there
appears to be less of a demand for oil than was previously anticipated. Although
we have seen renewal rates come down and some spending reduced, this bad news
has been reflected in the stock prices. It is worth keeping in mind that the
budgets of these oil companies are based on price estimates of crude oil over a
much longer time period than a few months, and that most experts do not expect
crude oil prices to remain at this abnormally low level. The technology for
finding oil has advanced so that it is much less expensive to locate oil than
it used to be. In addition, there remains a limited supply of rigs and
equipment, thus the supply/demand characteristics remain favorable. As the
commodity price returns to more normal levels, we expect the stock prices of the
oil services stocks to rebound. It is also important to note that even taking
into account the correction, our returns as of June 30 on Varco and R&B Falcon
were more than four times our original investment.
Q: What is the strategy of the U.S. Emerging Growth Fund?
A: The Fund's strategy continues to be centered on our stock selection process,
which seeks to identify small and micro-cap growth companies with improving
business fundamentals that are trading at reasonable valuations before their
potential is fully recognized by the market. We seek companies that will not
always be small but that have the potential to become large, successful growth
companies providing superior returns. We use a quantitative screening process to
uncover companies with improving growth; then we perform rigorous fundamental
analysis to determine the validity and sustainability of the company's
prospects. Finally, we apply valuation criteria to determine if this good growth
company is a good investment. We invest only in stocks that meet all three
steps of our process.
17
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
U.S. Emerging
Growth Fund
- --------------------
Investments
Q: Why is now a good time to be invested in the U.S. Emerging Growth Fund?
A: Over the past 12 months, the returns of the largest-cap stocks far exceeded
those of the small-caps, causing a significant valuation disparity between the
two groups. In addition, the small-cap companies are more domestically driven
and thus are far more insulated by the Asian economic crisis than the large
multinationals. The smallest-cap stocks, such as those in the U.S. Emerging
Growth Fund, offer the best combination of growth and value in the market and
therefore provide an opportunity for tremendous upside potential.
There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risk of price fluctuations.
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 93.8%
Shares Value (Note 1)
Aerospace and Defense - 3.0%
310,100 Moog, Inc., Class A+ ............................. $ 11,841,944
Air Freight Courier - 0.6%
50,000 Expeditors International of Washington, Inc. ..... 2,193,750
Apparel and Textiles - 4.0%
110,000 Oxford Industries Inc............................. 3,843,125
293,600 Interface, Inc.................................... 5,927,050
150,730 Pillowtex Corporation ............................ 6,048,041
---------
15,818,216
Auto/Auto Parts - 0.9%
200,000 Donnelly Corporation ............................. 3,437,500
Banks - 1.3%
110,000 Bank United Corporation, Class A ................. 5,273,125
Broadcasting/Advertising - 7.8%
100,000 Ackerley Group Inc................................ 2,100,000
425,000 HA-LO Industries, Inc.+ .......................... 13,228,125
220,000 Metro Networks Inc.+ ............................. 9,466,875
160,000 TMP Worldwide .................................... 5,575,000
---------
30,370,000
Building Materials - 6.5%
450,000 Elcor Corporation ................................ 11,362,500
91,000 Republic Group Inc................................ 1,911,000
222,500 Triangle Pacific Corporation+ .................... 12,230,547
---------
25,504,047
Business Services - 11.0%
106,500 Bell & Howell Company+ ........................... 2,749,031
470,000 Caribiner International, Inc.** .................. 8,225,000
224,000 Intelligroup, Inc.** ............................. 3,969,000
200,000 Lamalie Associates Inc.**+ ....................... 3,737,500
161,500 Maximus, Inc.+ ................................... 4,713,781
400,000 On Assignment, Inc.+ ............................. 14,012,500
200,000 Personnel Group of America Inc.+ ................. 4,000,000
90,000 SOS Staffing Services+ ........................... 1,566,563
---------
42,973,375
Chemicals - 1.8%
290,300 Brunswick Technologies Inc.+ ..................... 3,819,259
203,500 Tetra Technologies, Inc.+ ........................ 3,357,750
---------
7,177,009
Computers and Office Equipment - 1.8%
216,000 Micros Systems, Inc.+ ............................ 7,148,250
Consumer Services - 1.0%
160,000 Equity Corporation International**+ .............. 3,840,000
Electronics - 2.8%
101,100 Cubic Corporation ................................ 2,413,763
160,000 Kollmorgen Corporation ........................... 3,210,000
270,000 Plexus Corporation+ .............................. 5,332,500
---------
10,956,263
Food and Beverage - 8.2%
85,000 Beringer Wine Estates+ ........................... 3,742,656
86,000 Celestial Seasonings, Inc......................... 4,278,500
218,000 Dominick's Supermarkets, Inc.+ ................... 9,728,250
155,000 Nature's Sunshine Products, Inc................... 3,482,656
184,767 Suiza Foods Corporation+ ......................... 11,028,280
----------
32,260,342
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
--------------------
The Montgomery Funds
--------------------
U.S. Emerging
Growth Fund
--------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Health Care - 1.8%
350,000 Catalytica, Inc ..............................$ 6,879,688
Heavy Construction - 1.2%
158,000 Granite Construction, Inc .................... 4,838,750
Insurance - 4.4%
138,000 Amerin Corporation+ .......................... 4,023,563
157,000 Life RE Corporation .......................... 13,011,375
----------
17,034,938
Machinery and Tools - 5.7%
260,000 Applied Power, Inc., Class A ................. 8,937,500
335,000 Manitowoc Company ............................ 13,525,625
----------
22,463,125
Medical Products - 2.9%
315,000 Cooper Companies, Inc.+ ...................... 11,477,813
Metals and Mining - 3.2%
562,500 Encore Wire Corporation+ ..................... 9,105,469
165,500 Lindberg Corporation ......................... 3,268,625
----------
12,374,094
Oil - 0.8%
350,000 Belco Oil & Gas Corporation .................. 3,062,500
Oilfield Services - 3.2%
115,000 Key Energy Group, Inc.**+ .................... 1,509,375
67,000 Lufkin Industries Inc......................... 2,206,813
144,800 R&B Falcon Corporation+ ...................... 3,276,100
290,000 Varco International Inc.+ .................... 5,745,625
----------
12,737,913
Pharmacy/Drugs - 5.4%
475,500 Duane Reade, Inc.............................. 14,265,000
295,400 Roberts Pharmaceutical Corporation ........... 6,794,200
----------
21,059,200
Pollution Control - 1.0%
150,000 Casella Waste Systems, Inc., Class A ......... 4,031,247
Restaurants - 1.1%
200,000 Consolidated Products, Inc.................... 4,225,000
Retail Trade - 5.4%
240,000 Coldwater Creek, Inc.......................... 6,570,000
75,000 Ethan Allen Interiors Inc..................... 3,745,313
756,000 Filene's Basement Corporation+ ............... 4,122,563
220,000 Linens 'N Things, Inc.+ ...................... 6,723,750
----------
21,161,626
Software Systems - 5.0%
246,125 Boole and Babbage, Inc.+......................$ 5,891,617
130,000 Henry (Jack) & Associates** .................. 4,476,875
407,500 Indus International, Inc...................... 4,864,531
62,000 Kronos, Inc.+ ................................ 2,276,563
85,000 Platinum Software Corporation+ ............... 2,071,875
----------
19,581,461
Telecommunications Equipment - 0.6%
153,000 Harmonic Lightwaves, Inc.+ ................... 2,361,938
Trucking - 1.4%
280,000 Swift Transportation Company Inc.+ ........... 5,565,000
TOTAL COMMON STOCKS
(Cost $234,477,979) ........................................... 367,648,114
-----------
REPURCHASE AGREEMENTS - 4.8%
Principal Amount
$9,413,000 Agreement with Greenwich Capital Markets,
6.30% dated 06/30/97, to be repurchased
at $9,414,647 on 07/01/98, collateralized by
$9,601,260 market value of U.S. government
securities, having various maturities and
various interest rates............................ 9,413,000
9,413,000 Agreement with UBS, 6.30% dated 06/30/98,
to be repurchased at $9,414,647 on 07/01/98,
collateralized by $9,601,260 market value
of U.S. government securities, having various
maturities and various interest rates............. 9,413,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $18,826,000)............................................. 18,826,000
----------
TOTAL INVESTMENTS - 98.6%
(Cost $253,303,979)............................................ 386,474,114
OTHER ASSETS AND LIABILITIES - 1.4%
(Net).......................................................... 5,498,745
---------
NET ASSETS - 100.0%............................................$ 391,972,859
===========
* Aggregate cost for federal tax purposes was $253,489,836.
** Securities on loan at June 30, 1998, which have an aggregate market value
of $9,197,088, represent 2.3% of the total net assets of the Fund (see note
4 to Financial Statements).
+ Non-income producing security.
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Equity Income Fund
- --------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William King, CFA............................................ Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Equity Income Fund
Since inception (9/30/94) ............................................. 21.54%
One year .............................................................. 15.83%
Three years ........................................................... 22.05%
- --------------------------------------------------------------------------------
S&P 500 Index
Since 9/30/94 ......................................................... 29.72%
One year .............................................................. 30.20%
Three years ........................................................... 30.23%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
07/10/98
MONTGOMERY EQUITY INCOME(R)
Initial Investment: $10,000 Period: 09/30/94 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/94 12.00 $10,000 $0 $10,000
09/94 12.00 $10,000 $0 $10,000
10/94 12.10 $10,083 $0 $10,083
11/94 11.79 $9,825 $0 $9,825
12/94 11.77 $9,808 $99 $9,907
01/95 12.28 $10,233 $103 $10,336
02/95 12.59 $10,492 $105 $10,597
03/95 12.78 $10,650 $174 $10,824
04/95 13.02 $10,850 $178 $11,028
05/95 13.45 $11,208 $184 $11,392
06/95 13.38 $11,150 $276 $11,426
07/95 13.54 $11,283 $279 $11,562
08/95 13.75 $11,458 $284 $11,742
09/95 14.28 $11,900 $380 $12,280
10/95 14.28 $11,900 $380 $12,280
11/95 15.00 $12,500 $399 $12,899
12/95 15.36 $12,800 $592 $13,392
01/96 15.61 $13,008 $602 $13,610
02/96 15.72 $13,100 $605 $13,705
03/96 15.70 $13,083 $701 $13,784
04/96 15.75 $13,125 $703 $13,828
05/96 16.02 $13,350 $715 $14,065
06/96 16.09 $13,408 $824 $14,232
07/96 15.64 $13,033 $801 $13,834
08/96 15.95 $13,292 $816 $14,108
09/96 16.44 $13,700 $939 $14,639
10/96 15.59 $12,992 $2,134 $15,126
11/96 16.52 $13,767 $2,261 $16,028
12/96 16.04 $13,367 $2,481 $15,848
01/97 16.37 $13,642 $2,532 $16,174
02/97 16.87 $14,058 $2,610 $16,668
03/97 16.33 $13,608 $2,624 $16,232
04/97 16.61 $13,342 $2,669 $16,511
05/97 17.46 $14,550 $2,806 $17,356
06/97 17.91 $14,925 $3,010 $17,935
07/97 18.91 $15,758 $3,178 $18,936
08/97 18.26 $15,217 $3,068 $18,285
09/97 19.01 $15,842 $3,306 $19,148
10/97 18.28 $15,233 $3,179 $18,412
11/97 19.29 $16,075 $3,355 $19,430
12/97 17.78 $14,817 $5,167 $19,984
01/98 17.64 $14,700 $5,127 $19,827
02/98 18.49 $15,408 $5,375 $20,783
03/98 19.22 $16,017 $5,694 $21,711
04/98 18.81 $15,675 $5,573 $21,248
05/98 18.43 $15,358 $5,461 $20,819
06/98 18.27 $15,225 $5,549 $20,774
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
Equity Income Fund
<TABLE>
<CAPTION>
LIPPER
S&P 500 EQUITY INCOME
AVE AVE
9/94-6/98 9/94-6/98
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Sep-94 $10,000 Sep-94 $10,000
Oct-94 10224.34 Oct-94 10060.10
Nov-94 9852.45 Nov-94 9685.36
Dec-94 9998.32 Dec-94 9758.16
Jan-95 10257.43 Jan-95 9947.00
Feb-95 10656.79 Feb-95 10274.07
Mar-95 10970.95 Mar-95 10520.42
Apr-95 11293.56 Apr-95 10763.63
May-95 11744.26 May-95 11093.99
Jun-95 12016.57 Jun-95 11227.71
Jul-95 12414.89 Jul-95 11523.55
Aug-95 12445.88 Aug-95 11640.34
Sep-95 12970.82 Sep-95 12024.81
Oct-95 12924.48 Oct-95 11908.25
Nov-95 13491.20 Nov-95 12428.41
Dec-95 13751.08 Dec-95 12735.50
Jan-96 14218.56 Jan-96 13041.92
Feb-96 14350.84 Feb-96 13153.42
Mar-96 1448?.01 Mar-96 13318.28
Apr-96 14702.43 Apr-96 13462.92
May-96 15080.95 May-96 13670.79
Jun-96 15138.45 Jun-96 13693.17
Jul-96 14470.00 Jul-96 13208.62
Aug-96 14775.68 Aug-96 13552.12
Sep-96 15606.55 Sep-96 14070.95
Oct-96 16036.82 Oct-96 14394.03
Nov-96 17247.94 Nov-96 15205.24
Dec-96 16906.27 Dec-96 15123.54
Jan-97 17961.92 Jan-97 15678.28
Feb-97 18102.94 Feb-97 15867.34
Mar-97 17360.50 Mar-97 15388.40
Apr-97 18395.98 Apr-97 15845.18
May-97 19520.67 May-97 16748.59
Jun-97 20388.49 Jun-97 17365.78
Jul-97 22010.36 Jul-97 18481.34
Aug-97 20776.22 Aug-97 17923.78
Sep-97 21615.53 Sep-97 18802.77
Oct-97 21184.43 Oct-97 18223.30
Nov-97 22164.30 Nov-97 18791.27
Dec-97 22544.67 Dec-97 19240.43
Jan-98 22793.78 Jan-98 19211.71
Feb-98 24436.81 Feb-98 20295.03
Mar-98 25687.18 Mar-98 21225.05
Apr-98 25950.22 Apr-98 21228.19
May-98 25504.79 May-98 20897.24
Jun-98 26540.02 Jun-98 21042.27
</TABLE>
Page 1
Lipper Equity S&P Montgomery Equity
Date Fund's Average/2/ 500 Index/1/ Income Fund
- --------------------------------------------------------------------------------
9/94 $10,000 $10,000 $10,000
6/98 $26,540 $21,042 $20,774
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.
/2/ The Lipper Equity Income Funds Average universe consists of 113 funds.
INVESTMENT REVIEW
Q: How did the Fund perform during the year ended June 30, 1998?
A: The Fund provided a 15.83% total return during the period, compared with
30.20% for the Standard & Poor's 500 Index. The portfolio performed well in the
first half of the financial year, outpacing the index during a period
characterized by a "flight to quality." The S&P 500 returned to outpace the Fund
in the second half of the financial year. We continue to invest in what we see
as stable, higher-quality companies with consistent growth over the long term,
even though we may not keep up with the index during this precarious market.
Q: What happened?
A: The S&P 500 was driven by the performance of very large growth stocks,
perceived as safe havens from Asia-related earnings disappointments. Generally,
investors sought out household growth names like Microsoft, Pfizer and Coca
Cola, regardless of their valuations. For example, in June 1998 the S&P 500 was
selling at 29 times the prior 12 months' earnings--the highest in history. The
Fund has relatively light exposure to high price-to-earnings (P/E)
growth-oriented stocks, which investors favored over the past several years.
During the second half of the financial year, January through June 30, 1998, the
Fund's holdings in electric and gas utilities (15% of the portfolio) were unable
to keep up with the riskier higher-growth areas of the market. Riskier stocks
outperformed. In addition, our energy holdings (14% of the Fund)
underperformed as the price of oil dropped to below $15 per barrel, and the
energy sector had its worst performance relative to the S&P 500 since 1991. We
believe that oil prices and the outlook for our energy holdings are now
beginning to improve.
Q: Can you give an example of a high-quality company added in the last year that
is underperforming the market?
A: Emerson Electric Company, added last November, manufactures a broad range of
electrical products including the components for most household appliances. This
A+ rated company with sales of $12 billion has not had a decline in earnings in
more than 40 years. Over the past 20 years, Emerson has grown its earnings above
that of the average S&P 500 companies, yet currently sells at a 20% discount on
a price-to-earnings basis, and a 25% discount on a price-to-book basis. Emerson
is ranked in the top decile in earnings stability and has consistently grown
earnings 9 to 10% annually. We believe that Emerson is also well positioned to
grow internationally. We expect the market to come back to solid, lower-risk
companies like Emerson.
Q: Did you make any significant changes to the portfolio over the past year?
A: One of the more important factors we have emphasized over the years-and
continue to focus on--is investment in the highest-quality companies, with
seasoned management and sound finances. We have continued to keep the Fund in
lower-volatility stocks. Almost 10% of the portfolio is invested in telephones,
20
<PAGE>
--------------------
The Montgomery Funds
--------------------
Equity Income Fund
--------------------
Portfolio Highlights
15% in electric and gas utilities, and 15% in energy. These industries are not
only traditionally very defensive in a market correction, but generally provide
good upside potential. In addition, the portfolio continues to be well
diversified, including a portion of its assets in cyclical stocks that have
tended to hold up well even when the economy slows.
Q: Do you intend to make any changes to the Fund's investment strategy?
A: The strategy will continue to focus on high-quality, blue chip companies
trading at attractive prices. Although the market presently rewards higher-risk
strategies, as evidenced by the number of companies trading at record high
prices, we don't believe that this trend will last indefinitely. Because the
Equity Income Fund has much lower P/E multiples than the S&P 500, it is much
better positioned to withstand the slowdown in earnings that the market is
currently forecasting for the S&P 500. Our large companies have more-stable
earnings and stronger balance sheets. In addition, several sectors, including
energy and utilities, which have lagged in performance are especially
attractive. Our fundamental research focuses on U.S. common stocks with above-
average yields, to provide a portfolio with consistent characteristics and
strong returns. Our investors should benefit, because our valuation work keeps
the Fund in reasonably priced, high-quality investments.
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
SAFECO Corporation ....................................................... 3.1%
Bell Atlantic Corporation ................................................ 3.0%
Ameritech Corporation .................................................... 2.9%
Anheuser-Busch Companies, Inc. ........................................... 2.9%
GTE Corporation .......................................................... 2.8%
Chevron Corporation ...................................................... 2.6%
First Union Corporation .................................................. 2.6%
General Mills Inc. ....................................................... 2.5%
Kimberly-Clark Corporation ............................................... 2.5%
Genuine Parts Company .................................................... 2.4%
================================================================================
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Oil ...................................................................... 13.9%
Electric Utilities ....................................................... 12.6%
Food and Beverage ........................................................ 8.5%
Banks/Savings and Loans .................................................. 8.3%
Insurance ................................................................ 7.9%
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 99.5%
Shares Value (Note 1)
Apparel and Textiles - 2.0%
13,000 May Department Stores Company ................$ 851,500
Auto/Auto Parts - 2.4%
30,000 Genuine Parts Company ........................ 1,035,000
Banks/Savings and Loans - 8.3%
19,000 First Union Corporation ...................... 1,106,750
12,000 Keycorp ...................................... 427,500
7,000 Morgan (J.P.) & Company Inc. ................. 819,875
10,000 National City Corporation .................... 710,000
6,000 Wachovia Corporation ......................... 507,000
-------
3,571,125
Building Materials - 1.1%
8,000 Masco Corporation ............................ 484,000
Chemicals - 3.0%
7,000 Dow Chemical Company ......................... 676,813
18,000 Nalco Chemical Company ....................... 632,250
-------
1,309,063
Computers and Office Equipment - 1.6%
14,000 Pitney-Bowes Inc. ............................ 673,750
Conglomerates - 1.9%
10,000 Minnesota Mining & Manufacturing
Company ...................................... 821,875
Electric Utilities - 12.6%
20,000 Baltimore Gas & Electric Company ............. 621,250
7,000 Duke Energy Corporation ...................... 414,750
17,000 Florida Progress Corporation ................. 699,125
30,000 PacifiCorp ................................... 678,750
28,000 SCANA Corporation ............................ 834,750
31,000 Teco Energy Inc. ............................. 831,188
17,000 Western Resources, Inc. ...................... 659,812
22,000 Wisconsin Energy Corporation ................. 668,250
-------
5,407,875
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Equity Income Fund
- --------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Electrical Equipment - 4.9%
17,500 AMP, Inc. .................................... $ 601,563
14,500 Emerson Electric Company** ................... 874,531
15,000 Hubbell Inc., Class B ........................ 624,375
--------------
2,100,469
Food and Beverage - 8.5%
26,000 Anheuser-Busch Companies, Inc. ............... 1,226,875
16,000 General Mills Inc. ........................... 1,094,000
8,000 Heinz (H.J.) Co. ............................. 449,000
25,000 McCormick & Company, Inc.,
Non-Voting Shares ............................ 892,969
--------------
3,662,844
Gas Utilities - 3.2%
12,000 Consolidated Natural Gas Company ............. 706,500
34,000 Questar Corporation .......................... 667,250
--------------
1,373,750
Household Products - 1.9%
25,000 Rubbermaid, Inc. ............................. 829,688
Insurance - 7.9%
7,000 American General Corporation ................. 498,313
12,000 Marsh & McLennan Companies ................... 725,250
29,000 SAFECO Corporation ........................... 1,316,781
20,000 St. Paul Companies, Inc. ..................... 841,250
--------------
3,381,594
Newspapers/Publishing - 1.7%
9,000 McGraw-Hill Companies, Inc. .................. 734,063
Oil - 13.9%
21,000 Amoco Corporation ............................ 874,126
11,000 Atlantic Richfield Company ................... 859,375
14,000 Chevron Corporation .......................... 1,162,875
20,000 Dresser Industries, Inc. ..................... 881,250
6,000 Exxon Corporation ............................ 427,875
12,000 Mobil Corp. .................................. 919,500
18,000 Phillips Petroleum Company ................... 867,375
--------------
5,992,376
Pharmacy/Drugs - 4.1%
19,000 American Home Products Corporation ........... 983,250
17,000 Pharmacia & Upjohn, Inc. ..................... 784,125
--------------
1,767,375
Pulp and Paper - 5.8%
10,000 International Paper Company .................. 430,000
23,000 Kimberly-Clark Corporation ................... 1,055,125
8,000 Union Camp Corporation ....................... 397,000
13,000 Weyerhaeuser Company ......................... 600,438
--------------
2,482,563
Railroads - 1.4%
20,500 Norfolk Southern Corporation ................. 611,156
Retail Trade - 2.4%
14,000 Penney (J.C.) Company, Inc. .................. 1,012,375
Telephone/Networks - 2.9%
22,000 GTE Corporation .............................. 1,223,747
Telephone/Regional-Local - 5.9%
28,000 Ameritech Corporation ........................ 1,256,500
28,000 Bell Atlantic Corporation .................... 1,277,500
--------------
2,534,000
Tobacco - 2.1%
33,000 UST Inc. ..................................... 891,000
TOTAL COMMON STOCKS
(Cost $38,150,537)............................................ 42,751,188
--------------
REPURCHASE AGREEMENT - 0.1%
(Cost $35,000)
Principal Amount
$ 35,000 Agreement with Greenwich Capital Markets,
Tri-Party, 6.30% dated 06/30/98, to be
repurchased at $35,006 on 07/01/98,
collateralized by $35,700 market value of
U.S. government securities, having various
maturities and various interest rates......... 35,000
--------------
TOTAL INVESTMENTS - 99.6%
(Cost $38,185,537)............................................. 42,786,188
OTHER ASSETS AND LIABILITIES - 0.4%
(Net).......................................................... 192,737
--------------
NET ASSETS - 100.0%............................................ $ 42,978,925
==============
* Aggregate cost for federal tax purposes was $38,228,481.
** Security on loan at June 30, 1998, which has an aggregate market value of
$263,204, represents 0.6% of the total net assets of the Fund (see note 4
to Financial Statements).
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Montgomery
International Growth Fund
Since inception (7/3/95)................................................ 23.35%
One year................................................................ 23.27%
Three years............................................................. 23.30%
- --------------------------------------------------------------------------------
MSCI EAFE Index
Since 6/30/95........................................................... 10.69%
One year................................................................ 6.10%
Three years............................................................. 10.69%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a $10,000 investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALSIS
PAGE 1
07/10/98
MONTGOMERY INT'L GROWTH(R)
Initial Investment: $10,000 Period: 06/30/95 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions reinvested
<S> <C> <C> <C> <C>
06/30/95 12.00 $10,000 $0 $10,000
06/95 12.00 $10,000 $0 $10,000
07/95 12.00 $10,083 $0 $10,083
08/95 12.07 $10,058 $0 $10,058
09/95 12.50 $10,417 $0 $10,417
10/95 12.81 $10,675 $0 $10,675
11/95 12.94 $10,783 $0 $10,783
12/95 13.37 $11,142 $0 $11,142
01/96 13.67 $11,392 $0 $11,392
02/96 13.94 $11,617 $0 $11,617
03/96 14.21 $11,842 $0 $11,842
04/96 15.12 $12,600 $0 $12,600
05/96 15.51 $12,925 $0 $12,925
06/96 15.31 $12,758 $0 $12,758
07/96 14.62 $12,183 $0 $12,183
08/96 15.00 $12,500 $0 $12,500
09/96 15.26 $12,717 $0 $12,717
10/96 13.61 $11,342 $1,395 $12,737
11/96 14.34 $11,950 $1,470 $13,420
12/96 14.40 $12,000 $1,477 $13,477
01/97 14.69 $12,242 $1,506 $13,748
02/97 14.62 $12,183 $1,500 $13,683
03/97 14.67 $12,225 $1,505 $13,730
04/97 14.68 $12,233 $1,506 $13,739
05/97 15.57 $12,975 $1,597 $14,572
06/97 16.25 $13,542 $1,666 $15,208
07/97 16.78 $13,983 $1,721 $15,704
08/97 15.92 $13,267 $1,632 $14,899
09/97 16.87 $14,058 $1,731 $15,789
10/97 15.57 $12,975 $1,597 $14,572
11/97 15.76 $13,133 $1,617 $14,750
12/97 14.76 $12,300 $2,545 $14,845
01/98 15.39 $12,325 $2,653 $15,478
02/98 16.84 $14,033 $2,904 $16,937
03/98 17.76 $14,800 $3,062 $17,862
04/98 18.40 $15,333 $3,173 $18,506
05/98 18.61 $15,508 $3,209 $18,717
06/98 18.64 $15,533 $3,214 $18,747
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
MSCI EAFE IX ND INTERNATIONAL
AVE AVE
6/95-6/98 6/95-6/98
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Jun-95 $10,000 Jun-95 $10,000
Jul-95 10622.56 Jul-95 10534.59
Aug-95 10217.35 Aug-95 10336.54
Sep-95 10416.90 Sep-95 10488.38
Oct-95 10136.89 Oct-95 10278.70
Nov-95 10418.94 Nov-95 10390.71
Dec-95 10838.72 Dec-95 10704.43
Jan-96 10883.22 Jan-96 10943.31
Feb-96 10920.01 Feb-96 10990.06
Mar-96 11151.91 Mar-96 11182.01
Apr-96 11476.13 Apr-96 11537.02
May-96 11264.95 May-96 11500.93
Jun-96 11328.35 Jun-96 11579.29
Jul-96 10997.25 Jul-96 11145.59
Aug-96 11021.35 Aug-96 11269.85
Sep-96 11314.14 Sep-96 11510.53
Oct-96 11198.36 Oct-96 11427.96
Nov-96 11643.92 Nov-96 11912.59
Dec-96 11494.13 Dec-96 11950.79
Jan-97 11091.86 Jan-97 11906.18
Feb-97 11273.28 Feb-97 12059.72
Mar-97 11314.10 Mar-97 12087.09
Apr-97 11374.14 Apr-97 12106.56
May-97 12114.30 May-97 12825.31
Jun-97 12782.37 Jun-97 13423.66
Jul-97 12989.16 Jul-97 13797.13
Aug-97 12019.07 Aug-97 12781.09
Sep-97 12692.36 Sep-97 13570.35
Oct-97 11716.76 Oct-97 12524.33
Nov-97 11597.32 Nov-97 12397.17
Dec-97 11698.48 Dec-97 12489.41
Jan-98 12233.49 Jan-98 12792.50
Feb-98 13018.46 Feb-98 13636.25
Mar-98 13419.32 Mar-98 14330.59
Apr-98 13525.54 Apr-98 14530.60
May-98 13459.89 May-98 14540.02
Jun-98 13501.79 Jun-98 14428.72
</TABLE>
Montgomery International MSCI Lipper International
Date Growth Fund EAFE Index/1/ Funds Average/2/
- --------------------------------------------------------------------------------
7/95 $10,000 $10,000 $10,000
6/98 $18,747 $13,562 $14,429
/1/ The Morgan Stanley Capital International EAFE Index is composed of 21
developed market countries in Europe, Australasia and the Far East. The
returns are presented net of dividend withholding taxes.
/2/ The Lipper International Funds Average universe consists of 288 funds.
23
<PAGE>
- --------------------------
The Montgomery Funds
- --------------------------
International Growth Fund
- --------------------------
Investments
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Railtrack Group PLC ..................................................... 2.5%
Mannesmann AG ........................................................... 2.5%
Nokia Corporation AB, Series A .......................................... 2.4%
Orange PLC .............................................................. 2.3%
Renault S.A. ............................................................ 2.2%
Portugal Telecom S.A. ................................................... 2.0%
Sony Corporation ........................................................ 1.9%
Vivendi ................................................................. 1.9%
Australia & New Zealand Bank
Group, ORD .............................................................. 1.9%
Philips Electronics N.V. ................................................ 1.8%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
United Kingdom .......................................................... 12.2%
Japan ................................................................... 11.7%
France .................................................................. 9.5%
Germany ................................................................. 7.1%
Netherlands ............................................................. 7.0%
Q: Were there any disappointments during the period?
A: Fortunately, we had few disappointments. Advantest, a Japanese semiconductor
equipment maker, and ISPAT, a Dutch steel company, are two holdings whose
results negatively impacted the portfolio. Both were victims of the Asian
financial crisis, in which falling semiconductor and basic commodity prices hurt
the earnings of related companies. Most of the Fund's Advantest position was
sold, given the continued uncertainty regarding the company's earnings
potential. We retained our ISPAT holding, but because of the depreciation in its
price it now accounts for just 0.8% of the portfolio rather than 1.2%.
Q: The Asian economic crisis was a potent force in shaping investor sentiment
throughout the year. What's your outlook for the coming months?
A: All eyes are on Japan. The second quarter may mark the bottom of investor
sentiment and economic fundamentals for that troubled country. In April
Japanese officials announced a $115 billion economic stimulation package. In
June the government unveiled its plan to form a "bridge bank," modeled after the
U.S. Resolution Trust Corporation, to take over bad loans from troubled lenders.
Additionally, the current change in leadership is viewed as a catalyst to move
some of these initiatives ahead. Skeptics abound, however, as Japan has already
set up at least three institutions since 1990 to clean up problems with failed
banks and bad loans. In the past these efforts were largely disappointing.
The cloud of uncertainty cast by the Asian crisis over the global economy
continues to make earnings visibility critical to portfolio selection. As
always, we will continue to apply our primary, original research approach,
utilizing fundamental research at the country, sector and company levels. We
also intend to keep the number of portfolio names concentrated on companies that
possess positive business and earnings momentum, sustainable earnings growth
and attractive valuations. We believe that this approach will continue to
uncover opportunities and add value over the long term.
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of 6/30/98. The ratings are subject to change every month. Past performance is
no guarantee of future results. The ratings are calculated from the funds'
three-, five- and 10-year average annual returns (if available) in excess of
90-day Treasury bill returns with appropriate fee adjustments and a risk factor
that reflects fund performance below 90-day T-bill returns. Ten percent of
funds in a rating universe receive five stars.
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability and fluctuations in currency exchange rates.
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
--------------------------
The Montgomery Funds
--------------------------
International Growth Fund
--------------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 82.2%
Shares Value (Note 1)
Australia - 2.5%
35,000 AMP Ltd. (Software Systems) ........................$ 410,626
175,397 Australia & New Zealand Bank Group,
ORD (Banks) ........................................ 1,212,898
---------
1,623,524
Canada - 1.6%
37,700 Cognos, Inc.+ (Software Systems) ................... 1,004,941
China/Hong Kong - 5.4%
2,555,000 Beijing Datang Power Generation Company
Ltd. (Electric Utilities) .......................... 717,233
577,000 China Telecom (Hong Kong) Ltd.**+
(Telephone/Wireless) ............................... 1,001,633
96,000 Hang Seng Bank Ltd. (Banks) ........................ 542,695
316,000 New World Development Company Ltd.**
(Holding) .......................................... 611,771
147,000 Sun Hung Kai Properties Ltd. (Real Estate) ......... 624,200
---------
3,497,532
Finland - 3.7%
127,800 Merita PLC, Class A**+ (Banks) ..................... 845,385
21,240 Nokia Corporation AB, Series A
(Telecommunications Equipment) ..................... 1,563,723
---------
2,409,108
France - 9.5%
24,000 Alstom (Machinery & Tools)+ ........................ 789,983
6,640 AXA S.A. (Insurance) ............................... 746,845
9,305 Banco Nationale de Paris, ORD FF25 (Banks) ......... 760,321
7,400 Cap Gemini S.A. (Business Services) ................ 1,162,810
25,350 Renault S.A.+ (Auto/Auto Parts) .................... 1,441,994
5,733 Vivendi (Conglomerates) ............................ 1,224,226
---------
6,126,179
Germany - 7.1%
570 Axel Springer Verlag, Class A
(Newspapers/Publishing) ............................ 420,443
10,400 Bayerische Vereinsbank AG (Banks) .................. 882,480
15,650 Mannesmann AG (Machinery & Tools) .................. 1,610,047
1,200 Viag AG (Electric Utilities) ....................... 826,576
920 Volkswagen AG (Auto/Auto Parts) .................... 889,335
---------
4,628,881
Greece - 3.0%
45,777 Hellenic Telecommunication Organization
S.A.+ (Telephone/Networks) ......................... 1,173,712
5,760 National Bank of Greece (Banks) .................... 738,224
---------
1,911,936
Ireland - 1.6%
3,700 Axogen Ltd. Units+ (Pharmacy/Drugs) ................ 233,100
12,700 Elan Corporation PLC, ADR**+
(Pharmacy/Drugs) ................................... 816,769
---------
1,049,869
Italy - 4.9%
120,940 Ente Nazionale Idrocarbri-Eni SpA** (Oil) .......... 792,993
107,000 Saipem SpA**+ (Oilfield Equipment) ................. 549,830
105,700 Telecom Italia SpA**+ (Telephone/Networks) ......... 240,703
49,700 Telecom Italia di Risp (Telephone/Networks) ........ 778,435
130,900 Telecom Italia Mobile SpA**
(Telephone/Wireless) ............................... 800,835
---------
3,162,796
Japan - 8.5%
30 Advantest Corporation (Semiconductor) .............. 1,619
34,000 Bridgestone Corporation (Auto/Auto Parts) .......... 806,538
92,000 Kirin Brewery Company (Food & Beverage) ............ 871,628
24,300 Meitec (Software Systems) .......................... 843,567
277,000 Nissan Motor Company** (Auto/Auto Parts) ........... 875,454
14,300 Sony Corporation (Electronics) ..................... 1,235,879
12,000 TDK Corporation (Electronics) ...................... 889,564
---------
5,524,249
Netherlands - 7.0%
22,800 ASM Lithography Holding N.V.+
(Semiconductor) .................................... 661,913
17,000 International Nederlanden Groep N.V ................
(Banks) ............................................ 1,114,014
29,100 Ispat International N.V. (Metals & Mining) ......... 545,625
14,150 Philips Electronics N.V. (Electronics) ............. 1,190,392
13,200 Unilever N.V., ADR
(Cosmetics & Personal Care) ........................ 1,041,975
---------
4,553,919
New Zealand - 1.6%
106,000 Telecommunications Corporation of New
Zealand** (Telephone/Networks) ..................... 437,947
270,000 Telecommunications Corporation of New
Zealand, Installment Receipts**
(Telephone/Networks) ............................... 577,433
---------
1,015,380
Portugal - 2.5%
24,630 Portugal Telecom S.A. (Telephone/Networks) ......... 1,306,217
1,750 Telecel-Communicacaoes Pessoais S.A.+
(Telephone/Wireless) ............................... 310,943
---------
1,617,160
Singapore - 0.9%
14,600 Creative Technology Ltd.+
(Computers & Office Equipment) ................. 177,626
33,600 Creative Technology Ltd., ADR**+
(Computers & Office Equipment) ................. 416,850
---------
594,476
Spain - 4.6%
41,280 Argentaria (Banks) ............................. 926,007
24,698 Telefonica de Espana, ORD**
(Telephone/Networks) ........................... 1,141,890
73,200 Union Electrica Fenosa, S.A.+
(Electric Utilities) ........................... 942,744
---------
3,010,641
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
- -------------------------
The Montgomery Funds
- -------------------------
International Growth Fund
- -------------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Sweden - 2.5%
31,850 Ericsson (L.M.) Telephone Company, Class B
(Telecommunications Equipment)......................$ 930,538
23,600 Forenings Sparbanken AB, Swedbank
Banks).............................................. 710,219
-------
1,640,757
Switzerland - 3.1%
379 Baer (Julius) Holdings AG-B
Diversified Financial Services) .................... 1,187,581
490 Novartis AG (Pharmacy/Drugs) ....................... 816,721
-------
2,004,302
United Kingdom - 12.2%
114,148 Amvescap PLC (Investment Management) ............... 1,114,969
113,000 Cable & Wireless Communications PLC
(Telephone/Wireless) ............................... 1,144,320
30,353 Glaxo Wellcome PLC (Pharmacy/Drugs) ................ 911,740
139,854 Orange PLC (Telephone/Wireless) .................... 1,482,815
67,118 Railtrack Group PLC (Railroad) ..................... 1,646,263
40,863 Reckitt and Coleman PLC
(Cosmetics & Personal Care) ........................ 780,539
59,192 United Utilities PLC, ORD (Water Utilities) ........ 861,329
-------
7,941,975
TOTAL COMMON STOCKS
(Cost $43,490,066)................................................ 53,317,625
----------
PREFERRED STOCK - 2.0%
(Cost $1,794,287)
Brazil - 2.0%
5,800,000 Telec de Minas Gerais S.A. .........................
(Telephone/Regional-Local) ......................... 403,700
15,800,000 Telecomunicacoes de Minas Gerais-Telemig,
Series C+ (Telecommunications/Other) ............... 478,146
4,800,000 Telesp Celular S.A., Series B+
(Telephone/Wireless) ............................... 398,426
-------
1,280,272
CONVERTIBLE BONDS - 3.2%
(Cost $2,096,380)
Japan - 3.2%
172,000,000 Asahi Bank, 0.500% due 08/01/07 (Banks) ............ 1,159,976
100,000,000 Sumitomo Bank & Trust,
0.500% due 10/01/07*** (Banks) ..................... 611,123
50,000,000 Sumitomo Bank & Trust,
0.500% due 10/01/07 (Banks) ........................ 305,562
-------
2,076,661
RIGHTS - 0.0%#
(Cost $441)
3,567 Telec de Minas Gerais S.A., Rights, Expire
07/14/98+ (Telephone/Regional-Local)................ $ 0
REPURCHASE AGREEMENTS - 13.5%
Principal Amount
$4,356,000 Agreement with Bear Stearns, 6.35% dated
06/30/98, to be repurchased at $4,356,768 on
07/01/98, collateralized by $4,443,120 market
value of U.S. government securities, having
various maturities and various interest rates....... 4,356,000
4,356,000 Agreement with Greenwich Capital Markets,
Tri-Party, 6.30% dated 06/30/98, to be
repurchased at $4,356,762 on 07/01/98,
collateralized by $4,433,120 market value
of U.S. government securities, having various
maturities and various interest rates............... 4,356,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $8,712,000)................................................. 8,712,000
---------
TOTAL INVESTMENTS - 100.9%
(Cost $56,093,174*)............................................... 65,386,558
OTHER ASSETS AND LIABILITIES - (0.9%)
(Net)............................................................. (561,878)
-------
NET ASSETS - 100%................................................$ 64,824,680
==========
* Aggregate cost for federal tax purposes was $56,128,612.
** Securities on loan at June 30, 1998, which have an aggregate market value
of $6,135,091, represent 9.46% of the total net assets of the Fund (see
note 4 to Financial Statements).
*** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
--------------------
The Montgomery Funds
--------------------
International
Small Cap Fund
--------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
John Boich, CFA........................................ Senior Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery
International Small Cap Fund
Since inception (9/30/93)................................................ 8.86%
One year................................................................. 4.46%
Three years.............................................................. 15.18%
- --------------------------------------------------------------------------------
Salomon Smith Barney World
Extended (ex-U.S.) Market Index
Since 9/30/93............................................................ 4.96%
One year................................................................. 0.56%
Three years.............................................................. 6.33%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L SMALL CAP(R)
Initial Investment: $10,000 Period: 09/30/93 - 06/98
This a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/93 12.00 $10,000 $ 0 $10,000
09/93 12.00 $10,000 $ 0 $10,000
10/93 12.52 $10,433 $ 0 $10,433
11/93 12.59 $10,492 $ 0 $10,492
12/93 13.61 $11,342 $ 0 $11,342
01/94 14.54 $12,117 $ 0 $12,117
02/94 14.50 $12,083 $ 0 $12,083
03/94 13.39 $11,158 $ 0 $11,158
04/94 12.98 $10,817 $ 0 $10,817
05/94 12.75 $10,625 $ 0 $10,625
06/94 12.02 $10,017 $ 0 $10,017
07/94 12.54 $10,450 $ 0 $10,450
08/94 12.99 $10,825 $ 0 $10,825
09/94 12.62 $10,517 $ 0 $10,517
10/94 12.77 $10,642 $ 0 $10,642
11/94 11.94 $ 9,950 $ 1 $ 9,951
12/94 11.80 $ 9,833 $ 2 $ 9,835
01/95 11.18 $ 9,317 $ 1 $ 9,318
02/95 11.29 $ 9,408 $ 1 $ 9,409
03/95 11.16 $ 9,300 $ 1 $ 9,301
04/95 11.45 $ 9,542 $ 1 $ 9,543
05/95 11.56 $ 9,633 $ 2 $ 9,635
06/95 11.75 $ 9,792 $ 1 $ 9,793
07/95 12.34 $10,283 $ 2 $10,285
08/95 12.31 $10,258 $ 2 $10,260
09/95 12.90 $10,750 $ 1 $10,751
10/95 12.78 $10,650 $ 1 $10,651
11/95 12.68 $10,567 $ 19 $10,586
12/95 13.16 $10,967 $ 20 $10,987
01/96 13.67 $11,392 $ 21 $11,413
02/96 13.69 $11,408 $ 21 $11,429
03/96 13.98 $11,650 $ 21 $11,671
04/96 14.57 $12,142 $ 22 $12,164
05/96 14.96 $12,467 $ 23 $12,490
06/96 14.86 $12,383 $ 23 $12,406
07/96 14.37 $11,975 $ 22 $11,997
08/96 14.79 $12,325 $ 23 $12,348
09/96 14.88 $12,400 $ 23 $12,423
10/96 14.71 $12,258 $ 23 $12,281
11/96 15.30 $12,750 $ 23 $12,773
12/96 15.13 $12,608 $ 23 $12,631
01/97 15.62 $13,017 $ 24 $13,041
02/97 15.81 $13,175 $ 24 $13,199
03/97 15.61 $13,008 $ 24 $13,032
04/97 15.48 $12,900 $ 24 $12,924
05/97 16.72 $13,933 $ 26 $13,959
06/97 17.16 $14,300 $ 26 $14,326
07/97 17.00 $14,167 $ 26 $14,193
08/97 16.64 $13,867 $ 25 $13,892
09/97 16.91 $14,092 $ 26 $14,118
10/97 15.86 $13,217 $ 24 $13,241
11/97 14.99 $12,492 $ 23 $12,515
12/97 12.68 $10,567 $1,966 $12,533
01/98 13.11 $10,925 $2,033 $12,958
02/98 14.18 $11,817 $2,199 $14,016
03/98 15.17 $12,642 $2,353 $14,995
04/98 15.39 $12,825 $2,387 $15,212
05/98 15.36 $12,800 $2,382 $15,182
06/98 15.14 $12,617 $2,348 $14,965
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
From From
1 Month Inception Inception 1 Year 3 Year 3 Year
Return Date Value Cumulative Annualized Cumulative Cumulative Annualized
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
9/30/93 10,000.00
- -0.3600% 10/31/93 9,964.00 -0.3600%
- -8.3700% 11/30/93 9,130.01 -8.6999%
6.4400% 12/31/93 9,717.99 -2.8201%
9.9900% 1/31/94 10,688.81 6.8881%
0.7000% 2/28/94 10,763.63 7.6363%
- -1.6400% 3/31/94 10,587.11 5.8711%
3.0000% 4/30/94 10,904.72 9.0472%
- -1.4300% 5/31/94 10,748.79 7.4879%
2.1000% 6/30/94 10,974.51 9.7451%
1.1400% 7/31/94 11,099.62 10.9962%
1.0600% 8/31/94 11,217.28 12.1728%
- -2.8600% 9/30/94 10,896.46 8.9646% 8.9646% 8.9646%
1.8100% 10/31/94 11,093.69 10.9369% 10.0392% 11.3377%
- -6.2400% 11/30/94 10,401.44 4.0144% 3.4299% 13.9258%
1.3400% 12/31/94 10,540.82 5.4082% 4.2965% 8.4671%
- -3.2500% 1/31/95 10,198.24 1.9824% 1.4791% -4.5895%
- -1.4600% 2/28/95 10,049.35 0.4935% 0.3488% -6.6361%
4.2500% 3/31/95 10,476.45 4.7645% 3.1545% -1.0453%
3.0000% 4/30/95 10,790.74 7.9074% 4.9319% -1.0453%
- -1.7500% 5/31/95 10,601.90 6.0190% 3.5711% -1.3665%
- -1.2300% 6/30/95 10,471.50 4.7150% 2.6708% -4.5834%
5.8300% 7/31/95 11,081.99 10.8199% 5.7652% -0.1589%
- -2.5300% 8/31/95 10,801.61 8,0161% 4.1027% -3.7056%
0.7800% 9/30/95 10,885.87 8.8587% 4.3354% -0.0972%
- -2.8800% 10/31/95 10,572.35 5.7235% 2.7055% -4.6994%
1.0600% 11/30/95 10,684.42 6.8442% 3.1020% 2.7206%
3.8300% 12/31/95 11,093.63 10.9363% 4.7164% 5.2445%
1.7800% 1/31/96 11,291.10 12.9110% 5.3334% 10.7161%
1.5600% 2/29/96 11,467.24 14.6724% 5.8293% 14.1093%
2.2970% 3/31/96 11,730.64 17.3064% 6.5893% 11.9716%
5.2588% 4/30/96 12,347.54 23.4754% 8.5044% 14.4271%
- -0.8120% 5/31/96 12,247.27 22.4727% 7.8927% 15.5196%
0.0130% 6/30/96 12,248.87 22.4887% 7.6532% 16.9734%
- -3.7815% 7/31/96 11,785.68 17.8568% 5.9653% 6.3498%
1.0143% 8/31/96 11,905.22 19.0522% 6.1531% 10.2170%
0.5558% 9/30/96 11,971.39 19.7139% 6.1755% 9.9719% 19.7139% 6.1930%
- -0.3928% 10/31/96 11,924.37 19.2437% 5.8657% 12.7882% 19.6745% 6.1813%
1.6355% 11/30/96 12,119.40 21.1940% 6.2517% 13.4305% 32.7424% 9.9203%
- -1.8394% 12/31/96 11,896.48 18.9648% 5.4803% 7.2370% 22.4171% 6.9878%
- -2.1610% 1/31/97 11,639.40 16.3940% 4.6505% 3.0847% 8.8932% 2.8860%
1.6800% 2/28/97 11,834.94 18.3494% 5.0548% 3.2065% 9.9530% 3.2103%
- -1.3259% 3/31/97 11,678.01 16.7801% 4.5300% -0.4487% 10.3041% 3.3200%
- -1.4950% 4/30/97 11,503.43 15.0343% 3.9858% -6.8362% 5.4903% 1.7959%
6.4076% 5/31/97 12,240.52 22,4052% 5.6656% -0.0551% 13.8782% 4.4230%
2.2608% 6/30/97 12,517.26 25.1726% 6.1690% 2.1911% 14.0575% 4.4778%
1.5131% 7/31/97 12,706.65 27.0665% 6.4443% 7.8144% 14.4783% 4.6060%
- -4.2700% 8/31/97 12,164.08 21.6408% 5.1238% 2.1743% 8.4406% 2.7354%
1.7800% 9/30/97 12,380.60 23.8060% 5.4799% 3.4182% 13.6204% 4.3443%
- -3.9500% 10/31/97 11,891.57 18.8157% 4.3293% -0.2751% 7.1922% 2.3399%
- -4.4600% 11/30/97 11,361.20 13.6120% 3.1078% -6.2560% 9.2272% 2.9829%
- -2.2100% 12/31/97 11,110.12 11.1012% 2.5050% -6.6100% 5.4009% 1.7672%
4.1700% 1/31/98 11,573.41 15.7341% 3.4245% -0.5669% 13.4844% 4.3026%
7.4600% 2/28/98 12,436.79 24.3679% 5.0617% 5.0854% 23.7571% 7.3566%
4.7000% 3/31/98 13,021.32 30.2132% 6.0403% 11.5028% 24.2913% 7.5107%
0.7600% 4/30/98 13,120.28 31.2028% 6.1040% 14.0554% 21.5883% 6.7263%
1.8600% 5/31/98 13,364.32 33.6432% 6.4089% 9.1809% 26.0558% 8.0166%
- -2.9200% 6/30/98 12,974.08 29.7408% 5.6336% 3.6496% 23.8990% 7.3975%
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
LIPPER
INTERNATIONAL SMALL CAP
AVE
9/93-6/98
<TABLE>
<CAPTION>
DATE RETURN VALUE
<S> <C> <C>
Sep-83 $10,000
Oct-93 10492.44
Nov-93 10254.07
Dec-83 11222.30
Jan-94 12132.78
Feb-94 12134.62
Mar-94 11585.28
Apr-94 11706.52
May-94 11611.62
Jun-94 11370.82
Jul-94 11628.64
Aug-94 11935.75
Sep-94 11639.84
Oct-94 11749.61
Nov-94 11076.17
Dec-94 10927.22
Jan-95 10476.14
Feb-95 10512.66
Mar-95 10486.62
Apr-95 10835.54
May-95 10942.92
Jun-95 11049.80
Jul-95 11582.40
Aug-95 11421.31
Sep-95 11648.45
Oct-95 11341.74
Nov-95 11232.78
Dec-95 11554.34
Jan-96 11946.27
Feb-96 12203.36
Mar-96 12419.19
Apr-96 12853.14
May-96 13075.09
Jun-96 13140.47
Jul-96 12682.81
Aug-96 12895.08
Sep-96 12973.36
Oct-96 13010.08
Nov-96 13395.03
Dec-96 13507.89
Jan-97 13658.66
Feb-97 13856.64
Mar-97 13811.36
Apr-97 13646.40
May-97 14353.95
Jun-97 14737.35
Jul-97 14725.37
Aug-97 14313.30
Sep-97 14750.79
Oct-97 13937.76
Nov-97 13519.25
Dec-97 13378.45
Jan-98 13587.50
Feb-98 14580.08
Mar-98 15489.02
Apr-98 15802.42
May-98 15927.91
Jun-98 15433.47
</TABLE>
Lipper
Montgomery International Saloman Smith Barney
International Small Cap Funds World Extended (ex-U.S.)
Date Small Cap Fund Average/1/ Market Index/2/
9/93 $10,000 $10,000 $10,000
6/98 $15,433 $14,965 $12,974
/1/ The Lipper International Small Cap Funds Average universe consists of six
funds.
/2/ The Salomon Smith Barney World Extended (ex-U.S.) Market Index is a
comprehensive float-weighted equity index consisting of every company with
an investable market capitalization of over $100 million in 21 countries.
Within this index, the Extended (ex-U.S.) Market Index defines the
small-capitalization stock universe.
INVESTMENT REVIEW
Q: How did the Fund perform over the past year?
A: For the 12 months ended June 30, the Fund recorded a gain of 4.46%, compared
with its main benchmark, the unmanaged Salomon Smith Barney World Extended
(ex-U.S.) Market Index (SB EMI ex-U.S.), which gained 0.56%. We underperformed
against the Morgan Stanley Capital International Europe, Australia and Far East
Index (MSCI EAFE), however, which generated a return of 6.10%. The SB EMI
ex-U.S., which tracks small-cap stocks in the world's developed markets outside
the United States, provides a more relevant benchmark than the MSCI EAFE, which
comprises some of the very largest stocks in those markets.
Over the past six months to June 30, 1998, the performance of the Fund improved
over that of the first six months of the financial year. The Fund recorded a
gain of 19.4%, compared with 16.8% for the SB EMI ex-U.S. and 15.9% for the MSCI
EAFE. The Fund also garnered a four-star rating from Morningstar for its
risk/return profile over the three-year period ended June 30, 1998. The Fund was
rated against 778 international equity funds.
Q: What factors explain the Fund's performance?
A: A major factor explaining the Fund's strong performance is our disciplined
approach to stock selection in various industry sectors. In Europe, for example,
the transportation sector is performing well; our investments in this sector are
up overall more than the U.K. market as a whole. National Express, a U.K.-based
operator of trains and buses, was up 41% for the year. The positive trend in the
transportation sector is migrating from the United Kingdom to continental Europe
this year, so we remain optimistic about that sector. We also continue to seek
opportunities to capitalize on the world's most promising economic trends,
including the rapid growth in technology (20% of assets), consumer cyclicals
(18%) and services (16%).
Additionally, our relatively underweight position in Japan, with only 9% of Fund
assets invested, added to our performance. We continue to be overweighted in
Europe (62% of assets), with its environment of relatively low interest rates,
low inflation and moderate economic growth. As valuations of large-cap stocks
are driven higher, investors are looking for alternative investments in Europe,
which is helping fuel the growth of European small-cap stocks. The deregulation
of the pension fund system in Europe, combined with corporate restructuring, has
also helped buoy returns there.
Q: Were there any disappointments?
A: Japan has continued to be a disappointment. Policy changes announced by the
government designed to boost the ailing economy have not met investor
expectations so far in 1998. We continue to look for Japanese companies that are
essentially "self-reforming," that is, firms that are instituting change on
their own. Good examples include Fast Retailing and Otsuka, which are both
domestic retailers. On the other hand, retailers such as Laox and Mirai continue
to
27
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
International
Small Cap Fund
- ---------------------
Portfolio Highlights
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Smartone Telecommunications ............................................ 3.4%
Flextronics International Ltd........................................... 3.3%
V-Tech Holdings Ltd..................................................... 3.1%
Henlys Group PLC ....................................................... 3.0%
Baron de Ley, S.A ...................................................... 2.5%
Tyndall Australia Ltd................................................... 2.4%
Technomatrix Technologies Ltd........................................... 2.3%
Schaltbau AG ........................................................... 2.3%
Aker Maritime ASA ...................................................... 2.3%
Manuli Rubber Industries SpA ........................................... 2.2%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Germany ................................................................ 11.7%
United Kingdom ......................................................... 11.3%
Japan .................................................................. 9.4%
China/Hong Kong ........................................................ 6.5%
Italy .................................................................. 6.0%
come under pressure from the downdrafts in the Japanese economy despite good
long-term fundamentals.
Q: The strength of the U.S. dollar against the Japanese yen and other currencies
made headlines over the past year. How do currency trends like this affect the
Fund's strategy?
A: It appears that the strength of the dollar we have been seeing over the past
two and a half years is abating due to relative shifts in economic momentum. The
U.S. economy is decelerating, and the European economies are accelerating. The
opposite is true for Japan. The yen has weakened dramatically against the
dollar. Our strategy going forward will depend on the Japanese reform package.
If the government delivers when Japan announces its reform package, our
position in Japan will quickly increase. If the government continues to
disappoint, we will remain extremely underweighted in Japan.
Q: Why invest in small-cap stocks now?
A: There are many dynamic small companies outside the United States, and most of
them have not yet been discovered by investors. There continue to be material
inefficiencies in the small-cap market, because it is undercovered and
undervalued compared with large-cap stocks. With the International Small Cap
Fund, our goal is to capitalize on this valuation gap between large and small
companies.
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of 6/30/98. The ratings are subject to change every month. Past performance is
no guarantee of future results. The ratings are calculated from the funds'
three-, five- and 10-year average annual returns (if available) in excess of
90-day Treasury bill returns with appropriate fee adjustments and a risk factor
that reflects fund performance below 90-day T-bill returns. Ten percent of funds
in a rating universe receive five stars, and the next 22.5% receive four stars.
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability and fluctuations in currency exchange rates. There are
also risks associated with investing in small-cap companies, which tend to be
more volatile and less liquid than stocks of large companies, including the
increased risk of price fluctuations.
28
<PAGE>
---------------------
The Montgomery Funds
---------------------
International
Small Cap Fund
---------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 90.3%
Shares Value (Note 1)
Australia - 2.6%
940,388 Tyndall Australia Ltd.
(Diversified Financial Services) ...................$ 1,225,867
70,088 Tyndall Australia Ltd., Bonus Shares+
(Diversified Financial Services) ................... 87,014
---------
1,312,881
Austria - 1.7%
6,593 Voest Alpine Eisenbahnsystem
(Heavy Construction) ............................... 880,799
Canada - 1.7%
31,200 Cognos Inc.+ (Software Systems) .................... 831,675
51,640 InMedia Presentations Inc.+ (Software Systems) ..... 29,828
---------
861,503
China/Hong Kong - 6.5%
695,000 Smartone Telecommunications
(Telephone/Wireless) ............................... 1,695,341
422,000 V-Tech Holdings Ltd. (Electronics) ................. 1,571,335
---------
3,266,676
Finland - 0.6%
6,730 Helsingin Puhelin Oyj (Telephone/Networks) ......... 313,777
France - 2.4%
4,145 Assurances Banque Populaire (Insurance) ............ 431,249
16,800 Dassault Systemes S.A., ADR
(Computers & Office Equipment) ..................... 797,475
---------
1,228,724
Germany - 11.7%
955 Axel Springer Verlag, Class A
(Newspapers/Publishing) ............................ 704,426
30,250 Eurobike AG (Retail Trade) ......................... 788,503
14,600 Kiekart AG (Auto/Auto Parts) ....................... 825,911
13,030 Schaltbau AG (Railroad) ............................ 1,170,684
34,200 Turbon International AG (Business Services) ........ 741,623
14,960 Vossloh AG (Building Materials) .................... 954,135
16,500 Winkler & Duennebler AG+
(Machinery & Tools) ................................ 741,223
---------
5,926,505
Ireland - 3.2%
284,294 Anglo Irish Bank Corporation (Banks) ............... 764,424
22,500 Esat Telecom Group PLC, ADR+
(Telephone/Networks) ............................... 852,188
---------
1,616,612
Israel - 4.3%
48,200 ForSoft Ltd.+ (Software Systems) ................... 732,038
39,000 Paradigm Geophysical Ltd.+
(Software Systems) ................................. 275,438
58,900 Technomatrix Technologies Ltd.+
(Software Systems) ................................. 1,179,841
---------
2,187,317
Italy - 6.0%
79,000 Credito Agrario Bresciano (Banks) .................. 960,405
36,800 Industrie Natuzzi SpA, Sponsored ADR
(Home Appliance) ................................... 956,800
207,300 Manuli Rubber Industries SpA,
(Auto/Auto Parts) .................................. 1,120,068
---------
3,037,273
Japan - 9.4%
29,500 Fast Retailing Company Ltd. (Retail Trade) ......... 277,356
12,000 Fuso Lexel Inc. (Real Estate) ...................... 37,752
101,000 Laox (Retail Trade) ................................ 624,539
31,100 Meitec (Software Systems) .......................... 1,079,627
45,000 Mirai Industry Company, Ltd.
(Building Materials)*** ............................ 379,149
26,000 Nissin Company Ltd.
(Diversified Financial Services) ................... 479,497
17,900 Otsuka Kagu Ltd. (Home Appliance) .................. 828,524
111,000 Sawako Corporation (Real Estate)*** ................ 1,035,583
---------
4,742,027
Netherlands - 1.4%
21,300 Ordina Beheer NV+ (Business Services) .............. 690,562
New Zealand - 0.6%
46,300 Trans Rail Holdings, ADR (Railroad) ................ 305,291
Norway - 5.8%
64,900 Aker Maritime ASA (Oil)*** ......................... 1,143,277
346,000 Choice Hotels Scandanavia ASA+ (Lodging) ........... 1,038,429
78,600 CN Selmer A.S. (Heavy Construction) ................ 748,718
---------
2,930,424
Poland - 1.5%
44,700 Prokom Software, ADR (Business Services) ........... 767,723
Portugal - 0.6%
1,730 Telecel-Comunicacaoes Pessoais S.A.+
(Telephone/Wireless) ............................... 307,389
Russia - 3.8%
16,600 Global TeleSystems Group Inc., ADR***+
(Telephone/Networks) ............................... 807,175
24,700 Vimpel-Communications, ADR+
(Telephone/Wireless) ............................... 1,105,325
---------
1,912,500
Singapore - 3.3%
37,900 Flextronics International Ltd.+ (Electronics) ...... 1,647,466
Spain - 5.4%
6,415 Azkoyen S.A. (Consumer Services) ................... 985,990
37,950 Baron de Ley S.A.+ (Food & Beverage) ............... 1,259,638
20,900 Cortefiel S.A.*** (Retail Trade) ................... 456,567
---------
2,702,195
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
International
Small Cap Fund
- ---------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Sweden - 2.5%
63,000 Munters AB (Machinery & Tools) ..................$ 687,273
16,400 Scandic Hotels AB (Lodging) ...................... 596,364
-------
1,283,637
Switzerland - 4.0%
2,900 Fotolabo SA (Photography)*** ..................... 953,708
3,850 SAIA-Burgess Electronics AG (Electronics) ........ 1,037,311
---------
1,991,019
United Kingdom - 11.3%
172,100 Avis Europe PLC (Consumer Services) .............. 777,296
66,400 Delphi Group PLC (Business Services) ............. 656,893
26,800 ECsoft Group PLC, ADR (Business Services) ........ 860,950
1,529,000 Freepages Group PLC+
(Broadcasting/Advertising) ....................... 963,746
170,174 Henlys Group PLC (Auto/Auto Parts) ............... 1,498,835
57,350 National Express Group PLC (Railroad) ............ 927,409
-------
5,685,129
TOTAL COMMON STOCKS
(Cost $41,431,591) ............................... 45,597,429
WARRANTS - 0.2%
(Cost $177,771)
Canada - 0.2%
196,096 InMedia Presentations Inc., Warrants,
Expire 10/19/98**+ (Software Systems) ............ 113,268
-------
TOTAL SECURITIES
(Cost $41,609,362) .............................................. 45,710,697
----------
REPURCHASE AGREEMENTS - 7.2%
Principal Amount
$1,803,500 Agreement with Greenwich Capital Markets,
6.30% dated 06/30/98, to be repurchased at
$1,803,811 on 07/01/98, collateralized by
$1,839,570 market value of U.S. government
securities, having various maturities and
various interest rates ........................... 1,803,500
1,803,500 Agreement with UBS, Tri-Party, 6.30%
dated 06/30/98, to be repurchased at
$1,803,811 on 07/01/98, collateralized
by $1,839,570 market value of U.S.
government securities, having various
maturities and various interest rates ............ 1,803,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $3,607,000) ............................................... 3,607,000
---------
TOTAL INVESTMENTS - 97.7%
(Cost $45,216,362*)..............................................$ 49,317,697
OTHER ASSETS AND LIABILITIES - 2.3%
(Net)............................................................ 1,178,121
---------
NET ASSETS - 100.0%..............................................$ 50,495,818
==========
* Aggregate cost for federal tax purposes was $45,401,046.
** Illiquid security or special situation security (see note 6 to Financial
Statements).
*** Security on loan at June 30, 1998, has an aggregate market value of
$3,190,594, which represents 6.32% of the total net assets of the Fund (see
note 4 to Financial Statements).
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Markets Fund
---------------------
Portfolio Highlights
INVESTMENT REVIEW
Q: How did the Fund perform during the year?
A: The year ended June 30, 1998, was the most difficult 12-month period since
the Fund's inception in 1992. The Fund returned -39.20%, compared with -38.58%
for the International Finance Corporation (IFC) Global Composite Index. Of the
33 emerging markets included in the index, only eight showed positive results
for the year. Most markets suffered double-digit losses. Russia, Indonesia and
Thailand declined by more than 50%.
Q: What were some of the contributing factors?
A: The global rout can be traced largely to events in Southeast Asia, where a
series of currency devaluations dampened investor sentiment considerably in
1997. The markets rebounded sharply in the first quarter after the announcement
of several bailout packages sponsored by the International Monetary Fund (IMF),
but sentiment again turned sour when a declining yen and a confirmed recession
in Japan renewed worries that Southeast Asian economies would suffer additional
devaluations. The financial turmoil was aggravated by noneconomic events
including riots in Indonesia and nuclear testing in India and Pakistan.
The IFC Global Latin America Index declined 25% for the year. Latin American
markets were hurt by the general decline in investor sentiment for emerging
markets as well as concerns about lower commodities prices. Latin America is an
important supplier of agricultural products and metals. A drop in the price of
oil added to already negative investor sentiment in Venezuela, given that
economy's reliance on oil-related exports. Brazil was hard hit by profit taking
despite the implementation of major privatization programs. The Argentinean
market dropped, too, on concerns about its ability to maintain its
convertibility plan when other emerging markets currencies have become more
competitive. Chile, which fared relatively well following the devaluation of the
Mexican peso in 1994, also suffered in recent months due to lower copper prices
(its main export item) and because roughly one-third of its exports go to
Asia.
Among the group, the developing markets of Europe displayed the best
performance. Investors sought safety from Asia in such countries such as
Poland and Hungary, which stand to benefit from next year's Economic and
Monetary Union (EMU) and which are candidates for accession to the European
Union. The standouts, however, were Greece and Portugal, returning 46.3% and
56.6%, respectively, due to significant declines in interest rates.
Q: What was the Fund's strategy in Asia?
A: Throughout the year, we maintained an underweight position in
Asian markets, given the region's negative economic outlook. At the end of June,
the combined holdings in Korea, Malaysia, the Philippines and Thailand
amounted to less than 7% of assets. The Fund has no exposure to Indonesia, the
most troubled market in our estimation. Having such light positions helped us in
1997 but hindered our relative performance in the first quarter of 1998, when
several Asian markets rebounded sharply.
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Josephine Jimenez, CFA .............................. Sr. Portfolio Manager
Bryan Sudweeks, Ph.D., CFA .......................... Senior
Portfolio Manager
Frank Chiang ........................................ Portfolio Manager
Jesus Isidoro Duarte ................................ Portfolio Manager
Jose Fiuza .......................................... Regional Portfolio Manager
Stuart Quint, CFA ................................... Regional Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Emerging Markets Fund
Since inception (3/1/92)............................................... 1.63%
One year............................................................... (39.20%)
Five years............................................................. (0.01%)
- --------------------------------------------------------------------------------
IFC Global Composite Index
Since 3/1/92........................................................... 0.23%
One year............................................................... (38.58%)
Five years............................................................. 0.38%
- --------------------------------------------------------------------------------
MSCI Emerging Markets Free Index
Since 3/1/92........................................................... 1.76%
One year............................................................... (39.08%)
Five years............................................................. 0.45%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
07/10/98
MONTGOMERY EMERGING MKTS(R)
Initial Investment: $10,000 Period: 03/01/92 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
03/01/92 10.00 $10,000 $ 0 $10,000
03/92 9.97 $ 9,970 $ 0 $ 9,970
04/92 10.01 $10,010 $ 0 $10,010
05/92 10.14 $10,140 $ 0 $10,140
06/92 9.96 $ 9,960 $ 0 $ 9,960
07/92 9.75 $ 9,750 $ 0 $ 9,750
08/92 9.42 $ 9,620 $ 0 $ 9,620
09/92 9.57 $ 9,570 $ 0 $ 9,570
10/92 9.95 $ 9,950 $ 0 $ 9,950
11/92 9.88 $ 9,880 $ 0 $ 9,880
12/92 10.02 $10,020 $ 11 $10,031
01/93 10.23 $10,230 $ 12 $10,242
02/93 10.33 $10,330 $ 12 $10,342
03/93 10.47 $10,470 $ 12 $10,482
04/93 10.69 $10,690 $ 12 $10,702
05/93 10.91 $10,910 $ 12 $10,922
06/93 11.07 $11,070 $ 13 $11,083
07/93 11.25 $11,250 $ 13 $11,263
08/93 11.92 $11,920 $ 14 $11,934
09/93 12.31 $12,310 $ 14 $12,324
10/93 13.28 $13,280 $ 15 $13,295
11/93 13.40 $13,400 $ 289 $13,689
12/93 15.58 $15,580 $ 336 $15,916
01/94 15.77 $15,770 $ 340 $16,110
02/94 15.28 $15,280 $ 329 $15,609
03/94 14.14 $14,140 $ 305 $14,445
04/94 14.07 $14,070 $ 303 $14,373
05/94 14.42 $14,420 $ 311 $14,731
06/94 13.68 $13,680 $ 295 $13,975
07/94 14.47 $14,470 $ 312 $14,782
08/94 15.87 $15,870 $ 342 $16,212
09/94 16.09 $16,090 $ 347 $16,437
10/94 16.02 $16,020 $ 345 $16,365
11/94 14.49 $14,490 $1,101 $15,591
12/94 13.65 $13,650 $1,037 $14,687
01/95 12.24 $12,240 $ 930 $13,170
02/95 12.26 $12,260 $ 931 $13,191
03/95 12.18 $12,180 $ 925 $13,105
04/95 12.39 $12,390 $ 941 $13,331
05/95 13.16 $13,160 $1,000 $14,160
06/95 13.17 $13,170 $1,000 $14,170
07/95 13.54 $13,540 $1,029 $14,569
08/95 13.01 $13,010 $ 988 $13,998
09/95 12.86 $12,860 $ 977 $13,837
10/95 12.38 $12,380 $ 940 $13,320
11/95 12.00 $12,000 $ 912 $12,912
12/95 12.41 $12,410 $ 943 $13,353
01/96 13.23 $13,230 $1,005 $14,235
02/96 12.93 $12,930 $ 982 $13,912
03/96 13.17 $13,170 $1,000 $14,170
04/96 13.84 $13,840 $1,051 $14,891
05/96 14.09 $14,090 $1,070 $15,160
06/96 14.19 $14,190 $1,078 $15,268
07/96 13.31 $13,310 $1,011 $14,321
08/96 13.73 $13,730 $1,043 $14,773
09/96 13.82 $13,820 $1,050 $14,870
10/96 13.46 $13,460 $1,095 $14,555
11/96 13.76 $13,760 $1,119 $14,879
12/96 13.87 $13,870 $1,128 $14,998
01/97 14.94 $14,940 $1,215 $16,155
02/97 15.43 $15,430 $1,255 $16,685
03/97 15.07 $15,070 $1,226 $16,296
04/97 15.08 $15,080 $1,226 $16,306
05/97 15.64 $15,640 $1,272 $16,912
06/97 16.85 $16,850 $1,370 $18,220
07/97 17.45 $17,450 $1,419 $18,869
08/97 15.58 $15,580 $1,267 $16,847
09/97 16.20 $16,200 $1,318 $17,518
10/97 13.38 $13,380 $1,088 $14,468
11/97 12.93 $12,930 $1,052 $13,982
12/97 12.93 $12,930 $1,597 $14,527
01/98 11.44 $11,440 $1,413 $12,853
02/98 12.22 $12,220 $1,509 $13,729
03/98 12.59 $12,590 $1,555 $14,145
04/98 12.73 $12,730 $1,572 $14,302
05/98 11.07 $11,070 $1,367 $12,437
06/98 9.86 $ 9,860 $1,218 $11,078
</TABLE>
MSCI MSCI
EMERGING FREE INDEX EMERGING FREE INDEX
<TABLE> ???????? ?????????
<S> <C> <C> <C>
Feb-92 $10,000 Jan-96 $10,000
Mar-92 $10,338 Feb-96 $ 9,341
Apr-92 $10,267 Mar-96 $ 9,918
May-92 $10,230 Apr-96 $10,314
Jun-92 $ 9,216 May-96 $10,288
Jul-92 $ 9,315 Jun-96 $10,332
Aug-92 $ 8,8?1^ Jul-96 $ 9,628
Sep-92 $ 8,811 Aug-96 $ 9,873
Oct-92 $ 9,388 Sep-96 $ 9,958
Nov-92 $ 9,281 Oct-96 $ 9,892
Dec-92 $ 9,500 Nov-96 $ 9,855
Jan-93 $ 9,606 Dec-96 $ ?,8?0^
Feb-93 $ 9,787 Jan-97 $10,578
Mar-93 $10,000 Feb-97 $11,028
Apr-93 $10,322 Mar-97 $10,738
May-93 $10,610 Apr-97 $10,757
Jun-93 $10,825 May-97 $11,085
Jul-93 $11,21?^ Jun-97 $11,657
Aug-93 $12,160 Jul-97 $11,831
Sep-93 $12,605 Aug-97 $10,325
Oct-93 $13,750 Sep-97 $10,011
Nov-93 $14,343 Oct-97 $ 8,870
Dec-93 $16,714 Nov-97 $ 8,547
Jan-94 $17,018 Dec-97 $ 8,753
Feb-94 $16,718 Jan-98 $ 8,066
Mar-94 $15,203 Feb-98 $ 8,908
Apr-94 $14,89?^ Mar-98 $ 8,295
May-94 $15,409 Apr-98 $ 8,103
Jun-94 $14,954 May-98 $ 7,?33^
Jul-94 $15,91?^ Jun-98 $ 7,101
Aug-94 $17,891
Sep-94 $18,0?4^
Oct-94 $17,758
Nov-94 $16,844
Dec-94 $15,491
Jan-95 $13,843
Feb-95 $13,488
Mar-95 $13,574
Apr-95 $14,103
May-95 $14,837
Jun-95 $14,981
Jul-95 $15,318
Aug-95 $14,957
Sep-95 $14,886
Oct-95 $14,318
Nov-95 $14,001
Dec-95 $14,584
Jan-96 $15,728
Feb-96 $15,478
Mar-96 $15,588
Apr-96 $16,222
May-96 $16,150
Jun-96 $16,251
Jul-96 $15,140
Aug-96 $15,526
Sep-96 $15,882
Oct-96 $15,244
Nov-96 $15,500
Dec-96 $15,570
Jan-97 $16,632
Feb-97 $17,344
Mar-97 $16,869
Apr-97 $16,919
May-97 $17,?09^
Jun-97 $18,334
Jul-97 $18,608
Aug-97 $16,240
Sep-97 $16,590
Oct-97 $13,951
Nov-97 $13,442
Dec-97 $13,700
Jan-98 $12,687
Feb-98 $14,011
Mar-98 $14,619
Apr-98 $14,459
May-98 $12,478
Jun-98 $11,168
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
07/13/98
IFC-GLOBAL COMP INDEX T/R
Initial Investment: $10,000 Period: 02/92 - 06/98
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
02/92 370.28 $10,000 $0 $10,000
03/92 372.97 $10,073 $0 $10,073
04/92 366.88 $ 9,908 $0 $ 9,908
05/92 355.97 $ 9,614 $0 $ 9,614
06/92 342.40 $ 9,247 $0 $ 9,247
07/92 327.86 $ 8,854 $0 $ 8,854
08/92 321.30 $ 8,677 $0 $ 8,677
09/92 314.18 $ 8,485 $0 $ 8,485
10/92 330.09 $ 8,915 $0 $ 8,915
11/92 326.31 $ 8,813 $0 $ 8,813
12/92 331.44 $ 8,951 $0 $ 8,951
01/93 329.20 $ 8,891 $0 $ 8,891
02/93 344.84 $ 9,313 $0 $ 9,313
03/93 351.76 $ 9,500 $0 $ 9,500
04/93 358.02 $ 9,669 $0 $ 9,669
05/93 360.82 $ 9,745 $0 $ 9,745
06/93 368.61 $ 9,955 $0 $ 9,955
07/93 373.85 $10,096 $0 $10,096
08/93 390.94 $10,558 $0 $10,558
09/93 403.89 $10,908 $0 $10,908
10/93 435.27 $11,755 $0 $11,755
11/93 465.51 $12,572 $0 $12,572
12/93 555.15 $14,993 $0 $14,993
01/94 571.69 $15,439 $0 $15,439
02/94 552.20 $14,913 $0 $14,913
03/94 506.31 $13,674 $0 $13,674
04/94 509.18 $13,751 $0 $13,751
05/94 522.59 $14,113 $0 $14,113
06/94 512.95 $13,853 $0 $13,853
07/94 545.52 $14,733 $0 $14,733
08/94 604.90 $16,336 $0 $16,336
09/94 623.87 $16,849 $0 $16,849
10/94 610.66 $16,492 $0 $16,492
11/94 584.52 $15,786 $0 $15,786
12/94 552.23 $14,914 $0 $14,914
01/95 489.45 $13,218 $0 $13,218
02/95 483.33 $13,053 $0 $13,053
03/95 481.38 $13,000 $0 $13,000
04/95 488.94 $13,205 $0 $13,205
05/95 507.45 $13,704 $0 $13,704
06/95 506.46 $13,678 $0 $13,678
07/95 516.09 $13,938 $0 $13,938
08/95 496.00 $13,395 $0 $13,395
09/95 499.02 $13,477 $0 $13,477
10/95 484.30 $13,079 $0 $13,079
11/95 470.52 $12,707 $0 $12,707
12/95 484.17 $13,076 $0 $13,076
01/96 509.11 $13,749 $0 $13,749
02/96 505.91 $13,663 $0 $13,663
03/96 513.93 $13,880 $0 $13,879
04/96 552.19 $14,913 $0 $14,913
05/96 541.57 $14,626 $0 $14,626
06/96 549.50 $14,840 $0 $14,840
07/96 515.22 $13,914 $0 $13,914
08/96 526.68 $14,224 $0 $14,224
09/96 531.38 $14,351 $0 $14,351
10/96 519.53 $14,031 $0 $14,031
11/96 526.98 $14,232 $0 $14,232
12/96 522.36 $14,107 $0 $14,107
01/97 557.50 $15,056 $0 $15,056
02/97 582.83 $15,740 $0 $15,740
03/97 572.49 $15,461 $0 $15,461
04/97 572.59 $15,464 $0 $15,464
05/97 582.02 $15,718 $0 $15,718
06/97 611.77 $16,522 $0 $16,522
07/97 621.39 $16,782 $0 $16,782
08/97 554.12 $14,965 $0 $14,965
09/97 556.77 $15,036 $0 $15,036
10/97 471.98 $12,747 $0 $12,747
11/97 444.78 $12,012 $0 $12,012
12/97 446.37 $12,055 $0 $12,055
01/98 420.77 $11,364 $0 $11,364
02/98 464.13 $12,535 $0 $12,535
03/98 479.10 $12,939 $0 $12,939
04/98 475.36 $12,838 $0 $12,838
05/98 418.73 $11,308 $0 $11,308
06/98 375.72 $10,147 $0 $10,147
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
EMERGING MRKTS
AVE
2/92-6/98
DATE RETURN VALUE
<S> <C>
Feb-92 $10,000
Mar-92 9964.65
Apr-92 10114.17
May-92 10379.93
Jun-92 10184.29
Jul-92 9916.73
Aug-92 9682.22
Sep-92 9570.51
Oct-92 9732.72
Nov-92 9589.49
Dec-92 9639.89
Jan-93 9867.28
Feb-93 10313.37
Mar-93 10523.51
Apr-93 10973.89
May-93 11292.26
Jun-93 11373.58
Jul-93 11572.57
Aug-93 12490.06
Sep-93 1274?.52^
Oct-93 13846.67
Nov-93 14420.62
Dec-93 16749.30
Jan-94 17100.34
Feb-94 16634.48
Mar-94 15168.90
Apr-94 14881.65
May-94 15169.19
Jun-94 14424.53
Jul-94 15280.66
Aug-94 16717.20
Sep-94 16909.58
Oct-94 16530.76
Nov-94 15717.79
Dec-94 14573.26
Jan-95 13170.27
Feb-95 13113.59
Mar-95 13162.65
Apr-95 13559.57
May-95 14165.12
Jun-95 14196.34
Jul-95 14697.81
Aug-95 14343.78
Sep-95 14357.04
Oct-95 13712.42
Nov-95 13467.78
Dec-95 13979.56
Jan-96 15391.52
Feb-96 15197.02
Mar-96 15262.53
Apr-96 15814.51
May-96 15920.64
Jun-96 15938.37
Jul-96 14974.68
Aug-96 15426.63
Sep-96 15609.46
Oct-96 15191.12
Nov-96 15628.45
Dec-96 15814.98
Jan-97 16944.61
Feb-97 17594.47
Mar-97 16960.72
Apr-97 16838.31
May-97 17341.59
Jun-97 17922.09
Jul-97 18447.44
Aug-97 16156.64
Sep-97 16771.74
Oct-97 13848.21
Nov-97 13190.42
Dec-97 13297.35
Jan-98 12160.15
Feb-98 13288.29
Mar-98 13763.62
Apr-98 13881.29
May-98 12053.33
Jun-98 10960.84
</TABLE>
/1/ The IFC Global Composite Index comprises more than 1,200 individual stocks
from 33 developing countries in Asia, Latin America, the Middle East,
Africa and Europe.
/2/ The Morgan Stanley Capital International Emerging Markets Free Index is an
unmanaged, capitalization-weighted composite index that covers individual
securities within the equity markets of approximately 25 emerging markets
countries.
/3/ The Lipper Emerging Markets Funds Average universe consists of five funds.
31
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
Investments
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Telec Brasileiras-Telebras ON ........................................... 4.4%
De Beers Centenary AG ................................................... 3.1%
Liberty Life Association of Africa Ltd .................................. 2.2%
Telebras, ADR ........................................................... 2.1%
Cia Energetica de Minas Gerais .......................................... 2.1%
Barlow, Ltd ............................................................. 2.0%
Haci Omer Sabanci Holding A.S ........................................... 1.6%
Sasol, Ltd .............................................................. 1.6%
Yapi Ve Kredi Bankasi A.S ............................................... 1.6%
Brisa-Auto Estradas ..................................................... 1.4%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Brazil .................................................................. 18.7%
South Africa ............................................................ 14.9%
Turkey .................................................................. 6.7%
India ................................................................... 5.4%
Portugal................................................................. 5.3%
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
Our 3% weighting in China/Hong Kong reflects our relatively positive outlook for
that economy. China's currency is not freely convertible and thus has not come
under the same speculative pressures as other Asian currencies in recent months.
China also enjoys the insulation of a large domestic economy not heavily reliant
on exports. In the absence of strong Japanese economic policy, China has emerged
as a leader in Asia, pledging to keep its currency stable despite competitive
pressures.
Q: What is the Fund's strategy in other regions of the world?
A: We continue to favor markets in Europe. Our combined 17% exposure to Greece,
Turkey and Portugal helped boost performance during the year. We have also main-
tained overweight positions in Brazil and South Africa. These economies are in
various stages of reform, with ongoing privatizations and corporate
restructuring, and stocks are cheap. Our weightings in Brazil and South Africa
were a drag on performance during the year; Brazil succumbed to profit taking in
the latter part of the year, and South Africa's currency weakened due to
speculative pressures and US$ 3 billion of foreign debt coming due this year,
prompting the central bank to raise interest rates.
Q: After such a difficult year, what can we expect from the emerging markets
in the coming months?
A: Emerging markets around the world will likely remain volatile until the Asian
currency crisis subsides. We believe, however, that the negative environment is
creating a catalyst for positive change, building the foundation for stronger
and more-competitive markets over the long term. In markets from Brazil to
Turkey, we are seeing an increased emphasis on privatization and structural
reforms, greater transparency in financial reporting, and advances in capital
market development. Just as the U.S. market crash of 1987 now looks like a blip
on a long-term price chart, we believe that the emerging markets will recover
from this calamity and share in the powerful trends toward long-term global
prosperity.
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 86.3%
Shares Value (Note 1)
Argentina - 3.4%
250,500 Banco de Galicia, ADR (Banks) ....................$ 4,555,969
1,241,083 Cresud S.A. + (Real Estate) ...................... 1,986,021
364,906 Inversiones Y Representaciones (Real Estate) ..... 1,072,979
49,413 Inversiones Y Representaciones, GDR
(Real Estate) .................................... 1,439,124
26,413 Inversiones Y Representaciones, GDR (Euro)
(Real Estate) .................................... 769,279
1,241,851 Siderar S.A. (Steel) ............................. 4,719,717
235,500 Telefonica de Argentina, Sponsored ADR
(Telephone/Networks) ............................. 7,639,031
127,800 Y.P.F. Sociedad Anonima, ADS ..................... 3,841,988
---------
26,024,108
Bangladesh - 0.0%#
42,080 Apex Tannery (Apparel & Textiles) ................ 263,577
Brazil - 8.5%
195,700,000 Centrais Geradoras do Sul do Brasil S.A.-
Gerasul+ (Electric Utilities) ....................$ 267,352
25,796,000 Cia Saneamento Basico Estado
(Water Utilities) ................................ 3,100,293
195,700,000 Eletrobras (Electric Utilities) .................. 5,753,144
38,730 Electrobras, GDS*** (Electric Utilities) ......... 2,904,750
301,100 Souza Cruz S.A. (Tobacco) ........................ 2,238,952
145,511 Telebras, ADR (Telephone/Networks) ............... 15,887,982
418,630,000 Telec Brasileiras-Telebras ON
(Telephone/Networks) ............................. 33,300,730
4,556,835 Telecomunicacoes de Ceara
(Telephone/Regional-Local) ....................... 866,805
1,166,225 Telecomunicacoes de Sao Paulo S.A ................
(Telephone/Regional-Local) ....................... 176,363
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Markets Fund
---------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Brazil - continued
1,166,225 Telesp Celular SA+
(Telephone/Regional-Local) ...................... $ 49,460
--------------
64,545,831
Chile - 1.3%
115,000 Cia de Telecommunicaciones de Chile S.A.,
ADR (Telephone/Integrated) ...................... 2,335,938
306,300 Linea Aerea Nacional Chile S.A.+ (Airlines) ..... 2,488,687
79,216 Sociedad Quimica Minera de Chile
(Chemicals) ..................................... 2,653,736
288,200 Supermercados Unimarc S.A.+ (Retail Trade) ...... 2,233,550
--------------
9,711,911
China/Hong Kong - 3.4%
3,400,000 Anhui Conch Cement Company, Ltd.+
(Cement) ........................................ 473,929
165,000 China Telecom Ltd., Sponsored ADR+
(Telephone/Wireless) ............................ 5,702,813
1,500,000 CLP Holdings Ltd. (Electric Utilities) .......... 6,834,021
200,020 HSBC Holdings (Banks) ........................... 4,892,074
2,500,000 Shanghai Industrial Holdings Ltd.
(Conglomerates) ................................. 5,888,616
193,000 Yanzhou Coal Mining Company Ltd., ADR+
(Coal) .......................................... 1,881,750
--------------
25,673,203
Colombia - 1.2%
876,000 Almacenes Exito S.A. (Retail Trade) ............. 1,727,684
999,005 Bavaria (Food & Beverage) ....................... 5,837,866
730,205 Valores Bavaria S.A. (Holding) .................. 1,253,456
--------------
8,819,006
Czech Republic - 1.5%
174,900 Ceske Radiokomunikace, GDR**+
(Broadcasting/Advertising) ...................... 3,747,233
25,000 Ceske Radiokomunikace, GDR***
(Broadcasting/Advertising) ...................... 535,625
542,500 The Czech Value Fund (Mutual Funds) ............. 3,594,063
643,603 Vseobecny I.F. (Mutual Funds) ................... 1,253,336
271,076 Vynosovy I.F.+ (Mutual Funds) ................... 1,894,573
--------------
11,024,830
Egypt - 3.4%
35,000 Al-Ahram Beverages Company, GDR
(Food & Beverage) ............................... 1,111,250
242,000 Al-Ahram Beverages Company, GDR***
(Food & Beverage) ............................... 7,683,500
36,785 Al-Ahram Pyramid Beverages Company
(Food & Beverage) ............................... 2,350,789
374,923 Amreya Cement (Cement) .......................... 6,484,561
455,000 Paints and Chemicals Industries Company***
(Paint) ......................................... 4,254,250
245,860 Tora Cement (Cement) ............................ 4,234,306
--------------
26,118,656
Greece - 3.5%
76,000 Alpha Credit Bank (Banks) ....................... 6,161,791
154,700 Hellenic Petroleum S.A.+ (Oil) .................. 1,263,656
138,887 Hellenic Telecommunication Organization
S.A. (Telephone/Networks) ....................... 3,560,997
199,500 Heracles General Cement S.A. (Cement) ........... 4,649,448
56,562 National Bank of Greece (Banks) ................. 7,249,202
90,000 Hellas Telecommunications SA, ADR+
(Telephone/Wireless) ............................ 3,729,375
--------------
26,614,469
Hungary - 1.7%
191,220 Borsodchem Rt.+ (Chemicals) ..................... 5,595,040
55,000 EGIS Rt.+ (Pharmacy/Drugs) ...................... 1,937,683
105,000 Mol Magyar Olaj-es Gazipari Rt. (Oil) ........... 2,834,462
8,000 Zalakeramia Rt.+ (Building Materials) ........... 284,407
281,700 Zalakeramia Rt., GDR*** (Building Materials) .... 1,957,815
--------------
12,609,407
India - 5.4%
216,125 Bajaj Auto, Ltd.** (Auto/Auto Parts) ............ 2,915,649
133,900 Bajaj Auto, Ltd., GDS*** (Auto/Auto Parts) ...... 1,787,565
635,000 Bharat Petroleum Corporation Ltd. (Oil) ......... 5,252,978
115,000 Bombay Suburban Electric Company,
GDR (Electric Utilities) ........................ 1,187,375
174,500 BSES Ltd.**+ (Electric Utilities) ............... 642,028
100,300 Castrol (India) Ltd.** (Chemicals) .............. 1,411,060
350,000 Hindustan Petroleum Corporation Ltd.** (Oil) .... 3,223,467
68,750 Housing Development and Finance
Corporation** (Banks) ........................... 4,853,037
246,384 Indian Hotels Company Ltd.** (Lodging) .......... 2,497,253
205,700 Indian Hotels, GDS*** (Lodging) ................. 1,594,175
23,000 ITC Ltd.**+ (Tobacco) ........................... 353,679
207,000 ITC Ltd., GDR (Tobacco) ......................... 3,648,375
350,000 Kirloskar Cummins India Ltd.+
(Machinery & Tools) ............................. 2,911,851
1,270,000 Mahanagar Telephone Nigam, Ltd.**
(Telephone/Regional-Local) ...................... 5,343,585
1,012 Oil and Natural Gas Corporation Ltd.** (Oil) .... 4,289
150 State Bank of India** (Banks) ................... 748
10 Tata Engineering & Locomotive Company, Ltd.
(Auto/Auto Parts) ............................... 39
120,000 Videsh Sanchar Nigam Ltd., GDR
(Telephone/Long Distance) ....................... 1,242,000
220,000 Videsh Sanchar Nigam Ltd., GDR
(Telephone/Long Distance) ....................... 2,277,000
--------------
41,146,153
Indonesia - 0.0%#
360,500 Lippo Bank (F) (Banks) .......................... 18,456
Israel - 4.2%
3,560,000 Bank Leumi Le-Israel (Banks) .................... 7,102,341
474,000 Dor Energy Ltd., GDR+ (Oil) ..................... 3,412,800
189,300 ECI Telecom Ltd., ADR
(Telecommunications Equipment) .................. 7,169,738
70,000 Formula Systems Ltd., ADR+
(Computer Software) ............................. 2,439,063
1,412,332 Makhteshim-Agan Industries Ltd.
(Chemicals) ..................................... 4,495,936
2,256,383 Supersol Ltd. (Retail Trade) .................... 7,434,976
--------------
32,054,854
Jordan - 0.3%
8,400 Arab Bank Group (Banks) ......................... 2,303,797
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Kazakhstan - 0.4%
240,807 Central Asia Growth Fund** (Mutual Funds) .......... $1,806,053
42,285 Kazkommerts Bank+ (Banks) .......................... 909,128
-------
2,715,181
Korea - 2.8%
494,000 LG Semiconductor Company+
(Semiconductor) .................................... 3,849,818
742,410 Lucky-Goldstar Chemical Ltd. (Chemicals) ........... 4,109,480
184,000 Pusan City Gas Company Ltd. (Gas Utilities) ........ 2,425,637
46 Samsung Electronics Ltd., New, GDS***+
(Electronics) ...................................... 895
114,100 Seoul City Gas Company Ltd. (Gas Utilities) ........ 1,703,605
821,990 Shinhan Bank (Banks) ............................... 2,729,989
158,980 Sindo Ricoh Company
(Computers & Office Equipment) ..................... 4,330,555
110,000 Youngone Corporation (Apparel & Textiles) .......... 2,155,135
---------
21,305,114
Malaysia - 1.2%
1,666,000 Berjaya Sports Toto Berhad (Leisure Time) .......... 2,468,743
2,639,000 Powertek Berhad (Electric Utilities) ............... 2,797,807
9,888,000 Tan Chong International Ltd. Berhad**
(Auto/Auto Parts) .................................. 1,381,854
3,296,000 Tan Chong Motor Holdings Berhad
(Auto/Auto Parts) .................................. 599,598
3,820,000 YTL Power International Berhad
(Electric Utilities) ............................... 2,080,164
---------
9,328,166
Mexico - 4.1%
725,000 Acer Computer Latino America S.A. de C.V +
(Computers & Office Equipment) ..................... 427,633
200,000 Alfa S.A. de C.V. (Conglomerates) .................. 811,307
633,200 Corporacion GEO, S.A. de C.V., Series B+
(Building Materials) ............................... 3,516,408
1,634,952 Corporacion Interamericana Entertainment
S.A., Series B+ (Entertainment) .................... 4,603,448
357,000 Empresas La Moderna S.A. de C.V., Class A+
(Agriculture Commodities) .......................... 2,073,941
2,011,000 Grupo Financiero Banorte S.A. de C.V. (Banks) ...... 2,238,050
1,646,600 Grupo Herdez S.A., Series B+ (Food & Beverage) ..... 787,978
180,100 Grupo Industrial Maseca S.A. de C.V., Class B,
ADR (Agriculture Commodities) ...................... 2,003,613
466,600 Grupo Radio Central S.A. de C.V., ADR
(Broadcasting/Advertising) ......................... 5,190,925
451,200 Industrias Penoles CPO (Metals & Mining) ........... 1,431,106
217,993 Interamericana Entrenamiento Corporation,
Series "L" (Entertainment) ......................... 509,473
109,000 Panamerican Beverages Inc., Class A
(Food & Beverage) .................................. 3,426,688
93,200 Pepsi Bemex S.A., Sponsored ADR
(Food & Beverage) .................................. 1,124,225
798,000 San Luis Corporacion S.A. de C.V....................
(Auto/Auto Parts) .................................. 3,108,341
---------
31,253,136
Morocco - 0.0%#
2 Banque Marocaine du Commerce Exterieur,
GDR*** (Banks) ..................................... 48
Pakistan - 0.6%
278 Engro Chemicals Pakistan** (Chemicals) ............. 298
3,709,800 Fauji Fertilizer Company Ltd.**
(Agriculture Commodities) .......................... 4,023,208
453,866 Pakistan State Oil** (Oil) ......................... 727,974
---------
4,751,480
Peru - 0.5%
1,768,080 Ferreyros Enrique S.A. (Holding) ................... 2,383,540
52,487 Ferreyros Enrique S.A., ADS***
(Machinery & Tools) ................................ 1,408,948
---------
3,792,488
Philippines - 1.3%
300,000 Benpres, GDR*** (Broadcasting/Advertising) ......... 825,000
78,039 Keppel Philippines Holdings, Inc.,
Class B**+ (Shipping) .............................. 1,909
1,295,000 Manila Electric Company, Series B
(Electric Utilities) ............................... 3,416,067
6,413,000 Music Semiconductors Corporation+
(Semiconductor) .................................... 569,019
169,836 Phillippine Long Distance Telephone, ADR
(Telephone/Long Distance) .......................... 3,842,562
13,235,000 Philippino Telephone Corporation
(Telephone/Wireless) ............................... 1,047,374
---------
9,701,931
Poland - 0.8%
150,000 Bank Handlowy W Warszawie, GDR***
(Banks) ........................................... 2,853,750
187,500 Prokom Software GDR*** (Business Services) ........ 3,220,313
---------
6,074,063
Portugal - 4.7%
242,050 Brisa-Auto Estradas+ (Auto/Auto Parts) ............ 10,358,586
179,200 Cia de Segros Tranquilidade (Insurance) ........... 4,853,738
165,000 Cimpor-Cimentos de Portugal
(Building Materials) .............................. 5,800,921
90,000 Portugal Telecom S.A.+ (Telephone/Networks) ....... 4,773,023
184,150 Sonae Investmentos (Retail Trade) ................. 10,064,406
----------
35,850,674
Romania - 0.2%
2,300,000 Oltchim S.A. (Chemicals) .......................... 381,106
168,811 Romania Growth Fund PLC**+ (Mutual Funds) ......... 759,650
-------
1,140,756
Russia - 3.1%
899,000 AO Tatneft, Sponsored ADR (Oil) ................... 6,967,250
5,100,000 Bashkirenergo+ (Electric Utilities) ............... 408,000
21,850 Chelyabinskvyazinform, ADR
(Telephone/Regional-Local) ........................ 721,050
69,583 Global Telesystems Group Inc., ADR
(Telephone/ Networks) ............................. 3,315,804
863,300 Irkutskenergo ADR (Electric Utilities) ............ 4,476,211
86,825 Krasnoyarskelectrosvyaz, ADR
(Telephone/Networks) .............................. 260,475
99,800 Krasny Oktyabr (Food & Beverage) .................. 324,350
73,750 Lukoil Oil Company, ADR (Oil) ..................... 2,470,625
331,775 Murmansk Electrosvyaz, ADR
(Telecommunications/Other) ........................ 273,714
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Markets Fund
---------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Russia - continued
114,425 Nizhnovsvyazinform, Sponsored ADR
(Telephone/Regional-Local) .......................$ 201,388
474,375 Orenburg Region Electrosvyaz, ADR+
(Telecommunications/Other) ....................... 61,669
40,325 Samarasvyazinform+
(Telephone/Regional-Local) ....................... 1,713,813
24,725 Uraltelecom, ADR**+
(Telecommunications/Networks) .................... 247,250
302,100 Uralmas Zavody, ADR** (Machinery & Tools) ........ 1,963,650
---------
23,405,249
South Africa - 14.9%
2,899,701 Barlow, Ltd. (Conglomerates) ..................... 15,280,886
22,381,800 Consolidated African Mining Company+
(Metals & Mining) ................................ 4,868,891
1,361,200 De Beers Centenary AG (Metals & Mining) .......... 23,918,556
818,000 Engen Ltd. (Oil) ................................. 2,262,260
5,895,000 Highstone Property Fund** (Real Estate) .......... 1,565,704
1,493,724 JCI Ltd. (Diversified Financial Services) ........ 7,770,891
36,000 Liberty Holdings Ltd. (Holding) .................. 1,888,027
837,506 Liberty Life Association of Africa Ltd.
(Insurance) ...................................... 16,326,424
1,062,100 Molope Foods Ltd.+ (Food & Beverage) ............. 1,271,654
505,400 Molope Foods Ltd., "N" Shares+ (Holding) ......... 511,366
653,500 Nasionale Pers Beperk (Holding) .................. 4,297,892
2,077,400 NBS Boland Group Ltd.
(Diversified Financial Services) ................. 2,697,467
5,315,900 Orion Selections Ltd.
(Diversified Financial Services) ................. 6,588,847
32,000 Pepsi International Bottlers**+
(Food & Beverage) ................................ 2,784,000
2,093,936 Sasol, Ltd. (Oil) ................................ 12,129,292
2,441,900 Smith (C.G.) Ltd., ORD+ (Conglomerates) .......... 6,712,137
63 South Africa Iron and Steel Industrial
Corporation (Steel) .............................. 12
1,310,000 Wooltru Ltd. (Retail Trade) ...................... 1,701,012
530,000 Wooltru Ltd., "N" Shares (Retail Trade) .......... 679,258
-------
113,254,576
Taiwan - 4.9%
2,700,000 China Development Corporation
(Diversified Financial Services) ................. 6,246,999
2,356,000 Compal Electronics Inc.+
(Computers & Office Equipment) ................... 6,342,457
1,250,000 Hon Hai Precision Industry (Electronics) ......... 6,329,943
4,170,000 Kindom Construction (Real Estate) ................ 6,371,415
1,426,000 Synnex Technology International Corporation
(Computers & Office Equipment) ................... 6,162,920
2,625,109 Taiwan Semiconductor Company+
(Semiconductor) .................................. 5,424,331
---------
36,878,065
Thailand - 1.7%
1,596,100 BEC World Public Company Ltd.
(Entertainment) .................................. 6,165,031
277,400 BEC World Public Company Ltd. (F)
(Entertainment) .................................. 1,071,474
1,381,200 Cogeneration Public Company
(Electric Utilities) ............................. 556,408
560,000 Cogeneration Public Company (F)
(Electric Utilities) ............................. 225,592
6,604,800 Industrial Finance of Thailand
(Securities Brokerage) ........................... 1,361,653
481,200 PTT Exploration (F) (Oil) ........................ 3,648,910
---------
13,029,068
Turkey - 6.7%
121,600,000 Dogan Sirketler Grubu Holding A.S.+
(Holding) ........................................ 7,420,203
18,000,000 Eregli Demir Ve Celik Fabrikalari T.A.S.+
(Steel) .......................................... 2,805,107
201,075,000 Haci Omer Sabanci Holding A.S.+
(Holding) ........................................ 12,458,646
286,242,195 Turk Sise ve Cam+ (Glass) ........................ 9,458,999
169,000,000 Turkiye Halk Bankasi A.S.+ (Banks) ............... 6,822,193
465,477,637 Yapi Ve Kredi Bankasi A.S. (Banks) ............... 11,886,023
----------
50,851,171
Ukraine - 0.1%
721,000 Ukraine Enterprise Corporation
(Mutual Funds) ................................... 416,466
Vietnam - 0.0%#
37,064 The Vietnam Frontier Fund Ord
(Mutual Funds) ................................... 166,788
Venezuela - 0.5%
6,833,863 Electricidad de Caracas (Electric Utilities) ..... 3,084,966
37,800 Cia Anonima Telefonos de Venezuela, ADR
(Telephone/Networks) ............................. 945,000
-------
4,029,966
TOTAL COMMON STOCKS
(Cost $794,700,646) ............................................. 654,872,644
===========
PREFERRED STOCKS - 11.2%
Brazil - 10.2%
138,500,000 Banco do Estado de Sao Paulo S.A.-
Banespa (Banks) .................................. 6,407,968
97,320,000 Centrais Geradoras do Sul do Brasil S.A.-
Gerasul+ (Electric Utilities) .................... 140,525
500,913,536 Cia Energetica de Minas Gerais
(Electric Utilities) ............................. 15,591,965
419,583,000 Cia Paranaense de Energi (Electric Utilities) .... 3,918,115
5,766,500 Cia Rio Grandense de Telecomunicacoes+
(Telephone/Networks) ............................. 6,287,282
97,320,000 Eletrobras, "B" (Electric Utilities) ............. 2,928,309
10,788,000 Itausa Investimentos Itau (Holding) .............. 6,809,252
50,500 Kepler Weber S.A.+ (Machinery & Tools) . ......... 124,443
91,972,000 Lojas Renner S.A. (Retail Trade) ................. 2,703,772
96,937,500 Odebrecht S.A. (Heavy Construction) .............. 310,120
45,921,300 Petroleo Brasileiro (Oil) ........................ 8,536,665
7,515,194 Telebras (Telephone/Networks) .................... 817,441
66,859,988 Telec de Minas Gerais S.A ........................
(Telephone/Regional-Local) ....................... 4,653,693
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
Investments
PREFERRED STOCKS - continued
Shares Value (Note 1)
Brazil - continued
70,126,737 Telec do Rio Janeiro S.A .......................
(Telephone/Networks) ...........................$ 5,275,194
5,422 Teleceara Celular S.A., Series B+
(Telephone/Wireless) ........................... 530
4,556,835 Teleceara Celular S.A., Series D**+
(Telephone/Wireless) ........................... 236,401
5,422 Telecomunicacoes de Ceara
(Telecommunications Equipment) ................. 985
16,467,353 Telecomunicacoes de Sao Paulo S.A ..............
(Telephone/Regional-Local) ..................... 3,872,829
66,859,988 Telemig Celular S.A., Series C+
(Telephone/Wireless) ........................... 2,023,345
70,126,736 Telerj Celular S.A., Series B
(Telecommunications/Other) ..................... 4,171,042
30,575,827 Telesp Celular S.A.+
(Telephone/Regional-Local) ..................... 2,537,962
487,888 Vale do Rio Doce, "B" (Metals & Mining) ........ 0
----------
77,347,838
Greece - 0.2%
117,002 Delta Dairy S.A.+ (Food & Beverage) ............ 1,349,911
Portugal - 0.6%
349,000 Lusomundo-SGPS, S.A.+ (Entertainment) .......... 4,605,439
Russia - 0.2%
143,100 LukOil Company, ADR (Oil) ...................... 1,144,800
6,000 Samarasvyazinform+
(Telephone/Regional-Local) ..................... 90,000
------
1,234,800
---------
TOTAL PREFERRED STOCKS
(Cost $87,128,817) ............................................. 84,537,988
CONVERTIBLE BONDS - 0.3%
Principal Amount
Mexico - 0.1%
$750,000 Alpha S.A. de C.V., 8.000% due 09/15/00***
(Conglomerates)................................. 819,375
Thailand - 0.2%
2,660,000 Central Pattana Public Company, Ltd.,
2.750% due 04/10/01** (Real Estate)............. 1,729,000
50,000 Central Pattana Public Company, Ltd.,
2.750% due 04/10/01** (Real Estate)............. 32,500
------
1,761,500
TOTAL CONVERTIBLE BONDS
(Cost $3,510,010)............................................... 2,580,875
RIGHTS - 0.0%#
Shares
Brazil - 0.0%
41,119 Telec de Minas Gerais S.A., Rights, Expire
07/14/98+ (Telephone/Regional-Local)............ 0
632,473 Telec do Rio Janeiro S.A., Rights, Expire
06/12/98+ (Telephone/Networks).................. 0
-
0
Greece - 0.0%#
76,000 Alpha Credit Bank, Rights, Expire
07/22/98+ (Banks)............................... 129,490
-------
TOTAL RIGHTS
(Cost $0)....................................................... 129,490
WARRANTS - 0.2%
(Cost $2,448,305)
Philippines - 0.2%
5,000,000 Jollibee Food Company, Warrants, Expire
02/24/03+ (Food & Beverage)..................... 1,528,777
---------
TOTAL SECURITIES
(Cost $887,787,778)............................................. 743,649,774
REPURCHASE AGREEMENTS - 1.7%
Principal Amount
$6,610,000 Agreement with Greenwich Capital Markets,
Tri-Party, 6.30% dated 06/30/98, to be
repurchased at $6,611,157 on 07/01/98,
collateralized by $6,742,200 market value
of U.S. government securities, having various
maturities and various interest rates........... 6,610,000
6,610,000 Agreement with UBS, Tri-Party, 6.30%
dated 06/30/98, to be repurchased at
$6,611,157 on 07/01/98, collateralized by
$6,742,200 market value of U.S. government
securities, having various maturities and
various interest rates.......................... 6,610,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $13,220,000).............................................. 13,220,000
==========
TOTAL INVESTMENTS - 99.7%
(Cost $901,007,778*)............................................ 756,869,774
OTHER ASSETS AND LIABILITIES - 0.3%
(Net)........................................................... 2,453,829
---------
NET ASSETS - 100.0%.............................................$ 759,323,603
===========
* Aggregate cost for federal tax purposes was $903,277,357.
** Illiquid security or special situation security (see note 6 to Financial
Statements).
*** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
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 Depository Certificate
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
--------------------
The Montgomery Funds
--------------------
Emerging Asia Fund
--------------------
Portfolio Highlights
INVESTMENT REVIEW
Q: How has the Emerging Asia Fund performed for the year ended
June 30, 1998?
A: Primarily due to the devaluation of the Thai baht one year ago that sparked a
dramatic downturn in Asia's economic fortunes, the Fund has not performed well
over the fiscal year as a whole. The major stock market indices in Asia have
declined between 30% and 60% since last year, and regional currencies have, in
some instances, fallen precipitously against the U.S. dollar. For the 12 months
ended June 30, 1998, the Fund is down 63%, compared with the benchmark Morgan
Stanley Capital International (MSCI) All-Country Asia-Free (ex-Japan) Index,
which was down 57%.
Q: Southeast Asian markets were at the epicenter of the recent currency
crisis. How much exposure did the Fund have to them over this period?
A: We have been fairly underweighted in Southeast Asia, with only 25% of the
Fund invested in Singapore, Malaysia, Thailand, Indonesia and the Philippines.
We remain extremely cautious toward all of these economies, with the exception
of the Philippines.
This caution is also reflected in our attitude toward other markets in the Asia
Pacific region as a whole, which continues to suffer from the fallout of events
in Southeast Asia and the contraction in the Japanese economy. We are currently
particularly concerned about South Korea and are therefore underweighted there.
South Korea's banks need to be recapitalized, and companies need to be
restructured. Moreover, given the sensitivity of South Korea's economy to that
of Japan, economic uncertainty in Japan has left South Korea in an extremely
vulnerable position.
Q: Are there countries in the region that have been relatively immune to the
crisis?
A: As already mentioned, the Philippines does not have the same degree of
structural problems as other Southeast Asian economies; neither its private nor
public sector is as overextended as those of its regional counterparts. Its
economy is also more dependent on U.S. capital than on Asian capital. As a
result, the Japanese economic downturn has not had as serious an impact as on
other Southeast Asian nations. Moreover, the newly elected president, Joseph
Estrada (also known as Erap), is popular and pro-business, which gives us added
confidence in the growth prospects for this country, which grew by 1 to 2% last
year.
In addition to the Philippines, China and India have escaped much of the turmoil
originating in Southeast Asia, although India has had to deal with a different
set of problems. Both are relatively closed economies; as such, their currencies
are not fully convertible, so they are less vulnerable to currency traders, and
international trade is heavily regulated. Given their relative insulation, we
are overweighted both in "greater China," which includes Hong Kong and Taiwan,
and in India. At year end 49.8% of the Fund was invested in greater China and
4.1% was in India. Foreign investors remain cautious about India, however, due
to the recent nuclear testing and resulting economic sanctions. Our view is that
the sanctions will have a minimal effect on the economy, and we will continue to
invest there.
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Frank Chiang................................................. Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Emerging Asia Fund
Since inception (9/30/96).............................................. (27.01%)
One year............................................................... (63.45%)
- --------------------------------------------------------------------------------
MSCI All-Country Asia Free
(ex-Japan) Index
Since 9/30/96......................................................... (36.03%)
One year.............................................................. (56.88%)
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING ASIA(R)
Initial Investment: $10,000 Period: 09/30/96 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initiel Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/96 12.00 $10,000 $ 0 $10,000
09/96 12.00 $10,000 $ 0 $10,000
10/96 12.17 $10,142 $ 0 $10,142
11/96 14.10 $11,750 $ 0 $11,750
12/96 14.50 $12,083 $ 23 $12,106
01/97 15.34 $12,783 $ 24 $12,807
02/97 15.78 $13,150 $ 25 $13,175
03/97 15.90 $13,250 $ 25 $13,275
04/97 16.14 $13,450 $ 25 $13,475
05/97 17.37 $14,475 $ 27 $14,502
06/97 18.90 $15,750 $ 30 $15,780
07/97 19.47 $16,225 $ 31 $16,256
08/97 17.88 $14,900 $ 28 $14,928
09/97 16.81 $14,008 $ 27 $14,035
10/97 11.72 $ 9,767 $ 18 $ 9,785
11/97 10.77 $ 8,975 $ 17 $ 8,992
12/97 9.30 $ 7,750 $ 930 $ 8,680
01/98 7.64 $ 6,367 $ 763 $ 7,130
02/98 9.66 $ 8,050 $ 965 $ 9,015
03/98 9.32 $ 7,767 $ 931 $ 8,698
04/98 8.23 $ 6,858 $ 823 $ 7,681
05/98 7.11 $ 5,925 $ 711 $ 6,636
06/98 6.18 $ 5,150 $ 618 $ 5,768
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
MSCI ASIA FR EX-JAPAN PACIFIC EX-JAPAN
AVE AVE
9/96-6/98 9/96-6/98
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Sep-96 $10,000 Sep-96 $10,000
Oct-96 9810.40 Oct-96 9846.71
Nov-96 10273.82 Nov-96 10341.51
Dec-96 10238.22 Dec-96 10415.44
Jan-97 10449.84 Jan-97 10565.20
Feb-97 10539.17 Feb-97 10651.66
Mar-97 9943.77 Mar-97 10150.18
Apr-97 9795.14 Apr-97 9983.40
May-97 10238.28 May-97 10582.69
Jun-97 10612.98 Jun-97 10897.38
Jul-97 10701.76 Jul-97 11046.14
Aug-97 8803.85 Aug-97 9382.25
Sep-97 8764.44 Sep-97 9317.45
Oct-97 6815.88 Oct-97 7311.48
Nov-97 6348.51 Nov-97 6895.33
Dec-97 6111.60 Dec-97 6700.87
Jan-98 5583.20 Jan-98 6050.00
Feb-98 6767.04 Feb-98 7020.25
Mar-98 6667.43 Mar-98 6938.44
Apr-98 6083.05 Apr-98 6533.46
May-98 5154.73 May-98 5768.32
Jun-98 4576.20 Jun-98 5146.30
</TABLE>
Montgomery MSCI All-Country Lipper All-Pacific
Emerging Asian Free (ex-Japan)
Date Asia Fund (ex-Japan) Index/1/ Funds Average/2/
- --------------------------------------------------------------------------------
9/96 $10,000 $10,000 $10,000
6/98 $ 5,768 $ 4,576 $ 5,146
/1/ The MSCI All-Country Asia Free (ex-Japan) Index comprises equities in 12
countries in the Asia Pacific region.
/2/ The Lipper All-Pacific (ex-Japan) Funds Average universe consists of 74
funds.
Prepared by The Performance Measurements and Analytics Department.
37
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Asia Fund
- ---------------------
Investments
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
China Telecom Ltd., Sponsored ADR ........................................ 7.6%
China Shipping Development
Company, Ltd. ............................................................ 5.5%
Hutchison Whampoa Ltd. ................................................... 4.3%
HSBC Holdings ............................................................ 3.3%
Cheung Kong Holdings ..................................................... 3.0%
Manila Electric Company, Class B ......................................... 2.9%
Shanghai Industrial Holdings Ltd. ........................................ 2.9%
WEBS Malaysia Index Series ............................................... 2.8%
New World Development Company Ltd. ....................................... 2.5%
Hon Hai Precision Industry ............................................... 2.4%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
China/Hong Kong .......................................................... 49.8%
Philippines .............................................................. 7.5%
Taiwan ................................................................... 6.3%
Singapore ................................................................ 5.5%
Thailand ................................................................. 4.5%
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability and fluctuations in currency exchange rates.
Q: What steps is the Fund taking to mitigate the effects of the Asia crisis?
A: We are making several adjustments to our portfolio to defend against the
down-turn in Southeast Asia. We are maintaining a much higher cash level than
we have in the past--up to about 20% of the Fund--as one way to insulate
ourselves. We are also investing in defensive stocks, primarily in the utilities
sector. Utilities are a necessity, and, despite the negative market environment,
power and telecommunications companies will continue to operate while other
firms may go bankrupt. We are also investing in media companies and newspaper
publishers.
Stock selection will be extremely important going forward. Given that the
overall investment opportunities are not as favorable as we would like, we
will have greater concentration in individual stocks, rather than invest fewer
assets in a greater number of potentially volatile holdings. Our mood will be
cautious for the next 12 to 24 months.
Q: What is your outlook for the rest of the year?
A: A lot of work needs to be done in restructuring the regional economies. As a
result, the markets will remain volatile. Furthermore, as long as the Japanese
economy--the primary engine of growth for the region--stays near recession, the
rest of Asia will continue to have problems. When Japan begins to show signs of
recovery, the Southeast Asian economies should start to rebound. Those countries
that are following International Monetary Fund (IMF) restructuring guidelines
will recover sooner. We believe that Thailand will likely be the first country
to do so; it is already the most advanced in terms of implementation. Korea will
likely follow close behind. We are less sanguine about Indonesia, Malaysia and
Singapore.
Reform and restructuring in Asia will be a long-term process, with at least a
one- to two-year horizon. The brightest spot in the region is China, which
should continue to expand by 6 to 8%. The government is committed to the
country's expansion and has allocated $750 billion over next three years to
upgrade the country's infrastructure. There has been much speculation over
whether China will be forced to devalue. We believe that if the yen stabilizes
at an accepted market rate, China will not have to do so. If the position of the
yen continues to deteriorate, however, there will be pressure for China to
devalue to retain its export competitiveness.
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 84.3%
Shares Value (Note 1)
China/Hong Kong - 49.8%
3,200,000 An Hui Conch Cement Company Ltd.+
(Cement) ....................................... $ 446,051
9,000,000 Benefun International Holdings Ltd.+
(Apparel & Textiles) ............................. 267,166
150,000 Cheung Kong Holdings (Real Estate) ............... 737,610
1,000,000 China Everbright-IHD Holdings Ltd.+
(Holding) ........................................ 487,223
400,000 China Merchants Holdings (Chemicals) ............. 243,934
1,100,000 China Resources Beijing Land
(Conglomerates) .................................. 354,930
China/Hong Kong - continued
500,000 China Resources Enterprises Ltd. (Holding) ....... 516,262
12,000,000 China Shipping Development Company,
Ltd.+ (Shipping) ................................. 1,362,932
53,900 China Telecom Ltd., Sponsored ADR+
(Telephone/Wireless) ............................. 1,862,919
151,000 Citic Pacific Ltd. (Holding) ..................... 266,998
100,000 CLP Holdings Ltd. (Electric Utilities) ........... 455,601
800,000 First Tractor Company Ltd.+
(Heavy Construction) ............................. 211,668
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Asia Fund
---------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
China/Hong Kong - continued
1,000,000 Guangdong Investment Company Ltd.
(Real Estate) ....................................$ 224,574
23,800 Hong Kong Telecommunications Ltd., ADR
(Telecommunications Equipment) ..................... 449,225
32,842 HSBC Holdings (Banks) .............................. 803,247
200,000 Hutchison Whampoa Ltd. (Conglomerates) ............. 1,055,756
313,500 New World Development Company Ltd. .................
(Holding) .......................................... 606,931
241,000 New World Infrastructure Ltd.+
(Heavy Construction) ............................... 276,833
300,000 Shanghai Industrial Holdings Ltd. ..................
(Conglomerates) .................................... 706,634
100,000 Sun Hung Kai Properties Ltd. (Real Estate) ......... 424,626
50,000 Yanzhou Coal Mining Company Ltd., ADR+
(Coal) ............................................. 487,500
-------
12,248,620
India - 4.0%
40,900 Hindalco Industries, Sponsored GDR
(Metals & Mining) .................................. 570,555
41,500 Videsh Sanchar Nigam Ltd., GDR
(Telephone/Long Distance) .......................... 429,525
-------
1,000,080
Indonesia - 1.3%
27,800 Gulf Indonesia Resources Ltd.+ (Oil) ............... 319,700
Korea - 3.7%
48,000 LG Semiconductor Company+ (Semiconductor) .......... 374,071
106,000 Shinhan Bank (Banks) ............................... 352,047
9,070 Youngone Corporation (Apparel & Textiles) .......... 177,701
-------
903,819
Malaysia - 2.9%
225,000 Tan Chong International Ltd., Bonus Shares(**)
(Auto/Auto Parts) .................................. 31,444
200,000 WEBS Malaysia Index Series (Mutual Funds) .......... 687,500
-------
718,944
Philippines - 6.3%
268,800 Manila Electric Company, Class B
(Electric Utilities) ............................... 709,065
2,600 Philippine Long Distance Telephone
(Telephone/Long Distance) .......................... 59,233
20,000 Philippine Long Distance Company, ADR
(Telephone/Long Distance) .......................... 452,500
4,260,000 Philippino Telephone Corporation
(Telephone/Wireless) ............................... 337,122
-------
1,557,920
Singapore - 5.5%
100,000 City Developments Ltd. (Real Estate) ............... 280,119
25,000 Creative Technology Ltd., ADR+
(Computers & Office Equipment) ..................... 310,156
59,280 Singapore Press Holdings Ltd. ......................
(Newspapers/Publishing) ............................ 397,545
80,000 WEBS-Singapore Equity (Mutual Funds) ............... 355,000
-------
1,342,820
Taiwan - 6.3%
62,400 Compal Electronics Inc.+
(Computers & Office Equipment) ................... 167,983
115,000 Hon Hai Precision Industry+ (Electronics) .......... 582,355
240,000 Kindom Construction Company Ltd.+
(Real Estate) ...................................... 366,700
100,000 Synnex Technology International Corporation+
(Computers & Office Equipment) ..................... 432,182
-------
1,549,220
Thailand - 4.5%
127,500 BEC World Public Company Ltd. (F)
(Entertainment) .................................... 492,476
600,000 Cogeneration Public Company Ltd. (F)
(Electric Utilities) ............................... 241,706
1,000,000 Industrial Finance of Thailand (F)
(Securities Brokerage) ............................. 206,161
20,600 PTT Exploration and Production Public
Company Ltd.+ (F) (Oil) ............................ 156,209
-------
1,096,552
TOTAL COMMON STOCKS
(Cost $34,278,105) ............................................... 20,737,675
WARRANTS - 1.2%
China/Hong Kong - 0.0%
100,000 China Everbright, Warrants, Expire
01/01/2100+ (Real Estate) .......................... 0
Philippines - 1.2%
1,000,000 Jollibee Food Company, Warrants, Expire
02/24/03+ (Food & Beverage) ........................ 305,755
-------
TOTAL WARRANTS
(Cost $489,661) .................................................. 305,755
TOTAL SECURITIES
(Cost $34,751,108) ............................................... 21,043,430
REPURCHASE AGREEMENTS - 8.4%
(Cost $2,067,000)
Principal Amount
$2,067,000 Agreement with Greenwich Capital Markets,
Tri-Party, 6.30% dated 06/30/98, to be
repurchased at $2,067,362 on 07/01/98,
collateralized by $2,108,840 market value of
U.S. government securities, having various
maturities and various interest rates............... 2,067,000
---------
TOTAL INVESTMENTS - 93.9%
(Cost $36,818,108*)............................................... 23,110,430
OTHER ASSETS AND LIABILITIES - 6.1%
(Net)............................................................. 1,497,934
NET ASSETS - 100.0%...............................................$ 24,608,364
==========
* Aggregate cost for federal tax purposes was $36,998,410.
** Illiquid security or special situation security (see note 6 to Financial
Statements).
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Latin America Fund
- --------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Jesus Isidoro Duarte......................................... Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Latin America Fund
Since inception (6/30/97).............................................. (25.42%)
One year............................................................... (25.42%)
- --------------------------------------------------------------------------------
IFCG Latin America Index
Since 6/30/97.......................................................... (25.29%)
One year............................................................... (25.29%)
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY LATIN AMERICA
Initial Investment Period: 06/30/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/30/97 12.00 $10,000 $ 0 $10,000
06/97 12.00 $10,000 $ 0 $10,000
07/97 12.24 $10,200 $ 0 $10,200
08/97 11.69 $ 9,742 $ 0 $ 9,742
09/97 12.85 $10,708 $ 0 $10,708
10/97 10.13 $ 8,442 $ 0 $ 8,442
11/97 10.63 $ 8,858 $ 0 $ 8,858
12/97 11.00 $ 9,167 $187 $ 9,354
01/98 9.72 $ 8,100 $166 $ 8,266
02/98 9.98 $ 8,317 $170 $ 8,487
03/98 11.06 $ 9,217 $188 $ 9,405
04/98 10.97 $ 9,142 $187 $ 9,329
05/98 9.70 $ 8,083 $166 $ 8,249
06/98 8.77 $ 7,308 $150 $ 7,458
06/97 1438.68 $10,000 $ 0 $10,000
07/97 1521.47 $10,575 $ 0 $10,575
08/97 1394.11 $ 9,690 $ 0 $ 9,690
09/97 1505.80 $10,467 $ 0 $10,467
10/97 1220.43 $ 8,483 $ 0 $ 8,483
11/97 1253.57 $ 8,713 $ 0 $ 8,713
12/97 1326.94 $ 9,223 $ 0 $ 9,223
01/98 1174.20 $ 8,162 $ 0 $ 8,162
02/98 1228.55 $ 8,539 $ 0 $ 8,539
03/98 1312.19 $ 9,121 $ 0 $ 9,121
04/98 1298.91 $ 9,028 $ 0 $ 9,028
05/98 1137.67 $ 7,908 $ 0 $ 7,908
06/98 1074.79 $ 7,471 $ 0 $ 7,471
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
LATIN AMERICA FUNDS
AVE
6/97-6/98
RETURN VALUE
<S> <C>
Jun-97 $10,000
Jul-97 10662.50
Aug-97 9699.38
Sep-97 10580.92
Oct-97 8514.93
Nov-97 8806.38
Dec-97 9318.52
Jan-98 8306.69
Feb-98 8760.53
Mar-98 9390.83
Apr-98 9413.88
May-98 8100.21
Jun-98 7580.34
</TABLE>
Montgomerry Latin IFCG Latin Lipper Latin American
Date America Fund America Index/1/ Funds Average/2/
- --------------------------------------------------------------------------------
6/97 $10,000 $10,000 $10,000
6/98 $ 7,458 $ 7,580 $ 7,471
(1) The IFCG Latin America Index measures the performance of selected stocks of
seven countries in Latin America.
(2) The Lipper Latin America Funds Average universe consists of 40 funds.
INVESTMENT REVIEW
Q: How did the Fund perform from its inception-June 30, 1997-through
June 30, 1998?
A: For its first year's performance, the Fund posted a loss of 25.42%. This
compares with a loss of 25.29% for its benchmark, the International Finance
Corporation Global (IFCG) Latin America Index. For the first six months of 1998,
the Fund posted a loss of 20.27%, compared with the index's loss of 19.00%. We
launched the Fund one week prior to the devaluation of the Thai bhat, which
ushered in the crisis in Southeast Asia. Emerging markets around the world have
suffered as a result of the turmoil in Asia, with the Latin American markets
being no exception.
Q: What factors had the most impact on the Fund in the second half of 1997
and the first half of 1998?
A: When the Southeast Asian currency crisis unfolded during the summer of 1997,
Latin American markets remained relatively unaffected. The Asian contagion even-
tually spread to Latin America, however, and the loss of confidence caused an
out-flow of funds from the region's emerging markets into U.S.-based assets.
The Asian effect on commodities and borrowing costs sent the Latin economies
into a crisis management mode, resulting in heavily constrictive fiscal policy.
This was reflected in sell-offs across the board, and the outcome of this was a
difficult environment for the Fund in October and November. Although we have
seen a period of improvement in Latin American markets since October 27, 1997,
volatility still permeates the international investment environment based
largely on global externalities. Although the Latin American markets remain
subject to this volatility, the policy responses have been timely and have
averted further deterioration caused by the Asian currency crisis.
Q: Since the Fund's inception, Brazil has been its largest country weighting.
Why?
A: We have been overweighted in Brazil since we launched the Fund; it is now 68%
of the portfolio and has fluctuated between 65% and 70% since mid-1997. We
continue to like Brazil as the best market in Latin America, because of the
country's positive fundamentals. We believe that Brazil offers a lot more
value than Mexico, because it is the region's largest and most liquid stock
market and it is reasonably priced. We like the telecommunications sector in
Brazil in particular; our biggest position is in Telebras, and we have also
expanded into some of the telecom operating companies such as Telesp and Telerj.
More recently, we have bought shares in some of the cellular firms, including
Telesp Celular, Telerj Celular and Telemig Celular. In general, we are
overweighted in telecom companies in Brazil, as well as in those companies
that will benefit from restructuring or privatization, such as the electric
power companies Celesc and Copel. We believe that there are other reasons to
be positive about Brazil. By our calculations it is one of the cheapest markets
in the world right now. Given our positive outlook, Brazil remains the Fund's
largest country weighting.
40
<PAGE>
--------------------
The Montgomery Funds
--------------------
Latin America Fund
--------------------
Portfolio Highlights
Q: Mexico has been the portfolio's second-largest country weighting since
the Fund's inception. What's your view of that market now?
A: Our weighting for Mexico has ranged between 25% and 35% of the Fund. We think
it's important to be selective in Mexico right now. It has been more difficult
to make money in Mexico than in Brazil. For one, the decline in the price of oil
has negatively affected government revenues, and the lingering banking crisis
has led to a relative lack of liquidity. Mexico has been in a reform mode since
1994, however, and we believe that the political and economic situation will
gradually improve, albeit slowly. We are mainly invested in media and
consumer-related companies, including Corporacion Interamericana Entertainment
(CIE), Grupo Carso and Pepsi Gemex.
Q: Given the crisis in Southeast Asia, is there still a good reason to invest
in Latin America?
A: Yes. Latin American markets have some of the most attractive valuations of
the emerging economies. In nearly all countries, economic and political reform
is under way, and markets are more open to investors than just a decade ago.
Governments continue to implement privatization and deregulation schemes, which
will help spur growth over the long term. The region will, however, remain
subject to global externalities, and investors' confidence in emerging markets
will continue to suffer as a result of Asian volatility.
In terms of the tangible economic impact as opposed to investor sentiment, with
the exceptions of Peru and Chile, Latin American countries trade very little
with Asia. In view of this, we don't think most of them are directly vulnerable
to lower demand from the region. That said, Asia's currency devaluations could
put Latin American manufacturers at a competitive disadvantage in markets where
they vie with Asian exporters. Generally, however, the export volume of
countries such as Mexico depends on demand from the United States, and we expect
that to remain healthy in 1998. Thus, having seen such widespread volatility and
decline in prices for a region whose economic fundamentals are relatively
positive, we still have great confidence in Latin America's long-term potential.
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability and fluctuations in currency exchange rates.
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Telec Brasileiras-Telebras ON ........................................... 14.2%
Saraiva SA Livreiros Editores ........................................... 5.6%
Embraer Empresa ......................................................... 5.6%
Confab Industrial S.A. .................................................. 5.2%
Cia Rio Grandense
de Telecomunicacoes ..................................................... 5.2%
Telebras, ADR ........................................................... 5.1%
Grupo Fernandez Editores
S.A. de C.V., Series B .................................................. 5.1%
Telefonica de Argentina, ADR ............................................ 4.9%
Corporacion Interamericana
Entertainment S.A., Series B ............................................ 4.7%
Cia de Gas de Sao Paulo ................................................. 4.4%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Brazil .................................................................. 72.6%
Mexic ................................................................... 17.8%
Argentina ............................................................... 4.9%
Columbia ................................................................ 2.2%
Venezuela ............................................................... 1.9%
41
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Latin America Fund
- ---------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 62.4%
Shares Value (Note 1)
Argentina - 4.9%
6,800 Telefonica de Argentina, ADR
(Telephone/Networks) .............................$ 220,575
Brazil - 35.6%
1,300,000 Brasmotor S.A. (Holding) ......................... 119,147
213,000 Cia Rio Grandense de Telecomunicacoes
(Telephone/Regional-Local) ....................... 232,236
2,100 Electrobras, GDS/**/ (Electric Utilities) ........ 157,500
2,100 Telebras, ADR (Telephone/Networks) ............... 229,294
7,993,000 Telec Brasileiras-Telebras ON
(Telephone/Networks) ............................. 635,819
3,030,000 Telec do Rio Janeiro S.A.+
(Telephone/Networks) ............................. 124,443
44,464 Telecomunicacoes do Rio Janeiro
(Telephone/Networks) ............................. 0
3,030,000 Telerj Celular S.A.
(Telecommunications/Other) ....................... 91,695
------
1,590,134
Columbia - 2.2%
33,000 Carulla Y Cia S.A., ADR (Retail Trade) ........... 99,000
Mexico - 17.8%
55,000 Acer Computer Latino America S.A. de C.V. +
(Computers & Office Equipment) ................... 32,441
75,184 Corporacion Interamericana Entertainment
S.A., Series B+ (Entertainment) .................. 211,692
1,659,000 Grupo Fernandez Editores S.A. de C.V.,
Series B+ (Newspapers/Publishing) ................ 228,942
84,000 Grupo Financiero Banorte S.A. de C.V.,
Class B+ (Holding) ............................... 93,484
20,000 Grupo Carso S.A. de C.V. (Holding) ............... 82,244
11,358 Interamericana Entrenamiento Corporation,
Series "L" (Entertainment) ....................... 26,545
9,800 Pepsi-Gemex, ADR (Food & Beverage) ............... 118,213
-------
793,561
Venezuela - 1.9%
3,300 Compania Anonima Nacional Telefonos
de Venezuela, ADR (Telephone/Networks) ........... 82,500
TOTAL COMMON STOCKS
(Cost $3,898,280) ............................................... 2,785,770
PREFERRED STOCKS - 37.0%
Brazil - 37.0%
4,020,000 Banco do Estado de Sao Paulo S.A.-
Banespa (Banks) .................................. 185,993
3,500,000 Cia de Gas de Sao Paulo (Oil) .................... 198,219
20,000,000 Cia Paranaense de Energi (Electric Utility) ...... 186,762
138,600 Confab Industrial S.A. (Machinery & Tools) ....... 232,488
14,000,000 Embraer Empresa (Airlines) ....................... 248,152
59,700 Saraiva SA Livreiros Editores
(Newspapers/Publishing) .......................... 250,094
1,900,000 Telec do Rio Janeiro S.A. ........................
(Telephone/Networks) ............................. 142,925
1,900,000 Telerj Celular SA, Series B
(Telecommunications/Other) ....................... 113,009
1,700,000 Telecomunicacoes de Minas Gerais-Telemig,
Series C+ (Telecommunications/Other) ............. 51,446
500,000 Telesp Celular S.A., Series B+
(Telephone/Wireless) ............................. 41,503
------
TOTAL PREFERRED STOCKS
(Cost $1,885,723) ...............................................$ 1,650,591
REPURCHASE AGREEMENTS - 0.7%
(Cost $32,000)
Principal Amount
$32,000 Agreement with Greenwich Capital Markets,
6.30% dated 06/30/98, to be repurchased at
$32,006 on 07/01/98, collateralized by
$32,640 market value of U.S. government
securities, having various maturities and
various interest rates............................ 32,000
------
TOTAL INVESTMENTS - 100.1%
(Cost $5,816,003*)............................................... 4,468,361
OTHER ASSETS AND LIABILITIES - (0.1)%
(Net)............................................................ (2,969)
-----
NET ASSETS - 100.0%..............................................$ 4,465,392
=========
* Aggregate cost for federal tax purposes was $5,878,340.
** 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.
Abbreviations:
ADR American Depositary Receipt
GDR Global Depositary Receipt
GDS Global Depositary Share
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
-------------------------
The Montgomery Funds
-------------------------
Global Opportunities Fund
-------------------------
Portfolio Highlights
INVESTMENT REVIEW
Q: How did the Fund perform for the year ended June 30, 1998, and the first
half of calendar year 1998?
A: For the year ended June 30, the Fund outperformed the Morgan Stanley Capital
International (MSCI) World Index. The Fund returned 27% compared with the
index's performance of 17%. The Fund also outperformed the index for the six-
month period, generating returns of 31.2% versus index returns of 16.9%. Because
of these great results, we are pleased to report that the Fund has garnered a
five-star rating from Morningstar for its risk/return profile over the
three-year period ended June 30, 1998. The Fund was rated against 778
international equity funds.
Q: What were the main factors behind this performance?
A: The major factors contributing to the Fund's outperformance were its
overweight position in Europe, combined with its large weighting in the
telecommunications sector, which was the top-performing sector worldwide during
the first half of 1998. Finland, Belgium, France and Germany all recorded
double-digit gains in the second quarter. In the European telecom sector, market
deregulation as well as the expansion of wireless services and the development
of new services on existing networks, such as call-waiting and call-forwarding,
have led to strong growth. In addition, incumbent telephone companies have
enjoyed profit windfalls from the boom in data transmission, which has been
spurred by the increased penetration of personal computers.
The European financial services sector, which has rallied due to the specter of
pension deregulation and the prospects of a pan-European banking industry
(spurred by the introduction of the Economic and Monetary Union [EMU]), has
been--and we believe will continue to be--a strong performer for us. In the
financial sector, we are investing in companies that we believe will be
successful asset gatherers in a deregulated pension environment. In Europe, this
market is currently dominated by banks and insurance companies; we are hoping to
capitalize on the growth of their fee-based business, which in many cases is
becoming a larger portion of their business than traditional banking. We believe
that both the telecommunications and financial services sectors will continue to
perform strongly throughout the rest of the year.
At the end of June, the Fund's five largest country weightings were the United
Kingdom (13.9%), the United States (12.5%), Japan (8.0%), the Netherlands (7.3%)
and Germany (6.8%).
Q: You continue to be underweighted in Japan. What is your outlook for that
country, and how will the emerging markets be affected?
A: We are cautiously optimistic about moderate economic recovery in Japan
against the backdrop of the expected policy initiatives in the banking system.
These new initiatives could result in an improvement in the negative sentiment
in that country. The recent change in leadership and the expected shifts in
policy together will shed light on Japan's role in global financial
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
John Boich, CFA........................................ Senior Portfolio Manager
Oscar Castro, CFA...................................... Senior Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery
Global Opportunities Fund
Since inception (9/30/93)............................................... 18.34%
One year................................................................ 27.12%
Three years............................................................. 24.74%
- --------------------------------------------------------------------------------
MSCI World Index
Since 9/30/93........................................................... 15.92%
One year................................................................ 17.46%
Three years............................................................. 19.73%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
07/10/98
MONTGOMERY GLOBAL OPPORTUNITIES(R)
Initial Investment: 10,000 Period: 09/30/93 - 06/98
This is a no load fund.
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
09/30/93 12.00 $10,000 $0 $10,000
09/93 12.00 $10,000 $0 $10,000
10/93 12.83 $10,692 $0 $10,692
11/93 12.85 $10,708 $0 $10,708
12/93 14.22 $11,850 $0 $11,850
01/94 15.04 $12,533 $0 $12,533
02/94 14.82 $12,350 $0 $12,350
03/94 13.81 $11,508 $0 $11,508
04/94 13.98 $11,650 $0 $11,650
05/94 13.82 $11,517 $0 $11,517
06/94 12.92 $10,767 $0 $10,767
07/94 13.46 $11,217 $0 $11,217
08/94 14.23 $11,858 $0 $11,858
09/94 13.93 $11,608 $0 $11,608
10/94 14.26 $11,883 $0 $11,883
11/94 12.83 $10,692 $404 $11,096
12/94 12.53 $10,442 $394 $10,836
01/95 11.90 $ 9,917 $375 $10,292
02/95 12.05 $10,042 $379 $10,421
03/95 11.96 $ 9,967 $376 $10,343
04/95 12.33 $10,275 $388 $10,663
05/95 12.70 $10,583 $400 $10,983
06/95 13.25 $11,042 $417 $11,459
07/95 13.97 $11,642 $440 $12,082
08/95 13.72 $11,433 $433 $11,866
09/95 14.24 $11,867 $448 $12,315
10/95 13.91 $11,592 $438 $12,030
11/95 14.27 $11,892 $511 $12,403
12/95 14.62 $12,183 $524 $12,707
01/96 14.94 $12,450 $535 $12,985
02/96 15.29 $12,742 $567 $13,289
03/96 15.80 $13,167 $566 $13,733
04/96 16.74 $13,?50 $600 $14,550
05/96 17.17 $14,?08 $615 $14,923
06/96 16.96 $14.133 $608 $14,741
07/96 15.84 $13,200 $568 $13,768
08/96 16.43 $13,692 $588 $14,280
09/96 17.12 $14,267 $613 $14,880
10/96 16.43 $13,692 $1,130 $14,822
11/96 17.13 $14,275 $1,178 $15,453
12/96 16.73 $13,942 $1,329 $15,271
01/97 17.48 $14,567 $1,389 $15.956
02/97 17.20 $14,333 $1,367 $15,700
03/97 16.99 $14,158 $1,350 $15,508
04/97 17.05 $14,208 $1,355 $15,563
05/97 18.30 $15,250 $1,454 $16,704
06/97 19.17 $15,975 $1,523 $17,498
07/97 20.04 $16,700 $1,592 $18,292
08/97 19.15 $15,958 $1.522 $17,480
09/97 20.18 $16,817 $1,603 $18,420
10/97 18.35 $15,292 $1,458 $16,750
11/97 18.56 $15,467 $1,474 $16,941
12/97 14.63 $12,192 $4,767 $16,959
01/98 15.23 $12,692 $4,962 $17,654
02/98 16.95 $14,125 $5,523 $19,648
03/98 18.19 $15,158 $5,927 $21,085
04/98 19.04 $15,867 $6,203 $22,070
05/98 18.95 $15,792 $6,174 $21,966
06/98 19.19 $15,992 $6,252 $22,244
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
LIPPER
MSCI WORLD IX ND GLOBAL
AVE AVE
9/93-6/98 9/93-6/98
DATE RETURN VALUE DATE RETURN VALUE
Sep-93 $10,000 Sep-93 $10,000
Oct-93 10273.16 Oct-93 10402.83
Nov-93 9689.62 Nov-93 10109.50
Dec-93 10161.39 Dec-93 10889.01
Jan-94 10829.22 Jan-94 11398.94
Feb-94 10686.69 Feb-94 11157.49
Mar-94 10223.57 Mar-94 10675.68
Apr-94 10537.21 Apr-94 10856.82
May-94 10561.93 May-94 10836.09
Jun-94 10530.18 Jun-94 10624.26
Jul-94 10727.96 Jul-94 10938.05
Aug-94 11048.59 Aug-94 11325.73
Sep-94 10755.85 Sep-94 11109.78
Oct-94 11059.33 Oct-94 11288.13
Nov-94 10577.23 Nov-94 10785.29
Dec-94 10677.18 Dec-94 10692.30
Jan-95 10514.35 Jan-95 10383.39
Feb-95 10665.08 Feb-95 10562.22
Mar-95 11176.54 Mar-95 10834.90
Apr-95 11563.46 Apr-95 11180.10
May-95 11659.76 May-95 11418.59
Jun-95 11653.55 Jun-95 11605.37
Jul-95 12234.00 Jul-95 12200.34
Aug-95 11958.81 Aug-95 12025.14
Sep-95 12304.54 Sep-95 12266.66
Oct-95 12106.16 Oct-95 12023.90
Nov-95 12525.94 Nov-95 12232.49
Dec-95 12889.52 Dec-95 12463.07
Jan-96 13120.03 Jan-96 12787.60
Feb-96 13197.24 Feb-96 12927.02
Mar-96 13414.11 Mar-96 13151.58
Apr-96 13726.78 Apr-96 13558.20
May-96 13735.90 May-96 13677.98
Jun-96 13802.60 Jun-96 13667.34
Jul-96 13312.03 Jul-96 13086.30
Aug-96 13462.27 Aug-96 13401.40
Sep-96 139?6.57 Sep-96 13811.29
Oct-96 14081.44 Oct-96 13837.82
Nov-96 148?7.77 Nov-96 14520.59
Dec-96 14626.87 Dec-96 14520.63
Jan-97 14800.40 Jan-97 14868.68
Feb-97 14967.86 Feb-97 14949.01
Mar-97 14669.00 Mar-97 14756.44
Apr-97 15145.69 Apr-97 14985.16
May-97 16077.77 May-97 15852.14
Jun-97 16876.89 Jun-97 16550.67
Jul-97 17651.43 Jul-97 17380.57
Aug-97 16467.86 Aug-97 16355.68
Sep-97 17359.73 Sep-97 17343.33
Oct-97 16443.26 Oct-97 16229.15
Nov-97 16731.44 Nov-97 16314.33
Dec-97 16932.55 Dec-97 16526.09
Jan-98 17401.62 Jan-98 16744.77
Feb-98 18575.92 Feb-98 17935.33
Mar-98 19357.46 Mar-98 18836.60
Apr-98 19543.72 Apr-98 19157.29
May-98 19295.87 May-98 19032.59
Jun-98 19750.88 Jun-98 19159.81
Montgomery Global MSCI World Lipper Global
Date Opportunities Fund Index/1/ Funds Average/2/
- --------------------------------------------------------------------------------
9/93 $10,000 $10,000 $10,000
6/98 $22,244 $19,751 $19,160
/1/ The Morgan Stanley Capital International World Index measures the
performance of selected stocks in 23 developed countries. The index is
presented gross of dividend withholding taxes.
/2/ The Lipper Global Funds Average universe consists of 66 funds.
43
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- -------------------------
The Montgomery Funds
- -------------------------
Global Opportunities Fund
- -------------------------
Investments
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Mannesmann AG ............................................................ 3.1%
Nokia Corporation AB, Series A ........................................... 2.7%
Orange PLC ............................................................... 2.5%
Telefonica Nacional de Espana ............................................ 2.4%
Railtrack Group PLC ...................................................... 2.3%
Vivendi .................................................................. 2.2%
AirTouch Communications, Inc. ............................................ 2.2%
Portugal Telecom S.A. .................................................... 2.2%
WorldCom, Inc. ........................................................... 2.2%
United Utilities PLC, ORD ................................................ 2.0%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
United Kingdom ........................................................... 13.9%
United States ............................................................ 12.5%
Japan .................................................................... 8.0%
Netherlands .............................................................. 7.3%
Italy .................................................................... 6.8%
markets. Although we are not expecting radical change from the government in
Japan, we continue to have high hopes for reform-minded companies, such as
Nissan Motor Company, which constitutes 1.7% of the portfolio.
As for the emerging markets, over the past three months the declining yen set
off renewed concern that Southeast Asian markets would suffer another round of
currency devaluations. As a result, investor sentiment continued to be negative
in emerging markets generally. We believe that until the markets in Southeast
Asia become less volatile, global emerging markets in general will remain
jittery. The Fund's exposure to those markets, however, has been relatively
small during the past six months. We are cautiously optimistic regarding the
telecommunications sector in Brazil, and the telecom and banking sectors in
Greece. As Greece looks to become a member of Europe's EMU, the policy
initiatives that the government takes to make this happen should create a
positive environment for stocks.
Q: What is the difference between the Global Opportunities Fund and
Montgomery's other international funds?
A: The Global Opportunities Fund takes the best ideas of many of the Funds that
we manage, including International Growth, International Small Cap and Global
Communications, as well as select growth opportunities in emerging markets and
the United States. We use our bottom-up stock selection process to shape a
global portfolio with the best of our equity research ideas. The Fund is
consistent in its investment style, which looks for undervalued companies
having what we believe to be a minimum annual capital appreciation potential of
25%.
Q: What attributes do you consider in selecting stocks? And why do you
think your strategy makes the Fund a good place to invest?
A: Our strategy is to seek out high-quality companies that we think offer the
potential for long-term growth of earnings and cash flow and which trade at
attractive valuations. We have a great deal of flexibility in where we can look
for such companies, which is one of the key benefits of this Fund. Through it
investors can gain exposure to what we think are some of the most dynamic
companies in the world, whether they are located in the United States, in
developed foreign economies or in the emerging markets.
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of 6/30/98. The ratings are subject to change every month. Past performance is
no guarantee of future results. The ratings are calculated from the funds'
three-, five- and 10-year average annual returns (if available) in excess of
90-day Treasury bill returns with appropriate fee adjustments and a risk factor
that reflects fund performance below 90-day T-bill returns. Ten percent of
funds in a rating universe receive five stars.
44
<PAGE>
-------------------------
The Montgomery Funds
-------------------------
Global Opportunities Fund
-------------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 93.7%
Shares Value (Note 1)
Australia - 0.7%
57,600 AMP Ltd. (Software Systems) .......................$ 675,773
Canada - 1.5%
55,600 Cognos, Inc.+ (Software Systems) ................... 1,482,087
China/Hong Kong - 1.9%
1,085,000 China Telecom (Hong Kong) Ltd.**+
(Telephone/Wireless) ............................... 1,883,485
Finland - 4.2%
224,600 Merita PLC, Class A+ (Banks) ....................... 1,485,706
35,260 Nokia Corporation AB, Series A
(Telecommunications Equipment) ..................... 2,595,897
---------
4,081,603
France - 6.0%
11,500 Cap Gemini S.A. (Business Services) ................ 1,807,070
31,500 Renault (Auto/Auto Parts) .......................... 1,791,827
10,106 Vivendi (Business Services) ........................ 2,158,037
---------
5,756,934
Germany - 6.8%
880 Axel Springer Verlag, Class A
(Newspapers/Publishing) ............................ 649,104
16,600 Bayerische Vereinsbank AG (Banks) .................. 1,408,574
26,770 Kiekart AG (Auto/Auto Parts) ....................... 1,514,359
28,600 Mannesmann AG (Machinery & Tools) .................. 2,942,322
---------
6,514,359
Greece - 3.1%
10,200 National Bank of Greece (Banks) .................... 1,307,271
66,777 Hellenic Telecommunication Organization
S.A.+ (Telephone/Networks) ......................... 1,712,118
---------
3,019,389
Italy - 6.8%
147,000 Credito Agrario Bresciano (Banks) .................. 1,787,083
248,000 Saipem SpA**+
(Oilfield Equipment & Services) .................... 1,274,372
287,200 Telecom Italia Mobile Di Risp
(Telephone/Wireless) ............................... 969,860
137,900 Telecom Italia Mobile SpA**
(Telephone/Wireless) ............................... 843,661
176,400 Telecom Italia SpA**+ (Telephone/Networks) ....... 1,299,110
74,500 Telecom Italia di Risp (Telephone/Networks) ........ 360,812
-------
6,534,898
Japan - 8.0%
30 Advantest Corporation (Semiconductor) .............. 1,619
62,000 Bridgestone Corporation** (Auto/Auto Parts) ........ 1,470,746
41,500 Meitec (Software Systems)** ........................ 1,440,660
491,000 Nissan Motor Company (Auto/Auto Parts) ............. 1,551,797
21,600 Sony Corporation (Electronics) ..................... 1,866,782
19,000 TDK Corporation (Electronics) ...................... 1,408,476
---------
7,740,080
Netherlands - 7.3%
31,400 ASM Lithography Holding N.V.**+
(Semiconductor) .................................. 911,581
27,160 International Nederlanden Groep N.V (Banks) ........ 1,779,801
39,250 Ordina Beheer N.V. (Business Serivices) ............ 1,272,514
20,185 Philips Electronics N.V. (Electronics) ............. 1,698,096
17,000 Unilever N.V., ADR
(Cosmetics & Personel Care) ........................ 1,341,938
---------
7,003,930
New Zealand - 1.8%
819,000 Telecommunications Corporation of New Zealand**
(Telephone/Networks) ............................... 1,751,545
Norway - 1.6%
86,000 Aker Maritime** (Oil) .............................. 1,514,974
Portugal - 2.2%
40,230 Portugal Telecom S.A. (Telephone/Networks) ......... 2,133,541
Russia - 3.0%
31,200 Global Telesystems Group Inc.**
(Telecom/Networks) ................................. 1,517,100
29,900 Vimpel Communications, ADR**
(Telephone/Wireless) ............................... 1,338,025
---------
2,855,125
Singapore - 2.8%
9,600 Creative Technology Ltd.**+
(Computers & Office Equipment) ..................... 116,795
70,000 Creative Technology Ltd., ADR**+
(Computers & Office Equipment) ..................... 868,438
38,700 Flextronics International (Electronics) ............ 1,682,241
---------
2,667,474
Spain - 5.4%
62,000 Argentaria (Banks) ................................. 1,390,805
45,371 Baron de Ley S.A.+ (Food & Beverage) ............... 1,505,956
49,081 Telefonica Nacional de Espana**
(Telephone/Networks) ............................... 2,269,216
---------
5,165,977
Sweden - 2.7%
49,696 Ericsson (L.M.) Telephone Company, Class B
(Telecommunications Equipment) ..................... 1,451,933
38,300 Forenings Sparbanken AB (Banks) .................... 1,152,602
---------
2,604,535
Switzerland - 1.5%
880 Novartis AG (Pharmacy/Drugs) ....................... 1,466,764
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- -------------------------
The Montgomery Funds
- -------------------------
Global Opportunities Fund
- -------------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
United Kingdom - 13.9%
178,700 Amvescap PLC
(Investment Management) ........................$ 1,745,496
187,000 Cable & Wireless Communications PLC
(Telephone/Wireless) ............................. 1,893,699
48,300 Glaxo Wellcome PLC, ORD
(Pharmacy/Drugs) ................................. 1,450,831
108,110 National Express Group PLC (Railroad) ............ 1,748,252
227,900 Orange PLC+ (Telephone/Wireless) ................. 2,416,331
90,300 Railtrack Group PLC+ (Railroad) .................. 2,214,869
130,307 United Utilities PLC, ORD (Water Utilities) ...... 1,896,154
---------
13,365,632
United States - 12.5%
36,900 AirTouch Communications, Inc.+
(Telecommunications Equipment) ................... 2,156,344
19,350 Cisco Systems Inc.+
(Telephone/Networks) ............................. 1,782,014
23,000 Estee Lauder Companies Inc. ......................
(Cosmetics & Personel Care) ...................... 1,602,813
32,100 Galileo International Inc. .......................
(Business Services) .............................. 1,446,506
39,100 General Nutrition Center, Inc.+
(Retail Trade) ................................... 1,219,431
50,700 TMP Worldwide Inc.+
(Broadcasting/Advertising) ....................... 1,766,578
43,700 WorldCom, Inc.**+
(Telephone/Long Distance) ........................ 2,112,622
---------
12,086,308
TOTAL COMMON STOCKS
(Cost $76,325,972) ............................... 90,304,413
PREFERRED STOCKS - 1.9%
Brazil - 1.9%
11,770,000 Telemig Celular S.A., Series C
(Telephone/Wireless) ............................. 356,189
8,600,000 Telesep Celular S.A., Series B
(Telephone/Wireless) ............................. 713,847
11,770,000 Telec PN (Telephone) ............................. 819,234
7,239 Telec de Minas Cerais (Telephone/Wireless) ....... 0
-
TOTAL PREFERRED STOCKS
(Cost $2,546,917) ................................ 1,889,270
REPURCHASE AGREEMENTS - 3.7%
Principal Amount Value (Note 1)
$1,790,500 Agreement with Bear Stearns, Tri-Party,
6.35% dated 06/30/98, to be repurchased
at $1,790,816 on 07/01/98, collateralized
by $1,826,310 market value of U.S.
government securities, having various
maturities and various interest rates............. $ 1,790,500
1,790,500 Agreement with Greenwich Capital Markets,
Tri-Party, 6.35% dated 06/30/98, to be
repurchased at $1,790,816 on 07/01/98,
collateralized by $1,826,310 market value
of U.S. government securities, having various
maturities and various interest rates............. 1,790,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $3,581,000)............................................... 3,581,000
---------
TOTAL INVESTMENTS - 99.3%
(Cost $82,453,889*).............................................. 95,774,683
OTHER ASSETS AND LIABILITIES - 0.7%
(Net)............................................................ 636,931
-------
NET ASSETS - 100.0%..............................................$ 96,411,614
==========
* Aggregate cost for federal tax purposes was $82,975,942.
** Securities on loan at June 30, 1998, which have an aggregate market value
of $15,300,045, represent 15.9% of the total net asset value of the Fund
(see note 4 to Financial Statements).
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
46
<PAGE>
Montgomery
Global Communications Fund
Since inception (6/1/93)................................................ 19.85%
One year................................................................ 45.45%
Five years.............................................................. 19.32%
- --------------------------------------------------------------------------------
MSCI Telecommunications Index
Since 5/31/93........................................................... 14.37%
One year................................................................ 36.83%
Five years.............................................................. 14.12%
- --------------------------------------------------------------------------------
Performance is cumulative and for a limited period of time. Past performance is
no guarantee of future results. Net asset value, investment return and princi-
pal value will fluctuate, so shares, when redeemed, may be worth more or less
than their original cost.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL COMMUNICATION(R)
Initial Investment: $10,000 Period: 06/01/93 - 06/98
This is a no load fund.
Growth of a $10,000 investment
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
06/01/93 12.00 $10,000 $0 $10,000
06/93 12.45 $10,375 $0 $10,375
07/93 12.75 $10,625 $0 $10,625
08/93 14.01 $11,675 $0 $11,675
09/93 14.42 $12,017 $0 $12,017
10/93 15.44 $12,867 $0 $12,867
11/93 14.48 $12,067 $0 $12,067
12/93 16.18 $13,483 $0 $13,483
01/94 16.86 $14,050 $0 $14,050
02/94 16.27 $13,558 $0 $13,558
03/94 15.07 $12,558 $0 $12,558
04/94 15.29 $12,742 $0 $12,742
05/94 15.13 $12,608 $0 $12,608
06/94 14.20 $11,833 $0 $11,833
07/94 14.31 $12,342 $0 $12,342
08/94 15.86 $13,217 $0 $13,217
09/94 15.54 $12,950 $0 $12,950
10/94 15.74 $13,117 $0 $13,117
11/94 14.45 $12,042 $26 $12,068
12/94 13.98 $11,650 $25 $11,675
01/95 13.18 $10,983 $24 $11,007
02/95 13.15 $10,958 $24 $10,982
03/95 13.46 $11,217 $24 $11,241
04/95 14.01 $11,675 $25 $11,700
05/95 14.68 $12,233 $27 $12,260
06/95 15.42 $12,850 $28 $12,878
07/95 16.25 $13,542 $29 $13,571
08/95 16.28 $13,567 $29 $13,596
09/95 17.12 $14,267 $30 $14,297
10/95 16.32 $13,600 $29 $13,629
11/95 16.48 $13,733 $30 $13,763
12/95 16.34 $13,617 $29 $13,646
01/96 16.70 $13,917 $30 $13,947
02/96 16.84 $14,033 $31 $14,064
03/96 16.98 $14,150 $30 $14,180
04/96 18.15 $15,125 $33 $15,158
05/96 18.11 $15,092 $32 $15,124
06/96 18.05 $15,042 $32 $15,074
07/96 16.97 $14,142 $30 $14,172
08/96 17.31 $14,425 $31 $14,456
09/96 17.88 $14,900 $32 $14,932
Prepared by The Performance Measurements and Analytics Department.
MSCI Telecom PRICE Index
6/1/93 $10,000.00
(6/30) Jun 93 2.22 1.0222 $10,222.00
(7/31) Jul 93 0.98 1.032218 $10,322.18
Aug 93 5.85 1.092602 $10,926.02
Sep 93 -1.58 1.075339 $10,753.39
Oct 93 4.38 1.122439 $11,224.39
Nov 93 -5.27 1.063286 $10,632.86
Dec 93 1.81 1.082532 $10,825.32
Jan 94 4.28 1.128864 $11,288.64
Feb 94 -6.77 1.05244 $10,524.40
Mar 94 -3.28 1.01792 $10,179.20
Apr 94 3.11 1.049578 $10,495.78
May 94 0.42 1.053986 $10,539.86
Jun 94 -0.63 1.047346 $10,473.46
Jul 94 2.84 1.07709 $10,770.90
Aug 94 3.01 1.109511 $11,095.11
Sep 94 -3.01 1.076114 $10,761.14
Oct 94 2.06 1.098282 $10,982.82
Nov 94 -6.97 1.021732 $10,217.32
Dec 94 -0.4 1.017645 $10,176.45
Jan 95 2.13 1.039321 $10,393.21
Feb 95 -0.18 1.03745 $10,374.50
Mar 95 1.85 1.056643 $10,566.43
Apr 95 1.18 1.069111 $10,691.11
May 95 1.42 1.084293 $10,842.93
Jun 95 1.55 1.101099 $11,010.99
Jul 95 2.27 1.126094 $11,260.94
Aug 95 2.18 1.150643 $11,506.43
Sep 95 5.88 1.218301 $12,183.01
Oct 95 -1.25 1.203072 $12,030.72
Nov 95 0.58 1.21005 $12,100.50
Dec 95 3.06 1.247078 $12,470.78
Jan 96 1.68 1.268028 $12,680.28
Feb 96 -0.89 1.256743 $12,567.43
Mar 96 -1.53 1.237515 $12,375.15
Apr 96 3.16 1.27662 $12,766.20
May 96 -1.1 1.262577 $12,625.77
Jun 96 -0.3 1.25879 $12,587.90
Jul 96 -6.75 1.173821 $11,738.21
Aug 96 0.45 1.179104 $11,791.04
Sep 96 1.14 1.192545 $11,925.45
Oct 96 1.93 1.215562 $12,155.62
Nov 96 5.39 1.28108 $13,096.48
Dec 96 2.23 1.309648 $13,222.21
Jan 97 0.96 1.322221 $13,361.04
Feb 97 1.05 1.336104 $12,183.01
Mar 97 -3.17 1.29375 $12,937.50
Apr 97 1.08 1.307722 $13,077.22
May 97 6.1 1.387493 $13,874.93
Jun 97 4.22 1.446046 $14,460.46
Jul 97 1.8 1.472074 $14,720.74
Aug 97 -6.28 1.379628 $13,796.28
Sep 97 6.77 1.473029 $15,481.82
Oct 97 -1.47 1.451375 $14,513.75
Nov 97 6.67 1.548182 $15,481.82
Dec 97 3.66 1.604846 $16,048.46
Jan 98 5.77 1.697445 $16,974.45
Feb 98 3.93 1.764155 $17,641.55
Mar 98 8.69 1.91746 $19,174.60
Apr 98 -1.07 1.896943 $18,969.43
May 98 0.3 1.902634 $19,026.34
Jun 98 3.98 1.978359 $19,783.59
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL COMMUNICATION(R)
Initial Investment: $10,000 Period: 06/01/93 - 06/98
This is a no load fund.
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
10/96 16.70 $13,917 $582 $14,499
11/96 17.40 $14,500 $607 $15,107
12/96 16.76 $13,950 $790 $14,740
01/97 17.60 $14,667 $830 $15,497
02/97 17.24 $14,367 $813 $15,180
03/97 16.88 $14,067 $796 $14,863
04/97 17.25 $14,375 $814 $15,189
05/97 18.67 $15,558 $882 $16,440
06/97 19.59 $16,325 $925 $17,250
07/97 20.75 $17,292 $979 $18,271
08/97 19.44 $16,200 $918 $17,118
09/97 20.78 $17,317 $980 $18,297
10/97 19.15 $15,958 $904 $16,862
11/97 19.07 $15,892 $900 $16,792
12/97 15.57 $12,975 $4,099 $17.074
01/98 16.36 $13,633 $4,307 $17,940
02/98 19.66 $16,383 $5,176 $21,599
03/98 21.59 $17,992 $5,683 $23,675
04/98 22.15 $18,458 $5,831 $24,289
05/98 21.80 $18,167 $5,738 $23,905
06/98 22.88 $19,067 $6,023 $25,090
INDEX HYPOTHETICAL GROWTH FOR 10,000
LIPPER
TELECOMMUNICATION
AVE
5/93-6/98
DATE RETURN VALUE
May-93 $10,000
Jun-93 9855.82
Jul-93 10032.18
Aug-93 10625.78
Sep-93 10673.80
Oct-93 11111.90
Nov-93 10788.63
Dec-93 11657.41
Jan-94 12186.17
Feb-94 11918.62
Mar-94 11395.76
Apr-94 11575.48
May-94 11559.51
Jun-94 11334.39
Jul-94 11668.59
Aug-94 12088.43
Sep-94 11867.26
Oct-94 12056.46
Nov-94 11512.03
Dec-94 11392.95
Jan-95 11039.62
Feb-95 11230.21
Mar-95 11530.28
Apr-95 11909.82
May-95 12153.04
Jun-95 12348.52
Jul-95 13009.02
Aug-95 12815.28
Sep-95 13057.78
Oct-95 12776.91
Nov-95 12993.94
Dec-95 13234.54
Jan-96 13575.01
Feb-96 13715.67
Mar-96 13953.15
Apr-96 14388.52
May-96 14510.56
Jun-96 14490.54
Jul-96 13860.07
Aug-96 14200.54
Sep-96 14625.09
Oct-96 14638.80
Nov-96 15354.64
Dec-96 15382.48
Jan-97 15700.84
Feb-97 15781.94
Mar-97 15570.40
Apr-97 15789.25
May-97 16716.01
Jun-97 17447.18
Jul-97 18327.10
Aug-97 17242.68
Sep-97 18295.95
Oct-97 17073.96
Nov-97 17142.01
Dec-97 17367.78
Jan-98 17573.83
Feb-98 18826.09
Mar-98 19769.36
Apr-98 20096.10
May-98 19943.86
Jun-98 20073.61
M $31 SCI Lipper
Montgomeray Global Telecomm $30 unications Telecommunications
Date Communications Fund Index/1/ Funds Average/2/
- --------------------------------------------------------------------------------
6/93 $10,000 $10,000 $10,000
6/98 $25,090 $19,784 $29,074
/1/ The MSCI Telecommunications Index measures the performance of equity
securities of approximately 25 communications companies in developed
countries.
/2/ The Lipper Telecommunication Funds Average universe consists of seven
funds.
47
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Global Communications
Fund
- ---------------------
Portfolio Highlights
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Global TeleSystems Group, Inc., ADR ...................................... 12.1%
Colt Telecom Group PLC, ADR .............................................. 3.7%
Mannesmann AG ............................................................ 3.0%
Nokia Corporation AB, Series A ........................................... 2.7%
Telefonica de Espana, ORD ................................................ 2.6%
Orange PLC ............................................................... 2.5%
AirTouch Communications, Inc. ............................................ 2.5%
WorldCom, Inc. ........................................................... 2.3%
Vivendi .................................................................. 2.3%
ADC Telecommunications, Inc. ............................................. 2.2%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
United States ............................................................ 17.2%
Russia ................................................................... 14.2%
United Kingdom ........................................................... 10.2%
Netherlands .............................................................. 4.4%
Greece ................................................................... 4.3%
Q: Several high-profile telecom mergers and acquisitions have taken place over
the past 12 months. What implications might this have for the industry?
A: We view this activity as a strong vote of confidence in the
telecommunications sector. Companies are looking to deliver fully integrated
products at affordable prices. An excellent example of this is the WorldCom-MCI
merger. This union will meld an Internet company, an established long-distance
provider and a competitive local provider. The proposed AT&T-TCI union also
highlights the perceived value of TCI's cable access into the home, as it will
allow the expanded company to provide a greater range of services.
Q: Does digitalization continue to be an important trend for the telecommu-
nications industry?
A: Yes, digitalization continues to play a pivotal role in the transformation of
the telecom industry. Digitalization is displacing traditional analog
technologies in many industries due to its ability to facilitate the faster
movement of higher-quality data, thereby creating new avenues for sales and
revenue growth. In telecommunications, the trend toward digitalization is
being accelerated in wireless services through the development of smaller,
lighter, longer-battery-life phones. These offer businesses and personal users
better quality and a greater variety of products for their money. Digitalization
is also revolutionizing consumer electronics, with DVD (digital videodisc)
technology, digital cameras and so on. In our view this bodes well for firms
that are developing cutting-edge digital technology.
Q: Why should an investor consider the Global Communications Fund?
A: In our view some of the world's most exciting opportunities lie outside the
United States. Consumers in many of these countries have embraced new communi-
cations technology more quickly and enthusiastically than U.S. consumers have.
In a global fund, we have more flexibility to capitalize on opportunities
throughout the world. We believe that having a global scope may also potentially
minimize the Fund's risk. Sector funds confined to one country are doubly
vulnerable: The sector in any particular country may slump, or the entire market
may decline. With such focused exposure, this type of fund would not have the
ability to insulate itself from such a decline. That's why we invest around the
world, making careful decisions in terms of asset allocation, in markets at
different stages of the economic cycle. We also believe that this global
strategy may increase the Fund's long-term returns.
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability and fluctuations in currency exchange rates. There are
additional risks associated with investing in funds that lack industry
diversification.
48
<PAGE>
---------------------
The Montgomery Funds
---------------------
Global Communications
Fund
---------------------
I n v e s t m e n t s
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 93.4%
Shares Value (Note 1)
Brazil - 0.9%
22,200 Telebras, ADR (Telephone/Networks) ...............$ 2,423,963
Canada - 3.4%
182,400 Bell Canada International Inc.**+
(Telephone/Wireless) ............................. 4,292,100
147,700 Cognos, Inc.+ (Software Systems) ................. 3,937,127
35,100 Metronet Communications Corporation,
Class B+ (Telephone/Networks) .................... 987,188
-------
9,216,415
China/Hong Kong - 3.3%
1,887,000 China Telecom (Hong Kong) Ltd.**+
(Telephone/Wireless) ............................. 3,275,703
53,300 China Telecom (Hong Kong) Ltd.,
Sponsored ADR**+ (Telephone/Wireless) ............ 1,842,180
1,539,500 Smartone Telecommunications**
(Telephone/Wireless) ............................. 3,755,363
---------
8,873,246
Finland - 3.2%
31,270 Helsingin Puhelin Oyj (Helsinki Telephone
Corporation) (Telephone/Networks) ................ 1,457,922
97,900 Nokia Corporation AB, Series A
(Telecommunications Equipment) ................... 7,207,554
---------
8,665,476
France - 4.2%
32,000 Cap Gemini S.A. (Business Services) .............. 5,028,367
28,519 Vivendi (Conglomerates) .......................... 6,089,953
---------
11,118,320
Germany - 3.9%
3,305 Axel Springer Verlag, Class A
(Newspapers/Publishing) .......................... 2,437,829
78,600 Mannesmann AG (Machinery & Tools) ................ 8,086,240
---------
10,524,069
Greece - 4.3%
135,800 Hellas Telecommunications S.A., ADR**+
(Telephone/Wireless) ............................. 5,627,213
224,764 Hellenic Telecommunication Organization
S.A.**+ (Telephone/Networks) ..................... 5,762,868
---------
11,390,081
Ireland - 1.6%
111,000 Esat Telecom Group PLC, ADR+
(Telephone/Networks) ............................. 4,204,125
Italy - 3.9%
612,361 Telecom Italia SpA** (Telephone/Networks) ........ 4,509,776
455,000 Telecom Italia Mobile SpA**
(Telephone/Wireless) ............................. 2,783,650
203,613 Telecom Italia di Risp (Telephone/Networks) ...... 986,121
659,600 Telecom Italia Mobile di Risp
(Telephone/Wireless) ............................. 2,227,438
---------
10,506,985
Japan - 3.3%
59,500 Sony Corporation** (Electronics) ................. 5,142,294
50,000 TDK Corporation (Electronics) .................... 3,706,516
8,848,810
Mexico - 1.3%
264,000 Grupo Iusacell, Series L, ADR**+
(Telephone/Wireless) ............................. 3,630,000
Netherlands - 4.4%
83,500 ASM Lithography Holding N.V.**+
(Semiconductor) .................................. 2,424,109
65,550 Philips Electronics N.V
(Telecommunications Equipment) ................... 5,514,501
118,000 Ordina Beheer N.V. (Business Services) ........... 3,825,646
---------
11,764,256
New Zealand - 1.7%
2,111,000 Telecommunication Corporation of
New Zealand, Installment Receipts**
(Telephone/Networks) ............................. 4,514,667
Poland - 1.2%
180,200 Prokom Software, GDR+ (Business Services) ........ 3,094,935
Portugal - 2.8%
108,200 Portugal Telecom S.A. (Telephone/Networks) ....... 5,738,234
9,210 Telecel-Comunicacaoes Pessoais S.A.+
(Telephone/Wireless) ............................. 1,636,446
---------
7,374,680
Russia - 14.2%
676,480 Global TeleSystems Group, Inc., ADR**+
(Telephone/Networks) ............................. 32,235,963
200,000 Russian Telecommunications Development
Corporation**+ (Telephone/Networks) .............. 1,381,124
96,721 Vimpel-Communications, ADR**+
(Telephone/Wireless) ............................. 4,328,265
---------
37,945,352
Singapore - 2.8%
68,400 Creative Technology Ltd.**+
(Computers & Office Equipment) ................... 832,166
153,500 Creative Technology Ltd., ADR**+
(Computers & Office Equipment) ................... 1,904,359
107,200 Flextronics International (Electronics) .......... 4,659,850
---------
7,396,375
Spain - 4.1%
151,854 Telefonica de Espana, ORD**
(Telephone/Networks) ............................. 7,020,834
301,900 Union Electrica Fenosa S.A.+
(Electric Utilities) ............................. 3,888,181
---------
10,909,015
The accompanying notes are an integral part of these financial statements
49
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Global Communications
Fund
- ---------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Sweden - 1.5%
137,640 Ericsson (L.M.) Telephone Company, Class B
(Telecommunications Equipment) ................... $ 4,021,332
United Kingdom - 10.2%
505,000 Cable & Wireless Communications PLC
(Telephone/Wireless) ............................. 5,113,999
61,400 Colt Telecom Group PLC, ADR**
(Telephone/Regional-Local) ....................... 9,954,475
80,100 Dr. Solomon's Group, ADR**
(Software Systems) ............................... 2,788,481
4,216,000 Freepages Group PLC+
(Broadcasting/Advertising) ....................... 2,657,394
623,400 Orange PLC (Telephone/Wireless) .................. 6,609,658
---------
27,124,007
United States - 17.2%
158,500 ADC Telecommunications, Inc. .....................
(Telecommunications) ............................. 5,790,203
112,500 AirTouch Communications, Inc.+
(Telephone/Wireless) ............................. 6,574,219
78,800 Bell Atlantic Corporation
(Telephone/Regional-Local) ....................... 3,595,250
100,050 Celullar Comm International, Inc. ................
(Telephone/Wireless) ............................. 5,002,500
50,826 Cisco Systems, Inc.+ (Telephone/Networks) ........ 4,680,757
107,300 Galileo International Inc. .......................
(Business Services) .............................. 4,835,206
128,200 McLeod, Inc.+ (Telephone/Regional-Local) ......... 4,987,781
90,000 Montgomery Emerging Communications
Fund, Ltd.+/++ (Mutual Funds) .................... 1,327,500
55,100 Scripps Company (E.W.)
(Newspapers/Publishing) .......................... 3,020,169
128,348 WorldCom, Inc.**+
(Telephone/Long Distance) ........................ 6,204,824
---------
46,018,409
TOTAL COMMON STOCKS
(Cost $160,870,471) ............................................. 249,564,518
PREFERRED STOCKS - 3.3%
Brazil - 3.3%
5,415,660 Telecommunicacoes de Sao Paulo S.A.
(Telephone/Regional-Local) ....................... 1,273,667
84,709,077 Telecommunicacoes de Minas Gerais-Telemig,
Series C+ (Telecommunications/Other) ............. 2,563,503
29,272,562 Telesp Celular S.A., Series B+
(Telephone/Wireless) ............................. 2,429,783
34,809,077 Telec de Minas Gerais S.A.
(Telephone/Regional-Local) ....................... 2,422,836
---------
TOTAL PREFERRED STOCKS
(Cost $10,669,444) .............................................. 8,689,789
RIGHTS - 0.0%
(Cost $648)
Brazil - 0.0%
21,410 Telec de Minas Gerais S.A., Rights, Expire
07/14/98+ (Telephone/Regional-Local).............. $ 0
-
TOTAL SECURITIES
(Cost $171,540,563).............................................. 258,254,307
-----------
REPURCHASE AGREEMENTS - 1.1%
Principal Amount
$1,418,000 Agreement with UBS, Tri-Party, 6.30%
dated 06/30/98, to be repurchased at
$1,418,248 on 07/01/98, collateralized by
$1,446,360 market value of U.S. government
securities, having various maturities and
various interest rates............................ 1,418,000
1,418,000 Agreement with Greenwich Capital Markets,
Tri-Party, 6.30% dated 06/30/98, to be
repurchased at $1,418,248 on 07/01/98,
collateralized by $1,446,360 market value
of U.S. government securities, having various
maturities and various interest rates............. 1,418,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $2,836,000)................................................ 2,836,000
---------
TOTAL INVESTMENTS - 97.8%
(Cost $174,376,563*)............................................. 261,090,307
OTHER ASSETS AND LIABILITIES - 2.2%
(Net)............................................................ 6,022,580
---------
NET ASSETS - 100.0%.............................................. $267,112,887
===========
* Aggregate cost for federal tax purposes was $174,805,546.
** Illiquid security or special situation security (see note 6 to Financial
Statements).
*** Securities on loan at June 30, 1998, which have an aggregate market value
of $35,486,014, represent 13.3% of the total net assets of the Fund (see
note 4 to Financial Statements).
+ Non-income producing security.
++ See note 2 to Financial Statements.
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 those of
investment companies that do not similarly concentrate their investments. The
global communications industry may be subject to greater changes in governmental
policies and govern- mental regulation than many other industries, and
regulatory approval requirements may materially affect the products and services
of this industry.
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
--------------------
The Montgomery Funds
--------------------
Select 50 Fund
--------------------
Portfolio Highlights
INVESTMENT REVIEW
Q: How did the Select 50 Fund perform for fiscal year 1998?
A: For the 12 months ended June 30, the Fund gained 15.4%, compared with a 30.2%
return for the Standard & Poor's 500 Index. Contributing to this was the Fund's
underperformance in the first six months of calendar year 1998, at the end of
which it had generated returns of 11.5%, compared with 17.7% for the S&P 500.
The Select 50 Fund offers a unique and innovative approach to portfolio
diversification. Each of Montgomery's five equity investment teams selects 10 or
so of their best capital appreciation ideas from their areas of expertise to
create a portfolio of approximately 50 stocks. This results in a roughly 60%
exposure to the U.S. market and 40% to the international markets. The portfolio
comprises securities selected from the U.S. growth, equity income, and small-cap
categories, as well as the international developed and emerging markets.
Q: What were the major factors behind the underperformance?
A: For much of the year, the U.S. markets, particularly the stocks that compose
the S&P 500, have achieved a superior investment performance to most other world
markets. When juxtaposed with the investment strategy of the Select 50 (which,
as previously stated, results in an approximate mix of 60% U.S. stocks and 40%
non-U.S. equities), the Fund has had exposure to markets that have
underperformed the U.S. market. Although we have had good success relative to
the asset classes themselves, the returns have been no match for the strength
of the U.S. market overall.
Asian turbulence also contributed to the Fund's results. The market turmoil in
Asia has led to a difficult environment not only for Asian stocks, but also for
emerging markets worldwide, due to the extreme negative sentiment generated by
the crisis. In addition, the difficulties facing the Asian markets have had a
negative effect on the performance of many smaller or non-household-name stocks
in the U.S. markets: There was a "flight to quality" which bolstered the
performance of the largest companies. Due to attractive valuations and
compelling growth, the Select 50 portfolio has maintained exposure to these
sectors. In spite of their near-term weakness, we are confident in the longer-
term attractiveness of these holdings.
Q: In which industry sectors does the Fund have the largest positions?
A: At June 30, the top three sectors in which we were invested were consumer
cyclicals (15%), financial services firms (14%) and capital goods companies
(13%). Our sector allocation is decided by the way in which the five
subportfolios are constructed; that is, how the top stocks in each of the
portfolios are performing. We continuously monitor our sector exposure to make
sure we are not inadvertently overexposed to a particular sector.
Q: What's your outlook for global markets for the remainder of 1998?
A: We are optimistic that the environment for European equities will continue to
be strong, although we believe that the reduced economic activity in Asia will
begin to have a bigger impact on developed markets. The continued uncertainty
surrounding
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Kevin Hamilton, CFA
Chair, Investment Oversight Committee
Montgomery U.S. Growth Equity
Montgomery U.S. Small Cap Equity
Montgomery U.S. Equity Income
Montgomery International/Global
Montgomery Emerging Markets
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Select 50 Fund
Since inception (10/2/95)................................................ 28.94%
One year................................................................. 15.44%
- --------------------------------------------------------------------------------
S&P 500 Index
Since 9/30/95............................................................ 29.73%
One year................................................................. 30.20%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS PAGE 1
07/10/98
MONTGOMERY SELECT 50(R)
Initial Investment: $10,000 Period: 10/02/95 - 06/98
This is no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
10/02/95 12.00 $10,000 $ 0 $10,000
10/95 12.50 $10,417 $ 0 $10,417
11/95 13.24 $11,033 $ 47 $11,080
12/95 13.83 $11,525 $ 49 $11,574
01/96 14.28 $11,900 $ 51 $11,951
02/96 14.53 $12,108 $ 52 $12,160
03/96 14.96 $12,467 $ 53 $12,520
04/96 15.87 $13,225 $ 56 $13,281
05/96 16.81 $14,008 $ 60 $14,068
06/96 16.46 $13,717 $ 58 $13,775
07/96 15.18 $12,650 $ 54 $12,704
08/96 15.89 $13,242 $ 56 $13,298
09/96 16.37 $13,642 $ 58 $13,700
10/96 15.67 $13,058 $ 571 $13,629
11/96 16.26 $13,550 $ 592 $14,142
12/96 16.03 $13,358 $ 584 $13,942
01/97 17.20 $14,333 $ 627 $14,960
02/97 17.39 $14,492 $ 633 $15,125
03/97 16.84 $14,033 $ 614 $14,647
04/97 17.21 $14,342 $ 627 $14,969
05/97 19.00 $15,833 $ 693 $16,526
06/97 20.01 $16,675 $ 729 $17,404
07/97 21.54 $17,950 $ 785 $18,735
08/97 21.37 $17,808 $ 779 $18,587
09/97 22.60 $18,833 $ 824 $19,657
10/97 21.15 $17,625 $ 771 $18,396
11/97 20.79 $17,325 $ 757 $18,082
12/97 18.83 $15,692 $2,331 $18,023
01/98 18.42 $15,350 $2,281 $17,631
02/98 19.79 $16,492 $2,450 $18,942
03/98 21.06 $17,550 $2,608 $20,158
04/98 21.72 $18,100 $2,689 $20,789
05/98 21.21 $17,675 $2,626 $20,301
06/98 20.99 $17,492 $2,599 $20,091
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
S&P 500 CAP APPRECIATION
AVE AVE
9/95-6/98 9/95-6/98
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Sep-95 $ 10,000 Sep-95 $ 10,000
Oct-96 9964.27 Oct-95 9797.58
Nov-96 10401.19 Nov-95 10165.70
Dec-95 10601.54 Dec-95 10280.97
Jan-96 10961.95 Jan-96 10453.57
Mar-96 11063.93 Mar-96 10743.73
Mar-96 11170.45 Mar-96 10880.64
Apr-96 11334.99 Apr-96 11349.66
May-96 11626.82 May-96 11719.11
Jun-96 11671.15 Jun-96 11375.78
Jul-96 11155.80 Jul-96 10572.30
Aug-96 11391.47 Aug-96 11016.57
Sep-96 12032.04 Sep-96 11600.16
Oct-96 12363.76 Oct-96 11490.58
Nov-96 13297.49 Nov-96 12001.21
Dec-96 13034.08 Dec-96 11921.64
Jan-97 13847.95 Jan-97 12455.88
Feb-97 13956.67 Feb-97 12143.38
Mar-97 13384.28 Mar-97 11546.93
Apr-97 14182.60 Apr-97 11717.18
May-97 15049.69 May-97 12651.02
Jun-97 15718.74 Jun-97 13126.17
Jul-97 16969.14 Jul-97 14109.84
Aug-97 16019.21 Aug-97 13871.02
Sep-97 16896.03 Sep-97 14685.00
Oct-97 16332.38 Oct-97 14062.06
Nov-97 17087.82 Nov-97 14100.72
Dec-97 17381.07 Dec-97 14225.02
Jan-98 17573.13 Jan-98 14157.77
Feb-98 18839.84 Feb-98 15198.22
Mar-98 19803.83 Mar-98 15885.58
Apr-98 20006.62 Apr-98 16005.24
May-98 19663.21 May-98 15432.00
Jun-98 20461.33 Jun-98 15942.73
</TABLE>
Lipper
Montgomery Capital Appreciation
Date Select 50 Fund S&P 500 Index/1/ Funds Average/2/
- --------------------------------------------------------------------------------
10/95 $10,000 $10,000 $10,000
6/98 $20,091 $20,461 $15,943
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.
/2/ The Lipper Capital Appreciation Funds Average universe consists of 151
funds.
51
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Select 50 Fund
- ---------------------
Investments
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Akbank T.A.S ............................................................ 4.7%
Bank Leumi Le-Israel .................................................... 2.7%
Transportadora de Gas del Sur SA, ADR ................................... 2.6%
Portugal Tecom SA ....................................................... 2.6%
Mannesmann AG ........................................................... 2.4%
International Nederlanden Groep N.V...................................... 2.4%
Duane Reade, Inc......................................................... 2.4%
Montupet ................................................................ 2.3%
HA-LO Industries, Inc.................................................... 2.3%
Philips Electronics N.V.................................................. 2.3%
================================================================================
TOP FIVE INDUSTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Banks ................................................................... 14.0%
Retail Trade ............................................................ 7.8%
Telecommunications Equipment ............................................ 6.4%
Machinery and Tools ..................................................... 5.3%
Oil ..................................................................... 5.3%
the U.S. economy and Asia's impact on earnings will make stock selection
crucial. We believe that the Select 50 Fund is well positioned for this kind of
environment given our disciplined investment strategies. Our portfolio managers
use rigorous fundamen- tal analysis within a framework of macroeconomic,
geopolitical and company-specific research to construct each of the Fund's
subportfolios. Over the long term, we believe that this disciplined, diversified
strategy will help minimize the Fund's risk and maxi- mize shareholders'
returns.
Q: Why should an investor consider the Select 50 Fund?
A: The Select 50 Fund combines diversification across regions and investment
styles with a focus on stocks that our managers believe offer the best capital
appreciation potential. It showcases Montgomery's expertise in five different
market segments: equity income, which focuses primarily on large-cap,
value-oriented U.S. stocks; growth, which emphasizes mid- to large-cap domestic
growth stocks; small-cap, which specializes in small U.S. companies;
international, which invests in developed foreign stock exchanges; and emerging
markets, which focuses on developing foreign markets. So it's a great way for an
investor to tap into Montgomery's capabilities in various investment styles and
achieve instant diversification across company size, sectors and countries.
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability and fluctuations in currency exchange rates.
PORTFOLIO INVESTMENTS
June 30, 1998
COMMON STOCKS - 95.3%
Shares Value (Note 1)
Agricultural Commodities - 0.7%
3,000,000 PPB Oil Palms Berhad (Malaysia) .................. $ 1,951,690
Auto/Auto Parts - 3.6%
81,200 Brisa-Auto Estradas de Portugal SA+
(Portugal) ....................................... 3,474,973
158,858 Montupet (France) ................................ 6,306,286
---------
9,781,259
Banks - 14.0%
391,142,500 Akbank T.A.S. (Turkey) ........................... 12,631,714
3,685,000 Bank Leumi Le-Israel (Israel) .................... 7,351,721
90,000 First Union Corporation (United States) .......... 5,242,500
98,300 International Nederlanden Groep N.V ..............
(Netherlands) .................................... 6,441,621
85,000 National City Corporation (United States) ........ 6,035,000
---------
37,702,556
Broadcasting/Advertising - 3.3%
4,159,200 Freepages Group PLC+ (United Kingdom) ............ 2,621,593
200,712 HA-LO Industries, Inc.+ (United States) .......... 6,247,161
---------
8,868,754
Building Materials - 3.9%
175,050 Encore Wire Corporation+ (United States) ......... 2,833,622
103,700 Interface, Inc. (United States) .................. 2,093,444
90,000 Masco Corporation (United States)$ ............... 5,445,000
---------
10,372,066
Business Services - 3.2%
266,000 Caribiner International, Inc.+ (United States) ... 4,655,000
113,800 On Assignment, Inc.+ (United States) ............. 3,986,556
---------
8,641,556
Cement - 1.3%
199,999 Amerya Cement (Egypt) ............................ 3,459,125
Chemicals - 2.2%
60,000 Dow Chemical Company (United States) ............. 5,801,250
Computers and Office Equipment - 1.8%
100,000 Pitney Bowes, Inc. (United States) ............... 4,812,500
Conglomerates - 1.8%
60,000 Minnesota Mining & Manufacturing
Company (United States) .......................... 4,931,250
Consumer Services - 2.2%
38,762 Azkoyen S.A. (Spain) ............................. 5,957,746
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
---------------------
The Montgomery Funds
---------------------
Select 50 Fund
---------------------
I n v e s t m e n t s
COMMON STOCKS - continued
Shares Value (Note 1)
Diversified Financial Services - 1.7%
125,000 FIRSTPLUS Financial Group, Inc.+
(United States) ................................ $ 4,718,750
Electrical Equipment - 1.8%
80,000 Emerson Electric Company (United States) ....... 4,825,000
Electronics - 3.3%
69,700 Moog Inc., Class A+ (United States) ............ 2,661,669
73,100 Philips Electronics N.V. (Netherlands) ......... 6,149,657
---------
8,811,326
Food and Beverage - 1.8%
100,000 Dole Food Company, Inc. (United States) ........ 4,968,750
Machinery and Tools - 5.3%
122,829 Elevadores Atlas SA (Brazil) ................... 2,070,960
143,150 Manitowoc Company, Inc. (United States) ........ 5,779,681
63,400 Mannesmann AG (Germany) ........................ 6,522,489
---------
14,373,130
Medical Products - 2.2%
166,000 Cooper Companies, Inc.+ (United States) ........ 6,048,625
Metals and Mining - 1.4%
194,600 ISPAT International N.V.+ (Netherlands) ........ 3,648,750
Oil - 5.3%
72,200 Amerada Hess Corporation (United States) ....... 3,921,362
65,000 Chevron Corporation (United States) ............ 5,399,063
110,000 Dresser Industries, Inc. (United States) ....... 4,846,875
---------
14,167,300
Pharmacy/Drugs - 4.1%
97,000 Glaxo Wellcome Plc, ADR (United Kingdom) ....... 5,801,813
40,000 Merck & Company, Inc. (United States) .......... 5,350,000
---------
11,151,813
Pipelines - 2.6%
610,700 Transportadora de Gas del Sur SA, ADR
(Argentina) .................................... 7,023,050
Pulp and Paper - 2.0%
125,000 International Paper Company (United States) .... 5,375,000
Retail Trade - 7.8%
7,210 Carrefour SA (France) .......................... 4,561,631
214,000 Duane Reade, Inc.+ (United States) ............. 6,420,000
148,000 Linens 'N Things, Inc.+ (United States) ........ 4,523,250
70,000 Nordstrom Inc. (United States) ................. 5,405,312
---------
20,910,193
Software Systems - 4.2%
175,000 Avid Technology Inc. + (United States) ......... 5,867,969
241,000 Structural Dynamics Research Corporation+
(United States) ................................ 5,550,531
---------
11,418,500
Telecommunications Equipment - 6.4%
220,000 Aspect Telecommunications Corporation+
(United States) ................................ 6,036,250
105,000 Comverse Technology+ (United States) ........... 5,450,156
79,700 Nokia Corporation, ADR (Finland) ............... 5,783,231
---------
17,269,637
Telephone/Networks - 4.4%
130,000 Portugal Tecom SA+ (Portugal) .................. 6,894,366
18,600 Portugal Tecom, ADR (Portugal) ................. 981,150
48,780,000 Telec Brasileiras-Telebras ON (Brazil) ......... 3,880,299
---------
11,755,815
Telephone/Regional-Local - 2.0%
120,000 Bell Atlantic Corporation (United States) ...... 5,475,000
3,300 Mahanagar Telephone Nigam Ltd. (India) ......... 13,885
------
5,488,885
Trucking - 1.0%
140,700 Swift Transportation Company, Inc.+
(United States) ................................ 2,796,413
---------
TOTAL COMMON STOCKS
(Cost $226,285,379) ............................................ 257,030,689
REPURCHASE AGREEMENTS - 9.3%
Principal Amount
$12,490,000 Agreement with Bear Stearns, Tri-Party,
6.35% dated 06/30/98, to be repurchased at
$12,492,203 on 07/01/98, collateralized by
$12,739,800 market value of U.S. government
securities, having various maturities and
various interest rates.......................... 12,490,000
12,490,000 Agreement with Paine Webber Group,
Tri-Party, 6.10% dated 06/31/98, to be
repurchased at $12,492,116 on 07/01/98,
collateralized by $12,739,800 market value of
U.S. government securities, having various
maturities and various interest rates........... 12,490,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $24,980,000).............................................. 24,980,000
----------
TOTAL INVESTMENTS - 104.6%
(Cost $251,265,379*)............................................ 282,010,689
OTHER ASSETS AND LIABILITIES - (4.6)%
(Net)........................................................... (12,292,432)
----------
NET ASSETS - 100.0%.............................................$ 269,718,257
===========
* Aggregate cost for federal tax purposes was $253,907,126.
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
U.S. Asset Allocation
Fund
- ---------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Kevin Hamilton, CFA
Chair, Investment Oversight Committee
Montgomery Growth Team
Montgomery Fixed-Income Team
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery
U.S. Asset Allocation Fund
Since inception (3/31/94)............................................... 21.15%
One year................................................................ 14.67%
Three years............................................................. 17.67%
- --------------------------------------------------------------------------------
S&P 500 Index
Since 3/31/94........................................................... 27.36%
One year................................................................ 30.20%
Three years............................................................. 30.23%
- --------------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index
Since 3/31/94........................................................... 8.21%
One year................................................................ 10.54%
Three years............................................................. 7.87%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a $10,000 investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY U.S. ASSET ALLOCATION(R)
Initial Investment: $10,000 Period: 03/31/94 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
03/31/94 12.00 $ 10,000 $ 0 $ 10,000
03/94 12.00 $ 10,000 $ 0 $ 10,000
04/94 12.19 $ 10,158 $ 0 $ 10,158
05/94 12.45 $ 10,375 $ 0 $ 10,375
06/94 12.24 $ 10,200 $ 0 $ 10,200
07/94 12.89 $ 10,742 $ 0 $ 10,742
08/94 13.25 $ 11,042 $ 0 $ 11,042
09/94 13.37 $ 11,142 $ 0 $ 11,142
10/94 13.84 $ 11,533 $ 0 $ 11,533
11/94 14.05 $ 11,708 $ 226 $ 11,934
12/94 14.10 $ 11,750 $ 226 $ 11,976
01/95 14.24 $ 11,867 $ 228 $ 12,095
02/95 14.71 $ 12,258 $ 237 $ 12,495
03/95 15.16 $ 12,633 $ 244 $ 12,877
04/95 15.25 $ 12,708 $ 245 $ 12,953
05/95 15.82 $ 13,183 $ 254 $ 13,437
06/95 16.33 $ 13,608 $ 263 $ 13,871
07/95 16.83 $ 14,025 $ 270 $ 14,295
08/95 17.06 $ 14,217 $ 274 $ 14,491
09/95 17.41 $ 14,508 $ 280 $ 14,788
10/95 17.41 $ 14,508 $ 280 $ 14,788
11/95 17.49 $ 14,575 $ 978 $ 15,553
12/95 17.86 $ 14,883 $ 999 $ 15,882
01/96 17.84 $ 14,867 $ 997 $ 15,864
02/96 18.29 $ 15,242 $ 1,022 $ 16,264
03/96 18.54 $ 15,450 $ 1,036 $ 16,486
04/96 19.09 $ 15,908 $ 1,068 $ 16,976
05/96 19.51 $ 16,258 $ 1,091 $ 17,349
06/96 19.33 $ 16,108 $ 1,081 $ 17,189
07/96 18.74 $ 15,617 $ 1,047 $ 16,664
08/96 19.17 $ 15,975 $ 1,072 $ 17,047
09/96 19.64 $ 16,367 $ 1,098 $ 17,465
10/96 18.50 $ 15,417 $ 2,330 $ 17,747
11/96 19.11 $ 15,925 $ 2,407 $ 18,332
12/96 18.09 $ 15,075 $ 2,848 $ 17,923
01/97 18.37 $ 15,308 $ 2,893 $ 18,201
02/97 18.23 $ 15,192 $ 2,870 $ 18,062
03/97 17.84 $ 14,867 $ 2,808 $ 17,675
04/97 18.41 $ 15,342 $ 2,898 $ 18,240
05/97 19.45 $ 16,208 $ 3,063 $ 19,271
06/97 19.89 $ 16,575 $ 3,132 $ 19,707
07/97 21.35 $ 17,792 $ 3,361 $ 21,153
08/97 21.12 $ 17,600 $ 3,325 $ 20,925
09/97 21.86 $ 18,217 $ 3,441 $ 21,658
10/97 21.54 $ 17,950 $ 3,391 $ 21,341
11/97 21.59 $ 17,992 $ 3,399 $ 21,391
12/97 18.01 $ 15,008 $ 6,323 $ 21,331
01/98 17.94 $ 14,950 $ 6,298 $ 21,248
02/98 18.68 $ 15,567 $ 6,557 $ 22,124
03/98 19.12 $ 15,933 $ 6,713 $ 22,646
04/98 19.30 $ 16,083 $ 6,776 $ 22,859
05/98 19.08 $ 15,900 $ 6,698 $ 22,598
06/98 19.08 $ 15,900 $ 6,698 $ 22,598
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
S&P 500 LEHMSN AGG FLEXIBLE PORTFOLIOS
AVE AVE AVE
3/94-6/98 3/94-6/98 3/94-6/98
DATE RETURN VALUE DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Mar-94 $10,000 Mar-94 $10,000 Mar-94 $10,000
Apr-94 10128.12 Apr-94 9920.15 Apr-94 10019.58
May-94 10293.68 May-94 9918.76 May-94 10063.26
Jun-94 10041.78 Jun-94 9896.84 Jun-94 9894.16
Jul-94 10371.28 Jul-94 10093.42 Jul-94 10097.66
Aug-94 10795.51 Aug-94 10105.95 Aug-94 10342.91
Sep-94 10531.74 Sep-94 9957.21 Sep-94 10181.90
Oct-94 10768.01 Oct-94 9948.34 Oct-94 10245.77
Nov-94 10376.34 Nov-94 9926.25 Nov-94 10003.34
Dec-94 10529.96 Dec-94 9994.79 Dec-94 10062.73
Jan-95 10802.84 Jan-95 10192.59 Jan-95 10158.46
Feb-95 11223.43 Feb-95 10434.93 Feb-95 10446.76
Mar-95 11554.08 Mar-95 10498.95 Mar-95 10657.51
Apr-95 11894.05 Apr-95 10645.60 Apr-95 10872.66
May-95 12368.72 May-95 11057.56 May-95 11246.66
Jun-95 12655.51 Jun-95 11138.63 Jun-95 11472.73
Jul-95 13075.01 Jul-95 11113.75 Jul-95 11775.61
Aug-95 13107.65 Aug-95 11247.88 Aug-95 11857.07
Sep-95 13660.51 Sep-95 11357.31 Sep-95 12126.81
Oct-95 13611.70 Oct-95 11505.01 Oct-95 12060.48
Nov-95 14208.55 Nov-95 11677.41 Nov-95 12436.38
Dec-95 14482.24 Dec-95 11841.29 Dec-95 12621.04
Jan-96 14974.57 Jan-96 11919.92 Jan-96 12873.84
Feb-96 15113.88 Feb-96 11712.72 Feb-96 12946.58
Mar-96 15259.40 Mar-96 11631.30 Mar-96 13025.23
Apr-96 15484.17 Apr-96 11565.89 Apr-96 13188.55
May-96 15882.82 May-96 11542.40 May-96 13359.21
Jun-96 15943.37 Jun-96 11697.41 Jun-96 13352.04
Jul-96 15239.38 Jul-96 11729.42 Jul-96 12973.38
Aug-96 15561.31 Aug-96 11709.76 Aug-96 13203.02
Sep-96 16436.36 Sep-96 11913.82 Sep-96 13670.06
Oct-96 16889.51 Oct-96 12177.73 Oct-96 13908.41
Nov-96 18165.03 Nov-96 12386.32 Nov-96 14562.59
Dec-96 17805.19 Dec-96 12271.15 Dec-96 14419.16
Jan-97 18916.97 Jan-97 12308.73 Jan-97 14902.10
Feb-97 19065.48 Feb-97 12339.35 Feb-97 14887.35
Mar-97 18283.57 Mar-97 12202.61 Mar-97 14465.48
Apr-97 19374.11 Apr-97 12385.28 Apr-97 14870.78
May-97 20558.60 May-97 12502.36 May-97 15523.02
Jun-97 21472.56 Jun-97 12650.75 Jun-97 16003.56
Jul-97 23180.67 Jul-97 12991.90 Jul-97 16926.06
Aug-97 21883.02 Aug-97 12881.08 Aug-97 16413.04
Sep-97 23080.80 Sep-97 13071.05 Sep-97 17110.19
Oct-97 22310.83 Oct-97 13260.67 Oct-97 16727.09
Nov-97 23342.80 Nov-97 13321.73 Nov-97 17005.19
Dec-97 23743.40 Dec-97 13455.86 Dec-97 17221.17
Jan-98 24005.76 Jan-98 13628.61 Jan-98 17332.37
Feb-98 25736.15 Feb-98 13618.35 Feb-98 18176.57
Mar-98 27053.00 Mar-98 13665.15 Mar-98 18783.84
Apr-98 27330.02 Apr-98 13736.48 Apr-98 18962.13
May-98 26860.90 May-98 13866.78 May-98 18734.32
Jun-98 27951.17 Jun-98 13984.38 Jun-98 19087.73
</TABLE>
Montgomery S&P Lehman Brothers Lipper Flexible
U.S. Asset 500 Aggregate Portfolio
Date Allocation Fund Index/1/ Bond Index/2/ Funds Average/3/
- --------------------------------------------------------------------------------
3/94 $10,000 $10,000 $10,000 $10,000
6/98 $22,598 $27,951 $13,984 $19,088
/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 Bond Index comprises all bonds that are
investment grade, are in excess of $25 million and have at least one year
to maturity.
/3/ The Lipper Flexible Portfolio Funds Average universe consists of 106 funds.
INVESTMENT REVIEW
Q: How did the Fund perform for the year ended June 30, 1998, and the first six
months of calendar year 1998?
A: For the year ended June 30, 1998, the Fund gained 14.67%, underperforming its
benchmark (60% Standard & Poor's 500 Index and 40% Lehman Brothers Aggregate
Bond Index), which gained 22.23%. For the first six months of the calendar year,
the Fund gained 5.94%, compared with the benchmark return of 12.12%.
Q: What role did asset allocation and securities selection decisions play in the
Fund's performance?
A: The underperformance was a result of both asset allocation decisions and
security selection. Asset allocation decisions have broadly accounted for about
1.5% of underperformance for the six-month period and 2.3% for the year. Our
asset allocation process, which is a combination of quantitative and
qualitative research, has led to a conservative stance toward the U.S. equity
market. This translates into a generally underweight position in U.S. equities
in favor of fixed-income securities and cash. On the equity side, the Fund's
emphasis (through the Montgomery Growth Fund) on smaller-cap stocks and cyclical
shares has been a disadvantage over the past year. In contrast, the market has
rewarded large-cap, domestically oriented companies that were perceived to be
insulated from Asia's problems. We believe that our holdings represent better
growth opportunities than currently exist in the larger stocks-and they are
priced more attractively. In view of this, we still have confidence in the
stocks we've chosen, despite their underperformance in the latter half of 1997
and first half of 1998.
In contrast to the equities portion of the Fund, our fixed-income segment was
ahead of the Lehman Brothers Aggregate benchmark in both periods. Through the
Montgomery Total Return Bond Fund, which is the Fund's fixed-income investment
vehicle, the Fund has benefited from its exposure to bonds with longer-term
maturities. On a sector basis, the Total Return Bond Fund was overweighted in
U.S. Treasuries in the third quarter of 1997. These proved to be a magnet for
anxious investors in the fourth quarter, as investors acted on their belief that
deflation was taking hold. As heavy demand for Treasuries drove down their
yields in late 1997, we took profits on many $27,951 of our holdings in the
sector and redirected the proceeds into pre- mium mortgage-backed bonds and
other types of debt. By June 30, 1998, the Fund had just 23% of its assets in
Treasuries, with the remainder in corporates, asset-backed securities,
mortgage-backed bonds and other debt instruments.
Q: How is the Fund positioned now?
A: We are 45% invested in equities and 55% invested in fixed-income
instruments. We have recently taken a more conservative stance in favor of
fixed-income securities, as we believe that the impact of the Asian crisis could
have a moderating effect on economic activity in the United States later this
year and, therefore, on the stock market. We also believe that stock valuations
are too high in relation to corporate earnings in the equities market generally.
54
<PAGE>
---------------------
The Montgomery Funds
---------------------
U.S. Asset Allocation
Fund
---------------------
I n v e s t m e n t s
Q: How does the Fund position reflect your outlook for the coming year?
A: A neutral weighting for the Fund would be 60/40 stocks/bonds, so its current
posi- tioning means it is overweighted in bonds and underweighted in equities.
Those allo- cations are always subject to change, but at the moment they reflect
our view that a more conservative stance represents a better risk/return
tradeoff for our shareholders.
In part, our outlook hinges on the assumption that long-term interest rates may
con- tinue to decline. We believe that there is only a small chance that the Fed
will raise short-term interest rates, as the fallout from Asia may inevitably
slow the economy. Over the past decade, falling interest rates have usually
boosted both stocks and bonds. Now, however, corporations face a tight labor
market in which they may have to increase wages even if productivity gains slow
or stall. At the same time, many companies have little or no pricing power
through which to pass on the cost of rising wages. As a result, we believe that
corporate profit margins may continue to be under pressure in the coming year,
making it possible that stocks will not participate as strongly in an interest
rate-led rally as they have in the recent past.
Q: Why should an investor consider the U.S. Asset Allocation Fund?
A: Our goal with this Fund is to provide shareholders with a high degree of
diversifi- cation and solid long-term returns while minimizing risk. We do this
through moni- toring six main factors in determining how to allocate the Fund's
assets: consumer sentiment, economic activity (which includes statistics ranging
from auto and retail sales to wage growth), governmental policies, interest
rates, market liquidity and valuation. With the United States facing such an
uncertain economic outlook, this Fund clearly provides investors with a
carefully considered, risk-controlled invest- ment alternative.
PORTFOLIO INVESTMENTS
June 30, 1998
INVESTMENT COMPANY SECURITIES - 100.0%
Shares Value (Note 1)
Bond Mutual Fund-Taxable - 53.4%
5,500,145 Montgomery Total Return Bond Fund..............$ 68,421,806
Equity Mutual Fund - 46.6%
2,523,768 Montgomery Growth Fund......................... 59,762,815
----------
TOTAL INVESTMENTS - 100.0%
(Cost $128,627,730*) ........................................ 128,184,621
OTHER ASSETS AND LIABILITIES - 0.0%
(Net) ....................................................... (38,626)
------
NET ASSETS - 100.0% .........................................$ 128,145,995
===========
(*) Aggregate cost for federal tax purposes was $129,504,131.
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Total Return Bond Fund
- ----------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William Stevens....................................... Senior Portfolio Manager
================================================================================
F U N D P E R F 0 R M A N C E
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery
Total Return Bond Fund
Since inception (6/30/97)............................................... 10.92%
One year................................................................ 10.92%
- --------------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index
Since 6/30/97........................................................... 10.54%
One year................................................................ 10.54%
- --------------------------------------------------------------------------------
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 will fluctuate, so shares, when redeemed, may be worth more or less than
their original cost.
INVESTMENT REVIEW
Q: How has the Total Return Bond Fund performed in its first year?
A: The Fund had strong performance in its first year, both absolutely and
relative to its peers. Its return for the one-year period ended June 30, 1998,
was 10.92%, against a 10.54% return for the Lehman Brothers Aggregate Bond
Index, its benchmark. This places the Fund in the top 10% of 215 similar bond
funds, according to Lipper Analytical Services.
Q: What factors drove the Fund's performance?
A: The Fund benefited from its overweight position in U.S. Treasuries and its
exposure to bonds with longer-term maturities. At the beginning of the third
quarter last year, 40% of assets were in government paper, which proved highly
advantageous when the U.S. Treasury bond market began to rally sharply in the
second half of 1997. The market rally was driven by a dwindling supply of
government issuance and a surge in demand from both domestic and foreign
sources. The supply shrank due to the strength of the U.S. economy, which
resulted in a federal budget surplus. As a result, there has been less necessity
for the government to turn to the financial markets for funding. The supply-side
squeeze inadvertently coincided with currency turmoil in Asia, which led to
heavy foreign buying in the U.S. Treasuries market as investors looked for a
safe haven for their money. Given the strength of the U.S. markets in general
appear to have usurped gold's traditional role in this regard.
In addition to drawing capital into the economy, the crisis in Asia has begun to
have an impact on market sentiment. As the Asian economies have fallen into
various stages of near-collapse, fear of imported deflation has become a further
factor driving up prices of bonds with longer maturities. Bond analysts note
that deflationary pressures have already begun, as lower-priced goods have
flooded into the country and domestic manufacturers face stiffer competition.
This has helped sustain the bond market rally. Having taken advantage of this
trend, we have recently had profits on some of our holdings and are redirecting
the proceeds into premium mortgage-backed bonds and corporate debt.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
PAGE 1
07/10/98
MONTGOMERY TOTAL RETURN BOND(R)
Initial Investment: $10,000 Period: 06/30/97 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of
Growth of Value of Investment with
Initial Reinvested Distributions
Date Nav Investment Distributions Reinvested
<S> <C> <C> <C> <C>
06/30/97 12.00 $10,000 $0 $10,000
06/97 12.00 $10,000 $0 $10,000
07/97 12.27 $10,225 $51 $10,276
08/97 12.09 $10,075 $101 $10,176
09/97 12.22 $10,183 $150 $10,333
10/97 12.35 $10,292 $201 $10,493
11/97 12.35 $10,292 $251 $10,543
12/97 12.29 $10,242 $404 $10,646
01/98 12.40 $10,333 $459 $10,792
02/98 12.33 $10,275 $504 $10,779
03/98 12.32 $10,267 $557 $10,824
04/98 12.30 $10,250 $610 $10,860
05/98 12.38 $10,317 $668 $10,985
06/98 12.44 $10,367 $725 $11,092
</TABLE>
Prepared by The Performance Measurements and Analytics Department
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LEHMAN BROTHERS LIPPER
AGGREGATE BOND INDEX INTM INV-GRD DEBT
AVE AVE
6/97-/98 6/97-/98
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Jun-97 $10,000 Jun-97 $10,0000
Jul-97 10269.67 Jul-97 10261.67
Aug-97 10182.07 Aug-97 10169.64
Sep-97 10332.24 Sep-97 10313.51
Oct-97 10482.13 Oct-97 10433.17
Nov-97 10530.40 Nov-97 10464.28
Dec-97 10636.42 Dec-97 10559.42
Jan-98 10772.97 Jan-98 10697.59
Feb-98 10764.86 Feb-98 10682.54
Mar-98 10801.85 Mar-98 10720.45
Apr-98 10858.23 Apr-98 10766.42
May-98 10961.23 May-98 10862.00
Jun-98 11054.19 Jun-98 10941.74
</TABLE>
Growth of a $10,000 Investment
Montgomery Total Return Bond Fund
Lehman Brothers Aggregate Bond Index/1/
Lipper Intermediate Investment-Grade Debt Funds Average/2/
Q: Lower long-term interest rates have led to a wave of prepayments in the
mortgage-backed bond market, so why is the Fund investing in this sector?
A: It's true that prepayments have been a problem in this segment of the market.
Prepayments hit 50% on some of the faster-paying 8% coupons earlier in 1998 and,
if Treasuries rally further, the repayment rate for higher coupon bonds could be
even greater. Our premium mortgages have performed well, however, with
prepayments coming in below expectations, and prepayment expectations have grown
faster than prepayments. We believe that we are being very well compensated for
taking on prepayment risk at this time.
/1/ The Lehman Brothers Aggregate Bond Index comprises all bonds that are
investment grade, are in excess of $25 million and have at least one year to
maturity.
/2/ The Lipper Intermediate Investment-Grade Debt Funds Average universe
consists of 212 funds.
56
<PAGE>
--------------------------------
The Montgomery Funds
--------------------------------
Total Return Bond Fund
--------------------------------
Portfolio Highlights
Q: The Federal Reserve continues to worry about inflation. Do you think that a
rise in short-term interest rates is likely, and how will this affect the Fund?
A: The Federal Reserve currently has two main inflationary concerns: a tight
labor market and rising housing prices. While these remain genuine concerns,
counterbalancing these forces are a strong dollar, very robust growth in
productivity and already high real interest rates given that inflation is below
2%. Moreover, both the manufacturing and farm sectors are beginning to feel the
impact of the slowdown in Asia. This fed through into much slower economic
expansion in the second quarter of 1998. In view of these countertrends, we
believe that even if the Fed does decide that the tight housing and labor
markets call for higher rates, any rise will be modest. Moreover, it is our
opinion that real long-term interest rates are still high, so there is room for
further downward momentum in long-term rates.
Q: How does the Fund's position reflect your outlook for the bond market?
A: We remain bullish about the prospects for the bond market. The deflationary
argument suggests that the bond market rally has further upward momentum, as
deflation has been generally positive for bonds. This positive outlook is
expected to spread to all sectors of the bond market. The corporate sector has
tended to be a laggard due to investors' fears that Asia's slowdown would weigh
on U.S. firms. After carefully assessing Asia's potential impact on this sector,
however, we believe that this sell-off was overdone. The Total Return Bond Fund
differs from other Montgomery Fixed-Income Funds due to its active use of
corporate bonds, so we have taken advantage of the excellent value that this
sector offers to add to existing holdings. In addition, we generally expect to
remain overweighted in Treasuries, as this year's federal budget surplus is
likely to continue to exacerbate the shortage, maintaining the rally in this
sector.
- ---------------------------------------------------------------------------
TOP TEN HOLDINGS
- ---------------------------------------------------------------------------
(as a percentage of total net assets)
U.S. Treasury Bond,
6.500% due 11/15/26 ........................................... 8.0%
FNMA, 5.500% Pass-through Pools
due 01/01/24-04/01/28 ......................................... 7.8%
U.S. Treasury Bond,
8.875% due 02/15/19 ........................................... 7.2%
FNMA, Pool #323193
9.000% due 09/01/07 ........................................... 6.7%
U.S. Treasury Note,
6.500% due 05/15/05 ........................................... 6.4%
FHLB, 4.360% (FLTR) due 03/23/00.................................... 5.0%
FNMA, 1993-220PH,
5.550% due 12/25/11 ........................................... 3.5%
FHLMC, 9.000% Pass-through Pools
due 04/01/01--12/01/04 ........................................ 2.9%
Premier Trust, Series BI,
10.500% due 12/20/05 .......................................... 2.8%
FHLB, 4.625% (FLTR) due 03/22/00 ................................... 2.7%
- ---------------------------------------------------------------------------
ASSET MIX
- ---------------------------------------------------------------------------
(as a percentage of total investments)
Collateralized Mortgage Obligations ................................ 23.5%
Treasuries ......................................................... 21.1%
Mortgage Pass-throughs ............................................. 18.6%
Agencies ........................................................... 18.6%
Corporate Bonds .................................................... 15.1%
Other .............................................................. 3.1%
Lipper Analytical Services is a nationally recognized, independent company that
compiles performance data on mutual funds. Lipper rankings are based on total
returns.
57
<PAGE>
- ------------------------------
The Montgomery Funds
- ------------------------------
Total Return Bond Fund
- ------------------------------
I n v e s t m e n t s
PORTFOLIO INVESTMENTS
June 30, 1998
ASSET-BACKED SECURITIES -- 0.1%
Principal Amount Value (Note 1)
Union Acceptance Corporation (UAC):
$6,815,701 Series 1995-CI (PAC),
3.000% due 10/02/02.......................... $ 41,267
3,971,571 Series 1995-DI (PAC),
3.000% due 02/07/99.......................... 40,647
------
TOTAL ASSET-BACKED SECURITIES
(Cost $8,536)............................................. 81,914
------
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) -- 8.7%
1,300,000 Chase Manhattan Auto Owner Trust, Series
1997-BA5, 6.600% due 03/15/02................ 1,322,867
282,793 Conti-Mortgage Home Equity Loan Trust,
Series 1997-3A2, 6.510% due 05/15/12......... 282,362
910,853 Green Tree Home Improvement Loan Trust,
Series 1997-AHEA3, 6.620% due 03/15/28....... 925,167
2,000,000 Master Financial Asset Securitization Trust,
Series 1998-1A2, 6.220% due 08/20/11......... 1,998,480
2,151,970 Premier Trust, Series B1,
10.500% due 12/20/05......................... 2,141,211
112,475 UCFC Home Equity Loan, Series 1996-B1A2,
7.075% due 04/15/10.......................... 113,019
-------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $6,770,951)......................................... 6,783,106
---------
CORPORATE BONDS -- 16.5%
700,000 Associates Corporation N.A., MTN,
7.540% due 04/l4/04.......................... 747,250
650,000 Bear Stearns Company, Inc.,
6.200% due 03/30/03.......................... 649,188
Ford Motor Credit Company:
1,400,000 Notes, 6.750% due 05/15/08................... 1,445,500
805,000 Senior Notes, 6.500% due 02/28/02............ 819,088
200,000 Franchise Finance Corporation, MTN,
6.780% due 02/20/02.......................... 202,000
1,205,000 Hunt (J.B.) Transport Services, Inc., Notes,
6.250% due 09/01/03.......................... 1,203,494
875,000 IRT Property Company, Notes,
7.450% due 04/01/01.......................... 901,250
950,000 Irvine Apartment Communities, Notes,
7.000% due 10/01/07.......................... 963,063
650,000 Kimco Realty Corporation, Senior Notes,
6.500% due 10/01/03.......................... 650,813
110,000 Occidental Petroleum Corporation, MTN,
9.750% due 06/15/01.......................... 120,725
550,000 Price Reit Inc., 7.250% due 11/11/00......... 560,313
500,000 Salomon Smith Barney Holdings Inc.,
5.625% due 11/15/98.......................... 499,805
375,000 Security Capital Industrial Trust, Notes,
7.875% due 05/15/09.......................... 406,406
l,000,000 Security Capital Pacific Trust, Notes,
7.550% due 08/01/08.......................... 1,060,000
700,000 Tele-Communications Inc.,
7.250% due 08/01/05.......................... 741,125
122,000 U.S. West Communications Corporation,
MTN, 5.500% due 03/15/99**................... 121,645
645,000 Vastar Resources, MTN,
6.960% due 02/26/07.......................... 665,156
l,000,000 Viacom Inc., Notes, 7.750% due 06/01/05...... 1,072,500
---------
TOTAL CORPORATE BONDS
(Cost $12,575,787)........................................ 12,829,321
----------
FEDERAL HOME LOAN BANK (FHLB) -- 13.4%
Agencies:
1,550,000 6.494% (FLTR) due 07/30/99**................. 1,555,813
2,150,000 4.625% (FLTR) due 03/22/00**................. 2,103,909
4,000,000 4.360% (FLTR) due 03/23/00**................. 3,897,550
1,150,000 5.000% (FLTR) due 04/14/00**................. 1,140,405
1,700,000 6.320% due 02/21/06.......................... 1,751,663
----------
TOTAL FEDERAL HOME LOAN BANK
(Cost $10,376,027) ....................................... 10,449,340
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 14.4%
1,770,000 5.000% (FLTR) due 03/18/00**................. 1,748,207
CMOs:
1,480,000 1676KD (AD) 6.250% due 03/15/06.............. 1,503,819
1,050,000 1604IA (PAC) 6.000% due 09/15/08............. 1,050,548
557,344 1657C (PAC) 5.500% due 11/15/11.............. 556,296
131,113 1560PD (PAC) 5.500% due 01/15/13............. 130,830
362,935 1546C 5.500% due 10/15/13.................... 362,091
600,000 1722PG (PAC) 6.500% due 12/15/19............. 608,883
986,739 1101L (PAC) 6.950% due 09/15/20.............. 990,746
1,967,739 1502PX 7.000% due 04/15/23................... 1,988,185
Pass-throughs:
2,211,062 9.000% Pass-through Pools due
04/01/01--12/01/04........................... 2,268,019
---------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $10,952,543)........................................ 11,207,624
----------
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
----------------------
The Montgomery Funds
----------------------
Total Return Bond Fund
----------------------
Investments
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 29.2%
Principal Amount Value (Note 1)
$2,050,000 5.000% (FLTR) due 03/03/00**..................$ 2,025,374
1,500,000 7.000% due TBA................................ 1,526,250
CMOs:
700,000 1994-12PH (PAC), 6.250% due 01/25/09.......... 707,754
2,748,000 1993-220PH (PAC), 5.550% due 12/25/11......... 2,715,260
768,259 1988-16B (PAC), 9.500% due 06/25/18........... 827,498
657,882 1993-159PA (PAC), Zero Coupon due
01/25/21...................................... 621,698
39,075 1991-94C (PAC), Zero Coupon due
07/25/21...................................... 38,785
1,100,000 1993-234PB (PAC), 5.500% due 10/25/07......... 1,084,488
Pass-throughs:
5,016,106 Pool #323193 9.000% due 09/01/07.............. 5,241,831
6,386,717 5.500% Pass-through Pools due
01/0l/24-04/0l/28............................. 6,081,970
1,706,690 8.500% Pass-through Pools due
04/01/07-05/01/07............................. 1,789,035
---------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $22,598,148)......................................... 22,659,943
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 0.6%
(Cost $425,136)
Pass-throughs:
408,229 8.500% Pass-through Pools due
01/15/23-07/15/23............................. 431,060
-------
MUNICIPAL BOND -- 1.7%
(Cost $1,298,094)
1,300,000 Chicago, Illinois, Tax Increment Bonds,
Central Loop, Series B,
6.375% due 06/01/03........................... 1,319,500
---------
U.S. TREASURY BONDS -- 15.2%
4,050,000 U.S. Treasury Bonds, 8.875% due 02/15/19...... 5,578,227
5,625,000 U.S. Treasury Bonds, 6.500% due 11/25/26...... 6,246,394
---------
TOTAL U.S. TREASURY BONDS
(Cost $10,755,924)......................................... 11,824,621
----------
U.S. TREASURY NOTES -- 7.8%
$255,000 U.S. Treasury Notes,
6.625% due 06/30/01........................... 262,451
825,000 U.S. Treasury Notes,
6.250% due 0l/31/02........................... 843,431
4,710,000 U.S. Treasury Notes,
6.500% due 05/15/05........................... 4,971,264
---------
TOTAL U.S. TREASURY NOTES
(Cost $6,069,039) ......................................... 6,077,146
---------
REPURCHASE AGREEMENT -- 1.6%
(Cost $1,209,000)
1,209,000 Agreement with Bear Stearns,
Tri-Party, 6.35% dated 06/30/98,
to be repurchased at
$1,209,210 on 07/01/98, collateralized
by $1,233,180 market value of
U.S. government securities,
having various maturities and
various interest rates ...................... 1,209,000
---------
TOTAL INVESTMENTS -- 109.2%
(Cost $83,039,185*)........................................$ 84,872,575
OTHER ASSETS AND LIABILITIES -- (9.2)%
(Net)...................................................... (7,178,815)
----------
NET ASSETS -- 100.0%.......................................$ 77,693,760
==========
* Aggregate cost for federal tax purposes was $83,052,927.
** Floating-rate note reflects the rate in effect at June 30, 1998.
Abbreviations:
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.
CMO Collateralized Mortgage Obligation
FLTR Floating-Rate Securities: bonds with coupon rates that adjust in
proportion to an index.
MTN Medium-Term Note.
PAC Planned Amortization Class: bonds that are protected in part from
variations in prepayments, generally resulting in greater stability.
TBA To-Be-Announced Security.
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Short Duration
Government Bond Fund
- --------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William Stevens.........................................Senior Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery Short Duration
Government Bond Fund
Since inception (12/18/92)................................................ 6.60%
One year.................................................................. 7.56%
Five years................................................................ 6.15%
- --------------------------------------------------------------------------------
Lehman Brothers Government
Bond 1-3 Year Index
Since 12/31/92............................................................ 5.78%
One year.................................................................. 6.78%
Five years................................................................ 5.58%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost. Fund performance presented is for
Class R shares.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SHORT DURATION GOVT BD(R)
Initial Investment: $10,000 Period: 12/18/92 - 06/98
This is a no load fund
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/18/92 10.00 $10,000 $0 $10,000
12/92 10.02 $10,020 $23 $10,043
01/93 10.10 $10,100 $75 $10,175
02/93 10.14 $10,140 $128 $10,268
03/93 10.17 $10,170 $180 $10,350
04/93 10.19 $10,190 $235 $10,425
05/93 10.16 $10,160 $282 $10,442
06/93 10.23 $10,230 $335 $10,565
07/93 10.23 $10,230 $393 $10,623
08/93 10.25 $10,250 $449 $10,699
09/93 10.25 $10,250 $508 $10,758
10/93 10.23 $10,230 $566 $10,796
11/93 10.18 $10,180 $617 $10,797
12/93 10.10 $10,100 $756 $10,856
01/94 10.13 $10,130 $810 $10,940
02/94 10.03 $10,030 $850 $10,880
03/94 9.94 $9,940 $891 $10,831
04/94 9.86 $9,860 $931 $10,791
05/94 9.82 $9,820 $979 $10,799
06/94 9.80 $9,800 $1,029 $10,829
07/94 9.85 $9,850 $1,088 $10,938
08/94 9.83 $9,830 $1,141 $10,971
09/94 9.75 $9,750 $1,188 $10,938
10/94 9.72 $9,720 $1,241 $10,961
11/94 9.65 $9,650 $1,290 $10,940
12/94 9.63 $9,630 $1,349 $10,979
01/95 9.71 $9,710 $1,423 $11,133
02/95 9.79 $9,790 $1,497 $11,287
03/95 9.79 $9,790 $1,561 $11,351
04/95 9.82 $9,820 $1,628 $11,448
05/95 9.94 $9,940 $1,711 $11,651
06/95 9.95 $9,950 $1,775 $11,725
07/95 9.92 $9,920 $1,832 $11,752
08/95 9.94 $9,940 $1,895 $11,833
09/95 9.96 $9,960 $1,958 $11,918
10/95 9.98 $9,980 $2,024 $12,004
11/95 10.04 $10,040 $2,095 $12,135
12/95 10.08 $10,080 $2,162 $12,242
01/96 10.11 $10,110 $2,226 $12,336
02/96 10.02 $10,020 $2,261 $12,281
03/96 9.97 $9,970 $2,310 $12,280
04/96 9.92 $9,920 $2,357 $12,277
05/96 9.88 $9,880 $2,408 $12,288
06/96 9.92 $9,920 $2,478 $12,398
07/96 9.91 $9,910 $2,538 $12,448
08/96 9.89 $9,890 $2,595 $12,485
09/96 9.93 $9,930 $2,668 $12,598
10/96 10.01 $10,010 $2,750 $12,760
11/96 10.06 $10,060 $2,827 $12,887
12/96 10.00 $10,000 $2,872 $12,872
01/97 10.00 $10,000 $2,936 $12,936
02/97 9.97 $9,970 $2,987 $12,957
03/97 9.90 $9,900 $3,030 $12,930
04/97 9.94 $9,940 $3,105 $13,045
05/97 9.96 $9,960 $3,176 $13,136
06/97 9.99 $9,990 $3,250 $13,240
07/97 10.07 $10,070 $3,340 $13,410
08/97 10.02 $10,020 $3,388 $13,408
09/97 10.06 $10,060 $3,464 $13,524
10/97 10.10 $10,100 $3,542 $13,642
11/97 10.08 $10,080 $3,598 $13,678
12/97 10.10 $10,100 $3,669 $13,769
01/98 10.16 $10,160 $3,757 $13,917
02/98 10.12 $10,120 $3,807 $13,927
03/98 10.11 $10,110 $3,875 $13,985
04/98 10.11 $10,110 $3,946 $14,056
05/98 10.13 $10,130 $4,026 $14,156
06/98 10.14 $10,140 $4,102 $14,242
</TABLE>
- --------------------------------------------------------------------------------
Leham Brothers 1-3 Year Government Bond Index
---------------------------------------------
Source: Bloomberg (LEHM)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1 Month 3 Month 6 Month 2 Year 2 Year
Date Value Return Return Return YTD Return 1 Year Aggregate Annualized
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/92 10,000.00
1/31/93 10,105.00 1.050%
2/28/93 10,185.84 0.800%
3/31/93 10,217.42 0.310% 2.1742%
4/30/93 10,279.74 0.610% 1.7293%
5/31/93 10,255.07 -0.240% 0.6797%
6/30/93 10,331.98 0.750% 1.1213% 3.3198%
7/31/93 10,354.71 0.220% 0.7293% 2.4712%
8/31/93 10,440.66 0.830% 1.8097% 2.5017%
9/30/93 10,474.07 0.320% 1.3752% 2.5119%
10/31/93 10,497.11 0.220% 1.3752% 2.1145%
11/30/93 10,499.21 0.020% 0.5608% 2.3807%
12/31/93 10,541.21 0.400% 0.6410% 2.0250% 5.4121%
1/31/94 10,606.56 0.620% 1.0427% 2.4322% 4.9635%
2/28/94 10,541.86 -0.610% 0.4062% 0.9693% 3.4953%
3/31/94 10,488.10 -0.510% -0.5038% 0.1340% 2.6492%
4/30/94 10,448.24 -0.380% -1.4926% -0.4655% 1.6392%
5/31/94 10,462.87 0.140% -0.7493% -0.3461% 2.0263%
6/30/94 10,48?.03 0.250% 0.0089% -0.9450% 1.5200%
7/31/94 10,583.43 0.900% 1.2939% -0.2181% 2.2088%
8/31/94 10,618.36 0.330% 1.4861% 0.7256% 1.7020%
9/30/94 10,593.93 -0.230% 1.0001% 1.0091% 1.1444%
10/31/94 10,618.30 0.230% 0.3295% 1.6276% 1.1545%
11/30/94 10,573.70 -0.420% -0.4205% 1.0593% 0.7095%
12/31/94 10,593.79 0.190% -0.0013% 0.9988% 0.4989% 5.9379% 2.9262%
1/31/95 10,737.87 1.360% 1.1261% 1.4592% 1.2380% 6.2629% 3.0839%
2/28/95 10,883.90 1.360% 2.9337% 2.5008% 3.2446% 6.8533% 3.3699%
3/31/95 10,944.85 0.560% 3.3138% 3.3125% 4.3550% 7.1196% 3.4986%
4/30/95 11,042.26 0.890% 2.8348% 3.9928% 5.6853% 7.4177% 3.6425%
5/31/95 11,231.09 1.710% 3.1899% 6.2171% 7.?423% 9.5174% 4.6506%
6/30/95 11,291.73 0.540% 3.1693% 6.5882% 7.6528% 9.2891% 4.5414%
7/31/95 11,336.90 0.400% 2.6683% 5.5787% 7.1193% 9.4854% 4.6353%
8/31/95 11,404.92 0.600% 1.5478% 4.7871% 7.4076% 9.2357% 4.5159%
9/30/95 11,460.81 0.490% 1.4973% 4.7141% 8.1827% 9.4208% 4.6044%
10/31/95 11,555.93 0.830% 1.9320% 4.6518% 8.8303% 10.0868% 4.9222%
11/30/95 11,654.16 0.850% 2.1853% 3.7670% 10.2183% 11.0003% 5.3567%
12/31/95 11,741.56 0.750% 2.4497% 3.9837% 10.8344% 11.3873% 5.5402%
1/31/96 11,841.37 0.850% 2.4700% 4.4498% 10.2767% 11.6419% 5.6607%
2/29/96 11,795.18 0.390% 1.2101% 3.4219% 8.3727% 11.8890% 5.7857%
3/31/96 11,786.93 0.070% 0.3864% 2.8455% 7.6938% 12.3838% 6.0197%
4/30/96 11,798.71 0.100% -0.3602% 2.1009% 6.8505% 12.9253% 6.2753%
5/31/96 11,824.67 -0.220% 0.2500% 1.4681% 5.2852% 13.0155% 6.3177%
6/30/96 11,910.99 -0.730% 1.0526% 1.4430% 5.4842% 13.5567% 6.5722%
7/31/96 11,957.44 0.390% 1.3453% 0.9803% 5.4737% 12.9827% 6.3022%
8/31/96 12,001.69 0.370% 1.4970% 1.7507% 5.2325% 13.0277% 6.3234%
9/30/96 12,110.90 0.910% 1.6784% 2.7486% 5.6723% 14.3192% 6.9300%
10/31/96 12,247.76 1.130% 2.4279% 3.8058% 5.9868% 15.3457% 7.4096%
11/30/96 12,338.39 0.740% 2.8055% 4.3445% 5.8712% 16.6894% 8.0349%
12/31/96 12,340.86 0.020% 1.8987% 3.6090% 5.1040% 16.4914% 7.9424%
1/31/97 12,400.09 0.480% 1.2438% 3.7019% 4.7184% 15.4800% 7.4722%
2/28/97 12,429.85 0.240% 0.7413% 3.5675% 5.3807% 14.2040% 6.8566%
3/31/97 12,419.91 -0.080% 0.6406% 2.5515% 5.3702% 13.4772% 6.5164%
4/30/97 12,521.75 0.820% 0.9811% 2.2371% 6.1281% 13.3984% 6.4795%
5/31/97 12,609.40 0.700% 1.4445% 2.1965% 6.6364% 12.2724% 5.9503%
6/30/97 12,696.41 0.690% 2.2263% 2.8811% 6.5941% 12.4399% 6.0292%
7/31/97 12,834.80 1.090% 2.5000% 3.5057% 7.3373% 13.2126% 6.3924%
8/31/97 12,847.64 0.100% 1.8893% 3.3611% 7.0486% 12.6499% 6.1280%
9/30/97 12,945.28 0.760% 1.9601% 4.2300% 6.8895% 12.9526% 6.2703%
10/31/97 13,041.07 0.740% 1.6071% 4.1473% 6.4772% 12.8518% 6.2229%
11/30/97 13,073.68 0.250% 1.7594% 3.6819% 5.9593% 12.1804% 5.9069%
12/31/97 13,161.27 0.670% 1.6685% 9.6613% 6.6479% 12.0913% 5.8649%
1/31/98 13,287.62 0.960% 1.8905% 3.5280% 0.9600% 7.1574% 12.2136% 5.9225%
2/28/98 13,299.58 0.090% 1.7279% 3.5177% 1.0509% 6.9970% 12.7543% 6.1858%
3/31/98 13,351.44 0.390% 1.4450% 3.1976% 1.4450% 7.5003% 13.2733% 6.4299%
4/30/98 13,415.53 0.480% 0.9627% 2.8714% 1.9319% 7.1378% 13.7033% 6.6318%
5/31/98 13,487.97 0.540% 1.4166% 3.1690% 2.4823% 6.9676% 14.0664% 6.8019%
6/30/98 13,556.76 0.510% 1.5378% 3.0050% 3.0050% 6.7764% 13.8173% 6.6852%
- --------------------------------------------------------------------------------
Leham Brothers 1-3 Year Government Bond Index
---------------------------------------------
Source: Bloomberg (LEHM)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
3 Year 3 Year 4 Year 4 Year 5 Year 5 Year
Aggregate Annualized Aggregate Annualized Aggregate Annalized
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
17.4156% 5.4974%
17.1832% 5.4278%
15.7998% 5.0207%
15.9611% 4.8876%
14.7764% 4.7098%
15.3056% 4.8708%
15.2827% 4.8638%
15.4783% 4.9232%
14.9514% 4.7631%
15.6275% 4.9684%
16.6774% 5.2858%
17.5179% 5.5383%
17.0725% 5.4047% 23.4086% 5.4103%
16.9096% 5.3557% 22.7124% 5.2611%
17.9095% 5.6399% 22.0307% 5.0999%
18.4191% 5.7917% 21.5563% 4.9977%
19.8455% 6.2144% 21.8100% 5.0524%
20.5157% 6.4118% 22.9578% 5.2988%
21.0447% 6.5671% 22.8845% 5.2832%
21.2726% 6.6339% 23.9513% 5.5108%
20.9946% 6.5525% 23.0539% 5.3194%
22.1952% 6.9034% 23.5936% 5.4346%
22.8170% 7.0843% 24.2349% 5.5710%
23.6433% 7.3237% 24.5205% 5.6316%
24.2357% 7.4946% 24.8554% 5.7025% 31.6127% 5.6444%
23.7454% 7.3532% 25.2773% 5.7916 31.4955% 5.6256%
22.1949% 6.9033% 26.1596% 5.9773% 30.5693% 5.4764%
21.9883% 6.8431% 27.3009% 6.2160% 30.6734% 5.4933%
21.4926% 6.6983% 28.3999% 6.4443% 30.5045% 5.4660%
20.0950% 6.2880% 28.9127% 6.5504% 31.5249% 5.6303%
20.0592% 6.2774% 29.2471% 6.6194% 31.2116% 5.5800%
</TABLE>
<TABLE>
<CAPTION>
LIPPER
SHORT US GOVT
AVE
12/92-6/98
DATE RETURN VALUE
<S> <C> <C>
Dec-92 $ 10,000
Jan-93 10100.05
Mar-93 10180.00
Mar-93 10208.64
Apr-93 10264.99
May-93 10255.06
Jun-93 10331.31
Jul-93 10359.22
Aug-93 10434.46
Sep-93 10461.10
Oct-93 10477.97
Nov-93 10467.69
Dec-93 10505.68
Jan-94 10572.04
Feb-94 10510.48
Mar-94 10439.82
Apr-94 10401.02
May-94 10411.74
Jun-94 10426.48
Jul-94 10503.91
Aug-94 10530.72
Sep-94 10511.75
Oct-94 10530.99
Nov-94 10499.39
Dec-94 10524.03
Jan-95 10645.97
Feb-95 10776.98
Mar-95 10833.91
Apr-95 10918.61
May-95 11087.17
Jun-95 11141.06
Jul-95 11169.58
Aug-95 11238.24
Sep-95 11293.23
Oct-95 11377.14
Nov-95 11468.14
Dec-95 11551.11
Jan-96 11630.38
Feb-96 11588.30
Mar-96 11579.40
Apr-96 11590.96
May-96 11606.17
Jun-96 11683.08
Jul-96 11726.39
Aug-96 11756.36
Sep-96 11854.63
Oct-96 11972.60
Nov-96 12060.94
Dec-96 12055.90
Jan-97 12112.54
Feb-97 12142.99
Mar-97 12132.12
Apr-97 12224.22
May-97 12297.69
Jun-97 12375.61
Jul-97 12504.47
Aug-97 12511.77
Sep-97 12602.36
Oct-97 12686.13
Nov-97 12711.22
Dec-97 12779.08
Jan-98 12889.11
Feb-98 12899.96
Mar-98 12945.53
Apr-98 12997.30
May-98 13066.00
Jun-98 13125.80
</TABLE>
Montgomery Short Lehman Brothers Lipper Short
Duration Government Government Bond U.S. Government
Date Bond Fund 1-3 Year Index/1/ Funds Average/2/
12/92 $10,000 $10,000 $10,000
6/98 $14,242 $13,557 $13,126
(1) The Lehman Brothers Government Bond 1-3 Year Index comprises all U.S.
government issues with maturities of one to three years.
(2) The Lipper Short U.S. Government Funds Average universe consists of 32
funds.
INVESTMENT REVIEW
Q: How did the Fund perform for the year ended June 30, 1998?
A: We are very pleased to report that the Fund continued to outperform its index
throughout the year, returning 7.56% for the year ended June 30, 1998, against a
return of 6.78% for its benchmark, the Lehman Brothers Government Bond 1-3 Year
Index. Indeed, according to Lipper Analytical Services, the Fund's performance
was the #1 fund in its category for both the one-year period ended June 30,
1998, and the five-year period ended June 30, 1998. For those two periods,
Lipper's short duration government fund category included 74 and 38 funds,
respectively. The Fund's outperformance has also garnered it a four-star rating
from Morningstar for its risk/return profile over the three- and five-year
periods ended June 30, 1998, out of 1,468 and 890 taxable bond funds,
respectively.
Q: What strategies helped generate such an outperformance?
A: On a market basis, the Fund's performance was boosted by a flattening in the
yield curve, as medium- and long-term interest rates declined more than short-
term rates. The Fund's bias has been toward lower interest rates, and it gained
a slight advantage over its benchmark index from having a greater exposure to
bonds with maturities of three years or more.
Performance was enhanced in several sectors. For example, the Fund benefited
from its exposure to the premium mortgage sector, despite rising prepayments.
Our purchases focused on "superseasoned" premiums, or mortgages originated in
the late 1970s. These homeowners proved to be less prone to prepay their
mortgages even with steadily falling mortgage rates.
Unlike the pass-through mortgage market, in the collateralized mortgage
obligation (CMO) market, we looked for bonds with excellent prepayment
protection. We feel that even though the yields are lower than their more risky
companions, the total returns will be better. Our allocation to this sector can
change quickly over the course of a year, as we are very sensitive to the value
of this sector relative to the Treasury market and will take advantage of short-
term trading opportunities.
Q: Were there any strategies that the Fund pursued that were not as successful?
A: As is the case in any actively managed fund, some of our strategies were less
successful. These included positions taken in agency benchmark notes during the
first quarter of 1998. The Asian buyers we expected to be interested in these
issues did not materialize, and interest rate swap spreads widened, so the short
squeeze that we expected to develop disappointed us.
Q: Do you foresee any significant changes in the market in the coming year?
A: We foresee very little change in the market over the coming months and expect
the yield curve to remain relatively flat. Although the Federal Reserve has been
making noises for some time that suggest a tightening in monetary policy in the
wake of a
60
<PAGE>
-------------------------
The Montgomery Funds
-------------------------
Short Duration
Government Bond Fund
-------------------------
Portfolio Highlights
buoyant economy, low unemployment and strong consumer demand, there have been
countervailing forces that have already mitigated some of the overheating in the
economy These include lower prices for imported goods as a result of the
currency turmoil in Asia, and lower commodity prices, indeed, as inflation has
cased as a result of the latter trends, Federal Reserve Chairman Alan Greenspan
has referred to Federal Reserve policy inaction as "passive" tightening. As a
result of lower-than-expected inflation, real rates have risen without
regulators having to intervene. With the economy now showing signs that it is
slowing, we believe that there is room for a further reduction in rates.
Even if spiraling consumption and the wage pressures of a tight labor market
finally do lead to action on the part of the Federal Reserve, any rise in
interest rates is expected to be modest and is unlikely to push medium- and
long-term rates higher If there is any impact, it could well be to push
longer-term yields lower, signaling the market's fear that monetary tightening
at such a juncture is likely to cause deflation over the longer term. It is
these concerns that have been driving down the yields of bonds with medium- to
long-term maturities over the past year and are likely to sustain the rally in
the bond markets through the end of 1998.
Q: How Is the Fund positioned to take advantage of the market outlook?
A: We believe that the Fund is well positioned for such an outcome. At the end
of June, the Fund's largest weighting was in mortgage pass-throughs (29% of
assets), which have served us so well over the course of the previous year,
followed by CMOs (25%), agencies (22%) and Treasuries (21%). We remain
underweighted in corporates and asset-backed securities, which are likely to
fair worse in a deflationary environment; these accounted for just 3% of assets.
Because of the uncertain economic climate, we will actively try to minimize the
Fund's risk through diversification arid continue to look for areas of the
market where we think we have a competitive advantage.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
U.S. Treasury Bill, 5.625% due 04/30/00 ................................... 9.4%
FNMA, X-109A,
6.000% (PAC) due 08/25/05 ............................................. 7.5%
U.S. Treasury Note,
6.500% due 05/15/05 ................................................... 7.4%
FNMA, 7.000% due TBA ...................................................... 6.1%
FHLMC, Pool #GAOIB4J,
8.750% due 10/01/10 ................................................... 5.8%
PHLMC, 8.500% Pass-through Pools
due 05/01/06 - 06/01/07 ............................................... 4.9%
FXLB, 5.050% (FLTR) due 03/29/00 .......................................... 4.8%
FNMA, Pool #323193,
9.000% due 09/01/07 ................................................... 4.7%
FNMA, 1643PE
5.500% (PAC) due 10/15/19 ............................................. 4.5%
FNAM, 5.00% (FLTR) due 04/21/00 ........................................... 4.1%
- --------------------------------------------------------------------------------
ASSET MIX
- --------------------------------------------------------------------------------
(as a percentage of total investments)
Collateralized Mortgage Obligations ...................................... 27.5%
Agencies ................................................................. 27.4%
Mortgage Pass-throughs ................................................... 19.6%
Treasuries ............................................................... 18.9%
Other .................................................................... 6.6%
Lipper Analytical Services is a nationally recognized, independent company that
compiles performance data on mutual funds. Lipper rankings are based on total
returns.
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of 6/30/98. The ratings arc subject to change every month. Past performance is
no guarantee of future results. The ratings are calculated from the funds'
three-, five- and 10-year average annual returns (if available) in excess of
90-day Treasury bill returns with appropriate fee adjustments, and a risk Factor
that reflects fund performance below 90-day T-bill returns. Ten percent of funds
in a rating universe receive five stars, and the next 22.5% receive four stars.
61
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Short Duration
Government Bond Fund
- ---------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
ASSET-BACKED SECURITIES -- 0.0%#
Principal Amount Value (Note 1)
Union Acceptance Corporation (UAC):
$1,153,647 95-DI (ABS) 3.000% due O2/D7/99..................$ 11,807
2.538,847 95-CI (PAC) (ABS) 3.000% due 10/10/02 ........... 15,372
------
TOTAL ASSET-BACKED SECURITIES
(Cost $2,521)................................................. 27,179
------
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) -- 2.9%
282,793 Conti-Mortgage Home Equity Loan Trust,
Series l997-3A2, 6.510% due 05/15/12............. 282,362
140,872 Green Tree Financial Corporation, Series
1995-3A3, 6.650% due 08/15/25.................... 141,681
1,500,000 Master Financial Asset Securtization Trust,
Series 1998- 1A2, 6.220% due 08/20/11............ 1,498,860
---------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $1,922,691)............................................. 1,922,903
---------
FEDERAL HOME LOAN BANK (FHLB) -- 18.2%
Agencies:
667,562 Zero coupon due 02/25/99......................... 644,468
650,000 6 778% (FLTR) due 08/31/99**..................... 658,483
500,000 4 875% (FLTR) due 03/17/00**..................... 492,594
2,000,000 4.500% (FLTR) due 03/22/00**..................... 1,958,213
3,230,000 5.050% (FLTR) due 03/29/00**..................... 3,211,609
2,000,000 4.650% (FLTh) due 04/05/00**..................... 1,960,575
1,000,000 4.305% (FLTR) due 04/12/00**..................... 974,688
2,200,000 5.000% (FLTR) due 05/10/00**..................... 2,171,373
---------
TOTAL FEDERAL HOME LOAN BANK
(Cost $12,052,493)............................................ 12,072,003
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 27.9%
1,500,000 5.000% (FLTR) due 03/10/00** -................... 1,481,531
CMOs:
1,750,000 1659PB 5.750% (PAC) due 05/15107................. 1,747,912
2,164,797 1673C 5.350% (PAC) due03/I5/I2................... 2,360,146
1,103,126 1620PD 5.500% (PAC) due 07/15/12................. 1,100,911
738,824 1680PC 5.800% (PAC) due 02/15/14................. 737,915
990,713 327D 7.000% (PAC) due 03/25/35................... 990,390
3,000,000 1643PE 5.500% (PAC) due 10/15/19................. 2,987,405
57,686 162E 7.000% (PAC) due 02/15/20................... 57,457
Pass-throughs:
3,139,754 8.500% Pass-through Pools due
03/01/06--06/01/07............................... 3,278,531
3,656,428 Pool #0A01841 8.750% due 10/01/10................ 3,855,532
83,383 9.000% Pass-Passs-throughs due l0/0I/36--
05/0l/20......................................... 89,426
Principal Amount Value (Note 1)
Tiered Payments:
$16,427 Pool #730223 9.50% due 01/01/06.................. 17,053
6,041 Pool #730288 8.50% due 07/01/06.................. 6,245
-----
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $18,442,371)............................................ 18,510,454
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 34.4%
2,750,000 5.000% (FLTR) due 04/21/00**..................... 2,712,036
4,000,000 7.000% due TBA................................... 4,070,000
CMOs:
481,848 X-91 6.500% (PAC) due 04/25/99................... 483,347
650,000 1993-99D 6.700% (AD) due 03/25/04................ 668,941
5,000,000 X-109A 6.000% (PAC) due 08/25/05................. 4,992,150
7,855 1993-99PD 5.600% (PAC) due 10/25/13.............. 7,826
533,387 X-225C 5.200% (PAC) due 09/25/15................. 511,310
2,054,757 1994-23 5,125% (PAC) due 07/25/17................ 2,026,263
Pass-throughs:
2,968,717 Pool #323193 9.000% due 09/01/07................. 3,102,309
1,151,230 Pool #420599 5.000% due 03/01/27................. 1,613,936
2,745,248 5.500% Pass-through Pools due
01/01/24--04/01/28............................... 2,614,770
---------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $22,720,662)............................................ 22,800,868
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 0.0%#
(Cost $13,324)
33,324 GNMA II, 10.500% Pool #1123 due 01/20/19......... 14,557
------
MUNICIPAL BONDS -- 1.5%
(Cost $1,016,067)
1,000,000 Greater Orlando Aviation Authority, Orlando,
Florida, Airport Facilities Revenue Bonds,
Series E, 7.100% due l0/0l/99.................... 1,017,500
---------
U.S. TREASURY INFLATIONARY INDEX -- 1 .S%
(Cost $1,000, 153)
1,000,000 U.S. Treasury Inflationary Index,
3.625% due 07/15/02.............................. 989,060
U.S. TREASURY NOTES -- 19,6%
6,250,000 U.S. Treasury Bill, 5.625% due 04/30/00.......... 6,261,688
825,000 U.S. Treasury Bill, 5.500% due 05/31/00.......... 824,868
1,000,000 U.S. Treasury Note, 6.250% due 01/31/02.......... 1,022,340
4,650,000 U.S. Treasury Note, 6.500% due 05/15/05.......... 4,907,936
---------
TOTAL U.S. TREASURY NOTES
(Cost $12,990,557)............................................ 13,016,832
----------
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
----------------------
The Montgomery Funds
----------------------
Short Duration
Government Bond Fund
----------------------
I n v e s t m e n t s
REPURCHASE AGREEMENTS -- 5.8%
Principal Amount Value (Note 1)
$1,911,000 Agreement with Beam Stearns, Tri-Party,
6.35% dated 06/30/98, to be repurchased
at $1,911,332 on 07/01/98, collateralized by
$1,949,220 market value of U.S. government
securities, having various maturities and
various interest rates.......................... $ 1,911,000
1,911,000 Agreement with UBS, Tri-Party, 6.30%
dated 06/30/98, to be repurchased at
$1,911,330 on 07/01/98, collateralized by
$1,949,220 market value of U.S. government
securities, having various maturities and
various interest rates.......................... 1,911,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $5,822,000)............................................ 3,822,000
---------
TOTAL INVESTMENTS -- 111.8%
(Cost $73,982,837*).......................................... 74,193,351
OTHER ASSETS AND LIABILITIES --(1 l.8)%
(Net)........................................................ (7,833,084)
----------
NET ASSETS-- 100.0%.......................................... $ 66,360,267
==========
* Aggregate cost for federal tax purposes was $73,987,980.
** Floating-rate note reflects the rate in effect at June 30, 1998.
# Amount represents less than 0.1%
Abbreviations:
ABS Asset-Backed Securities,
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.
CMO Collateralized Mortgage Obligation.
FLTR Floating-Rate Securities: bonds with coupon rates that adjust in
proportion roan index.
PAC Planned Amortization Class: bonds that are protected in part from
variations in prepayments, generally resulting in greater stability.
TBA To-Be-Announced Security.
The accompanying notes are an integral part of these financial statements.
63
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
California Tax-Free
Intermediate Bond Fund
- ----------------------
Portfolio Highlights
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William Stevens.........................................Senior Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns
for the period ended 6/30/98
- --------------------------------------------------------------------------------
Montgomery California Tax-Free
Intermediate Bond Fund
Since inception (7/1/93)...................................................5.51%
One year...................................................................6.85%
Three years................................................................6.62%
- --------------------------------------------------------------------------------
Merrill Lynch California
Intermediate Municipal Bond Index
Since 6/30/93.............................................................4.70%
One year..................................................................5.91%
Three years...............................................................5.86%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY CA TAX FREE INTERM BD(R)
Initial Investment: $10,000 Period: 06/30/93 - 06/98
This is a no load fund.
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distribution Distribution Reinvested
<S> <C> <C> <C> <C>
06/30/93 12.00 $ 10,000 $ 0 $ 10,000
06/93 12.00 $ 10,000 $ 0 $ 10,000
07/93 11.95 $ 9,958 $ 33 $ 9,991
08/93 12.02 $ 10,017 $ 60 $ 10,077
09/93 12.04 $ 10,033 $ 88 $ 10,121
10/93 12.04 $ 10,033 $ 117 $ 10,150
11/93 12.00 $ 10,000 $ 144 $ 10,144
12/93 12.07 $ 10,058 $ 175 $ 10,233
01/94 12.11 $ 10,092 $ 203 $ 10,295
02/94 11.95 $ 9,958 $ 227 $ 10,185
03/94 11.80 $ 9,833 $ 253 $ 10,086
04/94 11.80 $ 9,833 $ 284 $ 10,117
05/94 11.83 $ 9,858 $ 317 $ 10,175
06/94 11.79 $ 9,825 $ 346 $ 10,171
07/94 11.86 $ 9,883 $ 381 $ 10,264
08/94 11.85 $ 9,875 $ 410 $ 10,285
09/94 11.80 $ 9,833 $ 438 $ 10,271
10/94 11.72 $ 9,767 $ 466 $ 10,233
11/94 11.63 $ 9,692 $ 495 $ 10,187
12/94 11.65 $ 9,708 $ 530 $ 10,238
01/95 11.74 $ 9,783 $ 569 $ 10,352
02/95 11.86 $ 9,883 $ 603 $ 10,486
03/95 11.93 $ 9,942 $ 641 $ 10,583
04/95 11.96 $ 9,967 $ 678 $ 10,645
05/95 12.07 $ 10,058 $ 719 $ 10,777
06/95 12.04 $ 10,033 $ 751 $ 10,784
07/95 12.07 $ 10,058 $ 791 $ 10,849
08/95 12.16 $ 10,133 $ 837 $ 10,970
09/95 12.21 $ 10,175 $ 879 $ 11,054
10/95 12.31 $ 10,258 $ 929 $ 11,187
11/95 12.42 $ 10,350 $ 977 $ 11,327
12/95 12.46 $ 10,383 $ 1,023 $ 11,406
01/96 12.51 $ 10,425 $ 1,070 $ 11,495
02/96 12.44 $ 10,367 $ 1,103 $ 11,470
03/96 12.29 $ 10,242 $ 1,131 $ 11,373
04/96 12.24 $ 10,200 $ 1,168 $ 11,368
05/96 12.18 $ 10,150 $ 1,205 $ 11,355
06/96 12.23 $ 10,192 $ 1,250 $ 11,442
07/96 12.28 $ 10,233 $ 1,298 $ 11,531
07/96 12.24 $ 10,200 $ 1,336 $ 11,536
09/96 12.30 $ 10,250 $ 1,384 $ 11,634
10/96 12.39 $ 10,325 $ 1,436 $ 11,761
11/96 12.56 $ 10,467 $ 1,497 $ 11,964
12/96 12.47 $ 10,392 $ 1,529 $ 11,921
01/97 12.47 $ 10,392 $ 1,572 $ 11,964
02/97 12.51 $ 10,425 $ 1,617 $ 12,042
03/97 12.32 $ 10,267 $ 1,634 $ 11,901
04/97 12.34 $ 10,283 $ 1,679 $ 11,962
05/97 12.45 $ 10,375 $ 1,737 $ 12,112
06/97 12.53 $ 10,442 $ 1,791 $ 12,233
07/97 12.80 $ 10,667 $ 1,872 $ 12,539
08/97 12.65 $ 10,542 $ 1,893 $ 12,435
09/97 12.74 $ 10,617 $ 1,949 $ 12,566
10/97 12.75 $ 10,625 $ 1,994 $ 12,619
11/97 12.76 $ 10,633 $ 2,039 $ 12,672
12/97 12.86 $ 10,717 $ 2,098 $ 12,815
01/98 12.97 $ 10,808 $ 2,160 $ 12,968
02/98 12.94 $ 10,783 $ 2,194 $ 12,977
03/98 12.84 $ 10,700 $ 2,220 $ 12,920
04/98 12.73 $ 10,608 $ 2,244 $ 12,852
05/98 12.87 $ 10,725 $ 2,313 $ 13,038
06/98 12.86 $ 10,717 $ 2,354 $ 13,071
</TABLE>
Prepared by The Performance Measurements and Analytics Department.
- --------------------------------------------------------------------------------
Merrill CA Municipal Bond
-------------------------
Index
-----
- --------------------------------------------------------------------------------
FOR:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
From Inception From Inception 1 Quarter YTD 1 Year
Returns Date Value Cumulative Annualized Cumulative Cumulative Cumulative
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
6/30/93 10,000.00
- -0.6175% 7/31/93 9,938.25 -0.6175%
0.0800% 8/31/93 9,946.20 -0.5380%
0.0330% 9/30/93 9,949.48 -0.5052% -0.5052%
0.8695% 10/31/93 10,035.99 0.3599% 0.9835%
- -0.1025% 11/30/93 10,025.71 0.2571% 0.7994%
1.3315% 12/31/93 10,159.20 1.5920% 2.1078%
0.5545% 1/31/94 10,215.53 2.1553% 1.7889% 0.5545%
- -1.0915% 2/28/94 10,104.03 1.0403% 0.7812% -0.5431%
- -0.8715% 3/31/94 10,015.97 0.1597% -1.4098% -1.4098%
0.0255% 4/30/94 10,018.53 0.1853% -1.9285% -1.3847%
0.0200% 5/31/94 10,020.53 0.2053% -0.8264% -1.3650%
- -1.5500% 6/30/94 9,865.21 -1.3479% -1.3479% -1.5052% -2.8938% -1.3479%
1.4790% 7/31/94 10,011.12 0.1112% 0.1025% -0.0739% -1.4576% 0.7332%
0.1990% 8/31/94 10,031.04 0.3104% 0.2653% 0.1049% -1.2615% 0.8530%
- -0.2250% 9/30/94 10,008.47 0.0847% 0.0677% 1.4522% -1.4837% 0.5929%
- -0.0030% 10/31/94 10,008.17 0.0817% 0.0611% -0.0294% -1.4866% -0.2772%
- -0.6850% 11/30/94 9,939.61 -0.6039% -0.4259% -0.9114% -2.1614% -0.8587%
0.5915% 12/31/94 9,998.41 -0.0159% -0.0106% -0.1005% -1.5827% -1.5827%
0.7565% 1/31/95 10,074.05 0.7405% 0.4653% 0.6582% 0.7565% -1.3850%
1.4100% 2/28/95 10,216.09 2.1609% 1.2917% 2.7815% 2.1772% 1.1091%
0.5915% 3/31/95 10,276.52 2.7652% 1.5702% 2.7815% 2.7815% 2.6013%
0.5060% 4/30/95 10,328.52 3.2852% 1.7792% 2.5260% 3.3016% 3.0942%
1.7950% 5/31/95 10,513.91 5.1391% 2.6475% 2.9152% 5.1559% 4.9237%
0.2020% 6/30/95 10,535.15 5.3515% 2.6409% 2.5167% 5.3683% 6.7909%
0.8950% 7/31/95 10,629.44 6.2944% 2.9711% 2.9135% 6.3113% 6.1764%
0.5200% 8/31/95 10,684.71 6.8471% 3.0993% 1.6245% 6.8642% 6.5165%
0.2100% 9/30/95 10,707.15 7.0715% 3.0805% 1.6326% 7.0886% 6.9809%
0.9970% 10/31/95 10,813.90 8.1390% 3.4049% 1.7354% 8.1563% 8.0507%
1.0270% 11/30/95 10,924.96 9.2496% 3.7245% 2.2485% 9.2670% 9.9133%
0.0350% 12/31/95 10,928.79 9.2879% 3.6104% 2.0700% 9.3053% 9.3053%
0.9430% 1/31/96 11,031.84 10.3184% 3.8658% 2.0154% 0.9430% 9.5076%
0.0040% 2/29/96 11,032.29 10.3229% 3.7606% 0.9824% 0.9470% 7.9893%
- -0.2940% 3/31/96 10,999.85 9.9985% 3.5314% 0.6503% 0.6503% 7.0387%
0.1280% 4/30/96 11,013.93 10.1393% 3.4741% -0.1624% 0.7791% 6.6361
0.1340% 5/31/96 11,028.69 10.2869% 3.4190% -0.0326% 0.9141% 4.8961%
0.4070% 6/30/96 11,073.58 10.7358% 3.4641% 0.6702% 1.3249% 5.1107%
0.6790% 7/31/96 11,148.76 11.4876% 3.5946% 1.2242% 2.0128% 4.8857%
0.1130% 8/31/96 11,161.36 11.6136% 3.5337% 1.2030% 2.1281% 4.4610%
0.5710% 9/30/96 11,225.09 12.2509% 3.6245% 1.3683% 2.7113% 4.8373%
0.6660% 10/31/96 11,299.85 12.9985% 3.7373% 1.3552% 3.3953% 4.4938%
0.7250% 11/30/96 11,381.78 13.8178% 3.8655% 1.9748% 4.1449% 4.1814%
0.0560% 12/31/96 11,388.15 13.8815% 3.7868% 1.4526% 4.2033% 4.2033%
0.2510% 1/31/97 11,416.74 14.1674% 3.7682% 1.0344% 0.2510% 3.4889%
0.6120% 2/28/97 11,486.61 14.8661% 3.8503% 0.9210% 0.8645% 4.1181%
- -0.5550% 3/31/97 11,422.86 14.2286% 3.6078% 0.3047% 0.3047% 3.8456%
0.2890% 4/30/97 11,455.87 14.5587% 3.6071% 0.3428% 0.5946% 4.0125%
1.0500% 5/31/97 11,576.15 15.7615% 3.8038% 0.7796% 1.6509% 4.9640%
0.9110% 6/30/97 11,681.61 16.8161% 3.9595% 2.2653% 2.5769% 5.4909%
1.4390% 7/31/97 11,849.71 18.4971% 4.2394% 3.4379% 4.0530% 6.2872%
- -0.2200% 8/31/97 11,823.64 18.2364% 4.0963% 2.1379% 3.8241% 5.9337%
0.7600% 9/30/97 11,913.50 19.1350% 4.2009% 1.9851% 4.6131% 6.1328%
0.3550% 10/31/97 11,955.79 19.5579% 4.2021% 0.8952% 4.9845% 5.8049%
0.3090% 11/30/97 11,992.74 19.9274% 4.1950% 1.4302% 5.3089% 5.3679%
0.8170% 12/31/97 12,090.72 20.9072% 4.3025% 1.4875% 6.1693% 6.1693%
0.7240% 1/31/98 12,178.26 21.7826% 4.3852% 1.8607% 0.7240% 6.6702%
0.2930% 2/28/98 12,213.94 22.1394% 4.3770% 1.8444% 1.0191% 6.3320%
0.1420% 3/31/98 12,231.28 22.3128% 4.3282% 1.1626% 1.1626% 7.0773%
- -0.2530% 4/30/98 12,200.34 22.0034% 4.1985% 0.1813% 0.9066% 6.4986%
0.8620% 5/31/98 12,305.50 23.0550% 4.3064% 0.7497% 1.7764% 6.3004%
0.3670% 6/30/98 12,350.66 23.5066% 4.3105% 0.9760% 2.1500% 5.7274%
<CAPTION>
- ------------------------------------------------------------------------
3 Year 3 Year 5 Year 5 Year
Returns Cumulative Annualized Cumulative Annualized
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -0.6175%
0.0800%
0.0330%
0.8695%
- -0.1025%
1.3315%
0.5545%
- -1.0915%
- -0.8715%
0.0255%
0.0200%
- -1.5500%
1.4790%
0.1990%
- -0.2250%
- -0.0030%
- -0.6850%
0.5915%
0.7565%
1.4100%
0.5915%
0.5060%
1.7950%
0.2020%
0.8950%
0.5200%
0.2100%
0.9970%
1.0270%
0.0350%
0.9430%
0.0040%
- -0.2940%
0.1280%
0.1340%
0.4070% 10.7358% 3.4641%
0.6790% 12.1804% 3.9129%
0.1130% 12.2174% 3.9243%
0.5710% 12.8209% 4.1106%
0.6660% 12.5933% 4.0404%
0.7250% 13.5259% 4.3274%
0.0560% 12.0969% 3.8871%
0.2510% 11.7586% 3.7822%
0.6120% 13.6834% 4.3635%
- -0.5550% 14.0464% 4.4744%
0.2890% 14.3468% 4.5660%
1.0500% 15.5244% 4.9233%
0.9110% 18.4122% 5.7896%
1.4390% 18.3655% 5.7758%
- -0.2200% 17.8705% 5.6282%
0.7600% 19.0342% 5.9744%
0.3550% 19.4603% 6.1006%
0.3090% 20.6560% 6.4531%
0.8170% 20.9264% 6.5325%
0.7240% 20.8874% 6.5210%
0.2930% 19.5559% 6.1288%
0.1420% 19.0217% 5.9707%
- -0.2530% 18.1228% 5.7035%
0.8620% 17.0402% 5.3798%
0.3670% 17.2329% 5.4376% 23.5066% 4.3105%
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
LIPPER
CALI DEBT INT
AVE
6/93/-6/98
DATE RETURN VALUE
<S> <C> <C>
Jun-93 $ 10,000
Jul-93 9995.30
Aug-93 10230.74
Sep-93 10361.75
Oct-93 10378.85
Nov-93 10256.60
Dec-93 10463.51
Jan-94 10580.20
Feb-94 10321.68
Mar-94 9854.86
Apr-94 9862.70
May-94 9952.36
Jun-94 9883.16
Jul-94 10076.25
Aug-94 10099.03
Sep-94 9929.30
Oct-94 9727.17
Nov-94 9505.68
Dec-94 9677.48
Jan-95 10016.57
Feb-95 10351.57
Mar-95 10450.24
Apr-95 10453.34
May-95 10822.11
Jun-95 10647.59
Jul-95 10705.41
Aug-95 10823.18
Sep-95 10901.81
Oct-95 11103.88
Nov-95 11344.98
Dec-95 11493.21
Jan-96 11533.13
Feb-96 11442.87
Mar-96 11236.25
Apr-96 11193.40
May-96 11206.34
Jun-96 11333.33
Jul-96 11459.98
Aug-96 11459.90
Sep-96 11635.13
Oct-96 11763.09
Nov-96 11987.68
Dec-96 11928.03
Jan-97 11906.54
Feb-97 12014.48
Mar-97 11843.35
Apr-97 11951.19
May-97 12139.04
Jun-97 12269.31
Jul-97 12657.33
Aug-97 12508.72
Sep-97 12678.53
Oct-97 12753.53
Nov-97 12832.10
Dec-97 13036.31
Jan-98 13164.77
Feb-98 13154.30
Mar-98 13154.36
Apr-98 13061.40
May-98 13288.71
Jun-98 13341.22
</TABLE>
<TABLE>
<CAPTION>
MONTGOMERY CALIFORNIA MERRILL LYNCH CALIFORNIA LIPPER CALIFORNIA
TAX-FREE INTERMEDIATE INTERMEDIATE MUNICIPAL INTERMEDIATE MUNICIPAL
DATE BOND FUND BOND INDEX/1/ DEBT FUNDS AVERAGE/2/
<S> <C> <C> <C>
6/93 $10,000 $10,000 $10,000
6/98 $13,071 $12,351 $13,341
</TABLE>
/1/ The Merrill Lynch California Intermediate Municipal Bond Index is composed
of those issues contained in the broader Merrill Lynch California Municipal
Bond Index whose maturities range from three to seven years.
/2/ The Lipper California Intermediate Municipal Debt Funds Average universe
consists of 12 funds.
INVESTMENT REVIEW
Q: How did the Fund perform over the year ended June 30, 1998?
A: The Fund was up by 6.85% for the year, outpacing its benchmarks, the
Merrill Lynch California Intermediate Municipal Bond Index and the Lipper
California Intermediate Municipal Debt Funds Average, which showed returns of
5.91% and 6.44%, respectively, over the year. This continues the record of
outperformance that the Fund has achieved since inception and ensured a four-
star and a five-star rating over the three- and five-year periods, respectively,
ended June 30, 1998, from Morningstar for the Fund's risk/return profile. This
fund was ranked against 1,549 and 860 municipal bond funds for the three- and
five-year periods, respectively.
Q: What were some of the trends in California's municipal bond market
during the period?
A: Encouraged by decelerating inflation and positive economic news, the
municipal bond market rallied during the first half of the fiscal year through
December 31, 1997, reflecting trends in the national bond market. During the
second half, this rally slowed and bonds traded in a tight range as interest
rates remained relatively stable. Although through both halves of the year the
market has shown positive gains, the municipal market rally was nowhere near as
strong as the rally in Treasuries.
There are a couple of reasons that explain this underperformance. The first is
the demand for Treasuries, accelerated by a "flight to quality" as investors,
including many foreigners, turned to them as a safe haven in the wake of the
economic turmoil in Asia and worries about its spillover effects. Second, the
Treasury bond market benefited from a reduced number of issues resulting from a
federal budget surplus due to strong economic growth. In direct contrast, heavy
supply of new municipal issuance acted as a drag on the gains within this
sector. Fortunately, however, this extra supply was soaked up easily, as demand
for California municipal bonds tends to be relatively heavy as a result of the
state's relatively high income taxes and concentration of wealth.
Q: Do you think that the rally in the bond markets has now run its course?
A: We firmly believe that there is room for a further rally in the bond markets
through the coming fiscal year. The factors that have served to dampen
inflationary pressures in the economy over the past year are now threatening not
just to dampen inflation but to trigger deflation. Federal Reserve Chairman Alan
Greenspan appears to recognize this as, in spite of short-term inflationary
pressures due to extremely tight labor and housing markets, the short-term
federal funds rate has been left unchanged since March 1997. Although these
short-term pressures may yet lead to a marginal increase in the federal 6/98
funds rate, the general picture of a slowing economy and imported deflation as
cheap imported goods put downward pressure on prices suggests that there is room
for additional downward momentum in medium- to long-term rates.
64
<PAGE>
---------------------
The Montgomery Funds
----------------------
California Tax-Free
Intermediate Bond Fund
----------------------
Portfolio Highlights
We believe that the California municipal bond market stands to benefit from
these trends. Municipals are generally cheaper than Treasuries right now, given
the strong run-up in the Treasury market and following a spate of continued new
issuance. Moreover, the California economy remains robust, which means that the
state is in much better fiscal shape than it was in the first half of the 1990s.
This combined with a more diversified economic base suggests that the state
should be able to weather any economic slowdown much more easily than in the
past, which makes holding California municipal bonds far more attractive.
Q: How is the Fund positioned to take advantage of these trends?
A: As of the beginning of the fiscal year, June 30, 1997, the effective duration
of the portfolio was 5.61 years and the maturity stood at 7.55 years. We
extended these over the course of the year to take advantage of declining rates.
By the fiscal year's end, we had increased duration to 5.86 years and maturity
to 8.01 years.
As of June 30, 1998, 75% of the portfolio was in insured bonds that carry an Aaa
credit rating. These bonds are considered a better value than uninsured credits
right now. Due to the low-interest rate environment, uninsured credits have
become scarce, resulting in less-attractive yields.
Q: Why should an investor consider the California Tax-Free Intermediate
Bond Fund right now?
A: Given their tax exemption, California municipal bonds offer great benefits to
investors in the higher tax brackets. In the current economic climate, and given
their relative cheapness against U.S. Treasuries, we believe that they offer an
attractive investment opportunity. We expect interest rates to continue to
decline, as they reflect lower inflation rates, and to be able to take advantage
of the consequent rally in bond prices. And though we anticipate continued
moderate growth in the economy, bonds are likely to benefit more than equities
from any slowdown. We have structured our portfolio defensively in case of this
eventuality, holding three quarters of our assets in bonds with excellent credit
quality.
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of 6/30/98. The ratings are subject to change every month. Past performance is
no guarantee of future results. The ratings are calculated from the funds'
three-, five- and 10-year average annual returns (if available) in excess of
90-day Treasury bill returns with appropriate fee adjustments, and a risk factor
that reflects fund performance below 90-day T-bill returns. Ten percent of funds
in a rating universe receive five stars, and the next 22.5% receive four stars.
A portion of income may be subject to some state and/or local taxes, and, for
certain investors, a portion may be subject to the federal alternative minimum
tax.
================================================================================
TOP TEN LONG-TERM HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
San Diego County, California, Regional Transportation Commission Sales
Tax Revenue, 6.000% due 04/01/05........................................3.3%
Puerto Rico, Electric Power Authority, Power Revenue, Series S,
6.125% due 07/01/09.....................................................3.2%
Redwood City, California, Public Financing Authority, Lease Revenue,
Capital Facilities Project, 5.000% due 07/15/10.........................3.2%
California State, Pollution Control Finance Authority, San Diego
Gas & Electric Company, Series A, 5.9000% due 06/01/14..................3.1%
Los Angeles County, California, Transportation Commission, Sales Revenue,
Proposition C, Second Series, Series A, 6.750% due 07/01/20.............3.1%
Los Angeles, California, State Building Authority, Lease Revenue,
5.600% due 05/01/08.....................................................2.6%
Sacramento, California, Municipal Utilities, Electric Revenue Refunding,
Series A, 6.250% due 08/15/10...........................................2.0%
Walnut Valley, California, School District, Series A, 7.000% due 08/01/08...2.0%
Metropolitan Water District, Southern California, Waterworks Revenue,
Series C, 6.000% due 07/01/08...........................................1.9%
San Jose, California, Redevelopment Agency Tax Allocation, Merged
Area Redevelopment Project, 6.000% due 08/01/10.........................1.8%
================================================================================
I N V E S T M E N T G R A D E
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Aaa..........................................................................75%
Aa........................................................................... 5%
A............................................................................11%
Baa.......................................................................... 2%
Nonrated..................................................................... 7%
65
<PAGE>
- -------------------------------
The Montgomery Funds
- -------------------------------
California Tax-Free
Intermediate Bond Fund
- -------------------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
MUNICIPAL BONDS AND NOTES -- 92.0%
Principal Amount Value (Note 1)
California -- 86.8%
$ 200,000 Bakersfield, California, Hospital,
Prerefunded, 7.375% due 01/01/14.................$ 207,534
205,000 Benicia, California, GO (MBIA Insured),
7.000% due 08/01/04.............................. 234,980
250,000 California Educational Authority Revenue,
University of San Francisco (MBIA Insured),
6.000% due 10/01/08.............................. 281,563
200,000 California Housing Finance Agency, Housing
Revenue, Series C (MBIA Insured),
6.150% due 08/01/14.............................. 213,500
California State:
40,000 6.800% due 03/01/99.............................. 40,843
260,000 6.200% due 11/01/02.............................. 281,450
100,000 6.750% due 04/01/04.............................. 112,625
115,000 7.000% due 04/01/06.............................. 134,406
200,000 7.400% due 09/01/07.............................. 244,000
250,000 6.000% due 10/01/08.............................. 281,562
145,000 7.000% due 08/01/09.............................. 176,356
100,000 7.000% due 10/01/10.............................. 122,750
100,000 6.250% due 09/01/12.............................. 115,500
(FGIC Insured):
250,000 7.000% due 04/01/06.............................. 293,124
500,000 6.500% due 02/01/08.............................. 581,250
1,000,000 Pollution Control Finance Authority,
San Diego Gas & Electric Company, Series A,
5.900% due 06/01/14.............................. 1,098,750
Public Works Board, Facilities Lease Revenue:
100,000 San Jose Facilities, Series A,
7.750% due 08/01/06.............................. 119,875
Various Community College Projects, Series A:
495,000 6.000% due 03/01/05.............................. 543,262
365,000 (AMBAC Insured), 6.000% due 03/01/06............. 403,781
Public Works Board, Lease Revenue:
265,000 Department of Corrections, Series A (AMBAC
Insured), 6.000% due 01/01/06.................... 292,825
300,000 Secretary of State, Series A (AMBAC Insured),
6.200% due 12/01/05.............................. 335,625
75,000 University Revenue (AMBAC Insured),
6.250% due 11/01/00.............................. 78,843
365,000 University Trust Certificates,
6.450% due 06/01/02.............................. 392,831
Veterans Bond:
25,000 Series AG, 8.100% due 10/01/98................... 25,261
70,000 Series AL, 9.600% due 04/01/01................... 79,888
100,000 Series AT (FGIC Insured), 9.500% due 02/01/10.... 143,000
250,000 California Statewide Communities, Development
Authority Revenue, Certificates of Participation
(St. Joseph Health System Group),
6.500% due 07/01/04.............................. 280,000
100,000 Carpinteria, California (FGIC Insured),
7.500% due 07/01/00.............................. 106,750
Castaic Lake, California, Water Agency,
Certificates of Participation, Refunding,
Water System Improvement Project,
Series A (MBIA Insured):
150,000 7.250% due 08/01/07.............................. 181,125
500,000 7.250% due 08/01/08.............................. 610,624
Chino Basin, California, Regional
Financing Authority Revenue, Municipal
Water and District Sewer Systems Project
(AMBAC Insured):
500,000 7.000% due 08/01/06.............................. 587,500
240,000 7.000% due 08/01/08.............................. 288,000
Commerce, California, Community Development
Commission, Tax Allocation, Merged
Redevelopment Project, Series A, Refunding:
100,000 5.100% due 08/01/04.............................. 100,000
190,000 5.200% due 08/01/05.............................. 191,187
120,000 5.500% due 08/01/09.............................. 121,050
Contra Costa, California, Transportation
Authority Sales Tax Revenue, Series A
(FGIC Insured):
300,000 6.000% due 03/01/05.............................. 329,250
500,000 6.000% due 03/01/07.............................. 556,874
300,000 Desert Hospital District, California, Hospital
Revenue, Certificates of Participation
(CGIC Insured), 6.150% due 07/01/02.............. 323,250
East Bay, California:
100,000 Regional Parks District, Series B,
8.750% due 09/01/99.............................. 105,750
75,000 Utility District, Series M,
7.500% due 03/01/00.............................. 79,312
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.................... 400,313
250,000 Elsinore Valley, California, Municipal Water
District, Certificates of Participation,
Refunding, Series A (FGIC Insured),
6.000% due 07/01/12.............................. 281,563
The accompanying notes are an integral part of these financial statements.
66
<PAGE>
----------------------
The Montgomery Funds
----------------------
California Tax-Free
Intermediate Bond Fund
----------------------
Investments
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
California -- continued
Emeryville, California, Public
Financing Authority:
270,000 Housing Revenue, 5.600% due 09/01/06..............$ 289,913
500,000 Lease Revenue, Civic Center Financing
Project, Series A (AMBAC Insured),
5.000% due 05/01/28............................... 486,875
50,000 Estero, California, Series S-1,
7.000% due 07/01/00............................... 52,813
290,000 Fresno, California, Sewer Revenue, Series A
(MBIA Insured), 6.000% due 09/01/07............... 324,800
La Mesa, California, Improvement Board,
Assessment District No. 98-1:
180,000 4.900% due 09/02/04............................... 180,000
100,000 5.500% due 09/02/11............................... 99,750
175,000 Lafayette, California, Elementary School
District, 6.900% due 05/15/06..................... 204,313
Los Angeles, California:
100,000 Series A, 6.400% due 09/01/98..................... 100,431
835,000 State Building Authority, Lease Revenue
(MBIA Insured), 5.600% due 05/01/08............... 910,150
Los Angeles County, California:
Certificates of Participation:
200,000 6.700% due 03/01/99............................... 203,952
200,000 6.708% due 06/01/15............................... 219,000
50,000 Public Works, Revenue Anticipation Notes,
4.500% due 03/01/01............................... 50,563
Transportation Commission, Sales Revenue,
Proposition C, Second Series, Series A:
180,000 6.200% due 07/01/04............................... 197,775
400,000 6.400% due 07/01/06............................... 453,500
1,000,000 6.750% due 07/01/20............................... 1,096,250
Metropolitan Water District, Southern
California Waterworks Revenue:
200,000 6.000% due 07/01/21............................... 211,250
600,000 Series C, 6.000% due 07/01/08..................... 675,750
250,000 Ontario, California, Redevelopment Financing
Authority, Revenue Refunding (Ontario
Redevelopment Project No. 1) (MBIA Insured),
6.550% due 08/01/06............................... 287,188
150,000 Oxnard, California, School District, Refunding
(MBIA Insured), 5.625% due 08/01/13............... 163,500
65,000 Paramount, California, Redevelopment Agency,
5.100% due 08/01/98............................... 65,066
Piedmont, California, School District, Series A:
75,000 8.300% due 08/01/01............................... 84,000
45,000 7.100% due 08/01/02............................... 49,894
40,000 Series C, 7.200% due 08/01/01..................... 43,600
200,000 Pomona, California, School District, Series A
(MBIA Insured), 5.950% due 08/01/10............... 225,750
Rancho, California, Water District Financing
Authority, Revenue Refunding (FGIC Insured):
$400,000 6.500% due 11/01/02............................... 437,500
400,000 6.500% due 11/01/05............................... 454,500
Redwood City, California:
330,000 Multi-family Housing (Redwood Shores), Series B,
Mandatory Put 10/01/00, 5.200% due 10/01/08....... 332,475
1,095,000 Public Financing Authority, Lease Revenue,
Capital Facilities Project, 5.000% due 07/15/10... 1,140,169
500,000 Riverside County, California, Transportation
Commission Sales Tax Revenue, Series A
(FGIC Insured), 6.000% due 06/01/09............... 563,750
625,000 Sacramento, California, Municipal Utilities,
Electric Revenue Refunding, Series A
(MBIA Insured), 6.250% due 08/15/10............... 724,219
San Bernardino, California, Joint Powers
Financing Authority, Tax Allocation Revenue:
500,000 Central City Merged Project, Series A
(AMBAC Insured), 5.750% due 07/01/16.............. 544,375
195,000 Sub-Central City Merged Project, Series B,
Refunding, 4.600% due 07/01/99.................... 195,837
250,000 San Bernardino County, California,
Transportation Authority Sales Tax Revenue,
Series A (MBIA Insured), 6.000% due 03/01/06...... 276,563
115,000 San Diego, California, Public Financing
Authority, Sewer Revenue (FGIC Insured),
6.000% due 05/15/07............................... 128,369
San Diego County, California:
1,075,000 Regional Transportation Commission Sales
Tax Revenue, 6.000% due 04/01/05.................. 1,181,156
175,000 Water Authority Revenue, Certificates of
Participation, Series A, 6.000% due 05/01/01...... 184,188
San Francisco, California, City and County:
375,000 City Hall Improvement Project, Series A
(FGIC Insured), 6.100% due 06/15/00............... 390,469
100,000 GO, Series A, 6.100% due 12/15/98................. 101,129
International Airport Revenue, AMT,
Second Series:
445,000 8.000% due 05/01/06............................... 543,456
500,000 8.000% due 05/01/09............................... 617,500
550,000 San Jose, California, Redevelopment
Agency Tax Allocation, Merged Area
Redevelopment Project (MBIA Insured),
6.000% due 08/01/10............................... 624,250
San Mateo-Foster City, California,
School District (MBIA Insured):
240,000 7.750% due 08/01/06............................... 294,000
500,000 5.000% due 08/01/27............................... 488,125
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
California Tax-Free
Intermediate Bond Fund
- -----------------------
Investments
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
California -- continued
Santa Rosa, California:
Central Packaging Service Facilities, Refunding:
$250,000 4.050% due 07/02/99.................................$ 250,478
265,000 4.200% due 07/02/00................................. 265,000
200,000 4.800% due 07/02/06................................. 199,250
100,000 4.900% due 07/02/07................................. 100,000
170,000 5.100% due 07/02/09................................. 171,275
500,000 High School District (FGIC Insured),
7.000% due 05/01/01................................. 539,375
375,000 Temecula, California, Special Tax, Community
Facilities District 88-12-A, Refunding,
4.250% due 09/01/99................................. 375,469
Walnut Valley, California, School District,
Series A (MBIA Insured):
100,000 6.850% due 08/01/07................................. 118,125
600,000 7.000% due 08/01/08................................. 723,000
65,000 Watsonville, California, Water Revenue
(MBIA Insured), 6.100% due 05/15/99................. 66,357
Wiseburn, California, Schoold District,
Series A (FGIC Insured):
360,000 6.875% due 08/01/06................................. 421,200
395,000 6.875% due 08/01/07................................. 467,581
-------
30,973,155
Puerto Rico -- 5.2%
350,000 Commonwealth of Puerto Rico,
Public Improvement Bonds,
5.000% due 07/01/07................................. 361,813
Puerto Rico:
1,000,000 Electric Power Authority, Power Revenue,
Series S (MBIA Insured),
6.125% due 07/01/09................................. 1,145,000
Public Building Authority, Educational &
Health Facilities Revenue, Series M, Refunding:
135,000 5.700% due 07/01/09................................. 147,319
170,000 (FSA Insured), 5.700% due 07/01/09.................. 188,488
-------
1,842,620
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $31,922,246)................................................ 32,815,775
----------
SHORT-TERM MUNICIPAL BONDS AND NOTES -- 13.2%
Principal Amount Value (Note 1)
California -- 13.2%
Pollution Control Finance Authority:
$800,000 Homestake Mining Company, Series 84B,
3.200% due 05/01/04++...............................$ 800,000
Pacific Gas & Electric Company:
400,000 Series A, Refunding, 3.150% due 12/01/16++.......... 400,000
1,800,000 Series C, Refunding, 3.600% due 11/01/26+........... 1,800,000
300,000 Series G, Refunding, 3.400% due 02/01/16+........... 300,000
100,000 Southern California Edison, Series A,
3.450% due 02/28/08+................................ 100,000
Manteca, California, School District,
Community Facilities District No. 89-1:
120,000 5.400% due 09/01/10................................. 120,000
170,000 5.450% due 09/01/11................................. 170,000
1,000,000 Orange County, California, Improvement
Board, Assessment District No. 88-1,
3.500% due 09/02/18+................................ 1,000,000
TOTAL SHORT-TERM MUNICIPAL BONDS AND NOTES
(Cost $4,690,000)................................................. 4,690,000
---------
TOTAL INVESTMENTS -- 105.2%
(Cost $36,612,246*)............................................... 37,505,775
OTHER ASSETS AND LIABILITIES -- (5.2)%
(Net)............................................................. (1,838,956)
-----------
NET ASSETS -- 100.0%..............................................$ 35,666,819
==========
* Aggregate cost for federal tax purposes was $36,612,246.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CGIC Capital Guaranty Insurance Corporation
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
MBIA Municipal Bond Investors Assurance
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.
The accompanying notes are an integral part of these financial statements.
68
<PAGE>
--------------------
The Montgomery Funds
--------------------
Money Market Funds
--------------------
Portfolio Highlights
INVESTMENT REVIEW
Q: How have the Funds performed over the past 12 months?
A: The Montgomery Money Market Funds have all outperformed their benchmarks over
the fiscal year ended June 30, 1998. The California Tax-Free Money Fund was up
3.00%, the Federal Tax-Free Money Fund was up 3.12% and the Government Reserve
Fund was up 5.27%. For the same time period, the benchmark numbers of the Lipper
California Tax-Exempt Money Market Funds Average, the Lipper Tax-Exempt Money
Market Funds Average and the Lipper Government Money Market Funds Average were
up by 2.96%, 3.07% and 5.01%, respectively.
Q: What were the major bond market trends during the period?
A: Once again the fixed-income markets were aided by a favorable domestic
environment of moderate growth and low inflation, which pushed down yields and
led to a market rally. Fortunately for money market fund investors, lower rates
were confined to longer-maturity bonds. Money market yields remained nearly
constant over the past year. Despite low unemployment rates and strong
first-quarter gross domestic product (GDP) growth, the yield on the bellwether
30-year bond reached a historic low during the first half of 1998. This was due
to market concerns about deflation.
Although bond market analysts monitored comments made by the Federal Reserve in
an attempt to determine the direction of interest rates, the Fed's view of the
economy began to contrast sharply with that of the market, which became
increasingly concerned with the deflationary impact of the Asian financial
crisis. Analysts noted that countries are beginning to import deflation from
Asia in the form of lower-priced goods, which translates into both cheaper goods
in stores and stiffer competition for domestic manufacturers. Added pressure has
come from a strong dollar, very robust productivity and high real interest
rates. The performance of other types of bonds suggests that the deflationary
view has been pervasive.
In addition to deflationary fears, a strong inflow of capital to the Treasuries
market benefited bonds. Foreign capital, which sought after U.S. government
bonds as a safe haven from currency turmoil, pushed prices even higher. As a
result of the rally in the Treasuries market, the yield curve (a graphical
depiction of the relationships among the yields on bonds of the same credit
quality but different maturities) has continued to flatten as medium- and
long-term rates have trended downward more than shorter rates.
Q: What should we expect in the second half of 1998?
A: Looking forward, the focus will be on the Federal Reserve as well as on the
short-and long-term effects the financial crisis in Asia will have on U.S.
growth and inflation. The federal funds rate has remained unchanged since March
1997, but this may change if labor shortages and rising wages threaten to push
up inflation in the short term. Although the next move in short-term interest
rates may be an upward one, albeit slight, we continue to believe in the
longer-term trend to lower rates. The currency crisis in Asia has, without a
doubt, had a dampening effect on the inflationary pressures that had begun to
emerge last year, and slower economic growth in the second quarter reflects
this.
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
William Stevens........................................ Senior Portfolio Manager
================================================================================
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Yields as of 6/30/98
- --------------------------------------------------------------------------------
Montgomery
Government Reserve Fund
One-day yield..............................................................5.46%
Seven-day yield............................................................5.21%
- --------------------------------------------------------------------------------
Montgomery
California Tax-Free Money Fund
One-day yield..............................................................2.83%
Seven-day yield............................................................2.97%
- --------------------------------------------------------------------------------
Montgomery
Federal Tax-Free Money Fund
One-day yield..............................................................3.29%
Seven-day yield............................................................3.28%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.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. A portion of income may be
subject to some state and/or local taxes, and, for certain investors, a portion
may be subject to the federal alternative minimum tax. Fund performance
presented is for Class R shares.
69
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Government Reserve Fund
- -----------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
FEDERAL FARM CREDIT BANK (FFCB) -- 10.2%
Principal Amount Value (Note 1)
$ 500,000 4.250% due 08/12/98+++.........................$ 499,155
1,000,000 5.744% due 08/26/98+++......................... 998,600
490,000 5.500% due 09/01/98............................ 489,729
520,000 5.750% due 09/11/98............................ 520,000
1,050,000 2.454% due 09/30/98+++......................... 1,040,470
10,000,000 5.505% due 10/01/98+++......................... 9,995,661
1,100,000 5.600% due 10/01/98............................ 1,099,716
1,500,000 6.320% due 10/30/98............................ 1,503,217
800,000 5.270% due 02/01/99............................ 797,978
5,000,000 5.350% due 02/02/99............................ 4,993,167
5,000,000 5.375% due 03/02/99............................ 4,994,819
10,000,000 5.405% due 04/01/99+++......................... 9,979,397
4,835,000 5.500% due 04/01/99............................ 4,830,564
4,000,000 5.770% due 04/01/99............................ 4,002,992
18,000,000 5.600% due 05/03/99............................ 17,987,115
7,810,000 5.550% due 06/01/99............................ 7,804,306
1,000,000 8.400% due 07/26/99............................ 1,028,305
1,000,000 6.460% due 07/07/00............................ 1,000,160
---------
73,565,351
----------
FEDERAL HOME LOAN BANK (FHLB) -- 35.0%
60,000,000 Discount Note due 07/01/98..................... 60,000,000
20,000,000 Discount Note due 07/06/98..................... 19,984,722
20,000,000 5.426% due 07/07/98+++......................... 19,999,708
1,000,000 5.215% due 07/08/98............................ 999,910
1,165,000 5.760% due 07/08/98............................ 1,165,045
4,500,000 2.654% due 07/15/98++++........................ 4,494,711
500,000 2.796% due 07/15/98+++......................... 499,493
1,000,000 2.996% due 07/15/98+++......................... 998,946
700,000 3.000% due 07/15/98++++........................ 699,280
500,000 3.000% due 07/16/98+++......................... 499,449
500,000 5.240% due 07/20/98............................ 499,828
2,600,000 2.375% due 07/28/98+++......................... 2,593,504
1,200,000 2.673% due 07/28/98++++........................ 1,197,055
2,573,000 5.510% due 08/03/98............................ 2,572,586
1,000,000 6.285% due 08/05/98............................ 1,000,408
5,000,000 6.020% due 08/13/98............................ 5,000,432
2,000,000 2.465% due 08/17/98+++......................... 1,992,406
1,000,000 3.215% due 08/17/98++++........................ 996,283
2,000,000 4.260% due 08/24/98+++......................... 1,995,548
500,000 2.608% due 08/27/98+++......................... 497,805
2,400,000 7.800% due 08/28/98............................ 2,407,155
550,000 4.785% due 09/09/98............................ 548,880
1,000,000 4.920% due 09/09/98............................ 998,505
15,000,000 5.900% due 09/10/98............................ 15,000,000
2,250,000 5.800% due 09/18/98............................ 2,250,748
400,000 7.640% due 09/21/98............................ 401,732
500,000 6.050% due 09/25/98............................ 500,443
500,000 2.182% due 09/30/98+++......................... 495,759
1,000,000 5.710% due 10/01/98............................ 1,000,028
500,000 5.690% due 10/02/98............................ 499,957
15,000,000 5.436% due 10/06/98+++......................... 14,997,050
500,000 5.716% due 10/06/98............................ 500,227
5,000,000 6.100% due 10/07/98............................ 5,005,919
1,000,000 4.890% due 10/14/98............................ 997,836
2,250,000 4.918% due 10/27/98+++......................... 2,243,816
2,500,000 5.800% due 10/27/98............................ 2,500,124
1,500,000 4.903% due 11/18/98++.......................... 1,495,721
1,000,000 5.300% due 11/18/98............................ 999,066
500,000 6.000% due 11/20/98............................ 500,542
500,000 5.068% due 11/24/98+++......................... 498,483
5,000,000 5.670% due 12/22/98+........................... 4,998,370
500,000 5.795% due 12/23/98............................ 500,267
1,040,000 5.450% due 01/15/99............................ 1,039,240
500,000 5.035% due 01/19/99............................ 498,460
500,000 5.605% due 01/22/99............................ 499,989
100,000 7.860% due 01/25/99............................ 101,183
1,500,000 5.230% due 02/01/99............................ 1,499,172
2,000,000 5.425% due 02/16/99............................ 1,998,512
4,500,000 5.644% due 02/23/99+++......................... 4,496,017
1,200,000 5.610% due 03/03/99............................ 1,200,077
1,000,000 5.270% due 03/04/99............................ 997,388
11,670,000 5.580% due 03/11/99............................ 11,662,488
5,000,000 5.605% due 03/12/99............................ 4,998,832
5,000,000 5.560% due 03/25/99............................ 4,995,654
7,000,000 5.500% due 03/26/99............................ 6,992,594
10,000,000 5.557% due 03/26/99++.......................... 9,996,696
9,810,000 5.570% due 04/07/99............................ 9,804,054
5,000,000 5.564% due 04/09/99++.......................... 4,998,069
1,000,000 6.440% due 04/16/99............................ 1,005,930
---------
253,812,102
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 0.4%
74,610 M90190, 6.500% due 07/01/98.................... 74,610
495,424 1557FB, 6.300% due 08/15/98+++................. 495,661
508,851 G50016, 6.000% due 09/01/98.................... 508,798
770,659 M90297, 5.500% due 09/01/98.................... 770,128
818,948 1991-127FA, 6.306% due 09/25/98+++............. 819,774
88,797 G50423, 6.500% due 10/01/98.................... 88,775
387,272 1727, 6.250% due 02/15/99...................... 387,180
-------
3,144,926
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 2.5%
358,118 6.500% due 07/25/98............................ 358,070
1,000,000 5.270% due 07/28/98............................ 999,682
750,000 9.400% due 08/10/98............................ 753,021
500,000 4.875% due 10/15/98............................ 499,014
10,000,000 5.230% due 11/25/98............................ 9,986,791
1,000,000 5.750% due 12/10/98............................ 1,000,000
1,124,471 5.000% due 12/25/98............................ 1,120,438
2,727,004 7.000% due 12/25/98+++......................... 2,726,052
The accompanying notes are an integral part of these financial statements.
70
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Government Reserve Fund
-----------------------
Investments
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) --
continued
Principal Amount Value (Note 1)
$ 100,000 5.570% due 03/05/99..............................$ 99,986
400,000 5.840% due 03/29/99.............................. 400,252
----------
17,943,306
----------
STUDENT LOAN MARKETING ASSOCIATION (SLMA) -- 9.3%
14,975,000 5.775% due 09/09/98.............................. 14,975,548
1,800,000 5.790% due 09/16/98.............................. 1,800,111
5,000,000 5.740% due 12/17/98.............................. 5,004,809
500,000 5.800% due 12/18/98.............................. 500,669
2,000,000 7.723% due 01/25/99.............................. 2,023,642
7,000,000 5.450% due 02/10/99.............................. 6,992,026
350,000 4.500% due 02/24/99+++........................... 347,007
500,000 5.200% due 02/26/99.............................. 498,503
6,000,000 5.580% due 03/11/99.............................. 5,998,401
5,000,000 5.662% due 04/16/99++............................ 4,998,060
3,325,000 5.630% due 06/02/99.............................. 3,323,902
5,000,000 5.525% due 06/10/99.............................. 4,993,685
16,000,000 5.351% due 08/02/99++............................ 15,949,365
----------
67,405,728
----------
TENNESSEE VALLEY AUTHORITY (TVA) -- 0.4%
2,700,000 5.950% due 09/15/98.............................. 2,700,780
---------
U.S. SOVEREIGN BONDS -- 0.1%
471,263 AID-Israel, Series B, 5.750% due 01/01/99++...... 471,263
-------
TOTAL SECURITIES.................................................. 419,043,456
-----------
REPURCHASE AGREEMENTS -- 42.3%
175,000,000 Agreement with Bear Stearns, Tri-Party, 6.35% dated
06/30/98, to be repurchased at $175,030,445 on
07/01/98, collateralized by $178,500,000 market
value of U.S. government securities, having various
maturities and various interest rates................ 175,000,000
70,000,000 Agreement with Greenwich Capital Markets, Tri-Party,
6.30% dated 06/30/98, to be repurchased at
$70,012,082 on 07/01/98, collateralized by
$71,400,000 market value of U.S. government
securities, having various maturities and various
interest rates ...................................... 70,000,000
61,842,000 Agreement with UBS, Tri-Party, 6.30% dated 06/30/98,
to be repurchased at $61,852,674 on 07/01/98,
collateralized by $63,078,840 market value of U.S.
government securities, having various maturities and
various interest rates............................... 61,842,000
----------
TOTAL REPURCHASE AGREEMENTS....................................... 306,842,000
-----------
TOTAL INVESTMENTS -- 100.2%
(At amortized cost*).............................................. 725,885,456
OTHER ASSETS AND LIABILITIES -- (0.2)%
(Net)............................................................. (1,266,431)
----------
NET ASSETS -- 100.0%..............................................$ 724,619,025
===========
* Aggregate cost for federal tax purposes was $725,885,456.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
+++ Floating-rate note, rate resets monthly.
++++ Floating-rate note, rate resets quarterly.
The accompanying notes are an integral part of these financial statements.
71
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
California Tax-Free
Money Fund
- ---------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
MUNICIPAL BONDS AND NOTES -- 111.8%
Principal Amount Value (Note 1)
California -- 110.8%
$ 3,000,000 Abag, California, Financing Authority
Revenue, Nonprofit Corporations, Certificates
of Participation, Series C, Refunding,
3.400% due 10/01/27+.............................$ 3,000,000
1,200,000 Alameda County, California, School Financing
Authority, Certificates of Participation,
(Capital Improvement Financing Projects),
Series C, 3.200% due 07/01/25+................... 1,200,000
125,000 Benicia, California, GO (MBIA Insured),
7.000% due 08/01/98.............................. 125,321
930,000 Berkeley, California, GO (AMBAC Insured),
3.800% due 06/01/99.............................. 930,000
2,025,000 Brentwood, California, School District, GO
(AMBAC Insured), 6.850% due 08/01/16............. 2,102,137
California State:
Commercial Paper:
5,000,000 3.900% due 07/10/98.............................. 5,000,000
2,500,000 3.850% due 07/16/98.............................. 2,500,000
Economic Development Financing Authority
Revenue (California Independant Systems Project):
3,000,000 Series A, 3.500% due 04/01/08+................... 3,000,000
5,000,000 Series C, 3.700% due 04/01/08+................... 5,000,000
2,000,000 Economic Financing Authority, Industrial
Development Revenue (Serra Microchassis
Project), AMT, 3.350% due 08/01/27+.............. 2,000,000
1,000,000 Educational Facilities Authority Refunding
Revenue, Stanford University, Series L-3,
3.200% due 10/01/15++............................ 1,000,000
General Obligations:
855,000 4.700% due 10/01/98.............................. 856,665
100,000 6.400% due 10/01/98.............................. 100,605
100,000 9.000% due 11/01/98.............................. 101,644
Health Facilities Financing Authority
Revenue (CASMED):
175,000 Prerefunded (AMBAC Insured),
7.625% due 10/01/15.............................. 180,066
5,000,000 Adventist Health Systems, Series B,
3.500% due 09/01/28+............................. 5,000,000
Kaiser Foundation Health Plan:
1,000,000 Series A, 3.500% due 05/01/28++.................. 1,000,000
4,100,000 Series B, 3.500% due 05/01/28++.................. 4,100,000
1,000,000 Pooled Loan Program, Series B (FGIC Insured),
3.100% due 10/01/10++............................ 1,000,000
Saint Joseph Health System, Series B:
100,000 3.250% due 07/01/09+............................. 100,000
80,000 3.250% due 07/01/13+............................. 80,000
1,200,000 Scripps Memorial Hospital, Series B (MBIA
Insured), 3.200% due 10/01/21++.................. 1,200,000
700,000 Sutter Healthcare, Series C,
3.250% due 07/01/22+............................. 700,000
Pollution Control Finance Authority:
Pacific Gas & Electric Company:
5,500,000 Series A, Refunding, AMT,
3.150% due 12/01/16++............................ 5,500,000
Series C, Refunding:
1,300,000 3.350% due 11/01/26+............................. 1,300,000
1,900,000 3.600% due 11/01/26+............................. 1,900,000
2,000,000 Series F, Refunding, 3.500% due 11/01/26+........ 2,000,000
Southern California Edison Company:
7,900,000 Series A, 3.450% due 02/28/08+................... 7,900,000
1,000,000 Series D, 3.450% due 02/28/08+................... 1,000,000
Solid Waste Disposal Revenue:
700,000 Gilton Solid Waste Management, Series A,
AMT, 3.300% due 12/01/05++....................... 700,000
1,200,000 Shell Oil Company (Martinez Project),
Series A, AMT, 3.350% due 10/01/24+.............. 1,200,000
250,000 Public Works Board, Lease Revenue,
Department of Corrections-California
State Prison, Series B (MBIA Insured),
4.400% due 12/01/98.............................. 250,708
3,000,000 School Cash Reserve Program Authority,
Series A, 4.750% due 07/02/98.................... 3,000,072
300,000 Transportation Commission, San Francisco
Bay Toll Bridge Revenue, Southern Bridge Unit,
Series A, 4.250% due 09/01/98.................... 300,179
California Statewide Communities
Development Authority:
Industrial Development Revenue:
365,000 (Encore Video Project) 3.450% due 08/01/07++..... 365,000
1,115,000 (J. Michelle Properties Project) Series B,
3.400% due 11/01/15++............................ 1,115,000
1,000,000 (Karcher Property Project) Series C,
3.250% due 12/01/19++............................ 1,000,000
Multi-family Housing Revenue:
1,000,000 (Ocotillo Place Apartments Project)
Series O, 3.900% due 06/25/24.................... 1,000,000
4,600,000 (Pittsburg Plaza Apartments) Series K,
AMT, 3.350% due 09/01/27++....................... 4,600,000
1,000,000 Concord, California, Redevelopment
Agency, Tax Allocation Revenue, Series 3,
Prerefunded, 8.000% due 07/01/18................. 1,020,000
1,000,000 Contra Costa County, California, Refunding
Revenue Bonds, 3.250% due 11/15/22++............. 1,000,000
500,000 Corona, California, Multi-family Housing
Revenue (Country Hills Project), Series B,
3.300% due 02/01/20++............................ 500,000
200,000 Desert Sands, California, School District,
Certificates of Participation (Measure O
Project), Series D (MBIA Insured),
4.100% due 03/01/99.............................. 200,251
The accompanying notes are an integral part of these financial statements.
72
<PAGE>
---------------------
The Montgomery Funds
---------------------
California
Tax-Free Money Fund
---------------------
Investments
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
California -- continued
$1,000,000 East Bay, California, Regional Park District,
GO, Series A, 8.700% due 09/01/98..............$ 1,008,365
140,000 Eastern Municipal Water District, California,
Water and Sewer Revenue, Certificates of
Participation, Refunding (FGIC Insured),
3.600% due 07/01/98............................ 140,000
2,000,000 Elk Grove, California, School District, TRANS,
4.500% due 06/30/99............................ 2,017,320
5,000,000 Fontana, California, School District, TRANS,
4.000% due 07/09/99............................ 5,016,350
150,000 Foothill de Anza, California, Community
College District, Certificates of Participation,
8.250% due 07/01/18............................ 154,500
2,500,000 High School District, TRANS,
3.900% due 06/30/99............................ 2,504,800
4,000,000 Multi-family Housing Revenue (TreeTops
Apartments Project), Series A, AMT,
3.300% due 08/15/26++.......................... 4,000,000
500,000 Fresno, California, School District,
Series A, Refunding (MBIA Insured),
4.800% due 08/01/98............................ 500,481
1,100,000 Govt Dev. Bank, Commercial Paper,
3.750% due 09/04/98............................ 1,100,000
300,000 Hillsborough, California, School District,
TRANS, 4.500% due 07/09/98..................... 300,041
405,000 La Mesa-Spring Valley, California, School
District, Certificates of Participation
(Capital Projects) (AMBAC Insured),
3.800% due 09/01/98............................ 405,000
800,000 Lassen, California, Municipal Utilities District
Revenue, Series A, Refunding, AMT (FSA
Insured), 3.450% due 05/01/08++................ 800,000
490,000 Local Government, California, Joint Powers
Financing Authority Revenue, Refunding,
6.700% due 09/01/98............................ 492,507
1,050,000 Judgement Obligation Bonds, Series A,
4.700% due 08/01/98............................ 1,050,700
Milti-family Housing Revenue:
5,000,000 (Channel Gateway Apartments) Series B,
4.400% due 08/01/19++.......................... 5,000,000
4,100,000 (Loans to Lender Program) Series A,
3.500% due 08/01/26++.......................... 4,100,000
2,000,000 (Mission Village Terrace) Series D, AMT,
3.400% due 07/01/27++.......................... 2,000,000
2,500,000 Series K, 3.450% due 07/01/10++................ 2,500,000
1,820,000 Municipal Improvement Lease Revenue,
Series B (MBIA Insured),
8.000% due 09/01/98............................ 1,832,708
School District:
610,000 Series A, 4.500% due 07/01/98.................. 610,000
1,600,000 TRANS, 4.500% due 07/01/98..................... 1,600,000
250,000 Waste Water System Revenue (MBIA Insured),
7.625% due 08/01/14............................ 255,762
Los Angeles County, California:
5,000,000 3.700% due 10/08/98............................ 5,000,000
345,000 Community Facilities, District No. 5
(Rowland Heights Area), Refunding
(FSA Insured), 3.600% due 09/01/98............. 345,000
3,755,000 Industrial Development Authority Revenue
(Caitac & Jae Company Inc., Project), AMT,
3.750% due 12/01/06++.......................... 3,755,000
1,000,000 Lease Revenue, 3.800% due 07/08/98............. 1,000,000
4,000,000 Metropolitan Transportation Authority,
Sales Tax Revenue, Proposition C, Second
Series, Series A (MBIA Insured),
3.000% due 07/01/20++.......................... 4,000,000
7,800,000 Pension Obligation Bonds, Refunding (AMBAC
Insured), Series B, 3.100% due 06/30/07++...... 7,800,000
1,600,000 Series C, 3.100% due 06/30/07++................ 1,600,000
5,000,000 TRANS, Series A, 4.500% due 06/30/99........... 5,043,300
500,000 Marin County, California, Certificate of
Participation (Capital Improvements
Project), 5.900% due 08/01/98.................. 500,831
3,000,000 Metropolitan Water District, Southern
California Waterworks Revenue, Commercial
Paper, 3.600% due 07/09/98..................... 3,000,000
100,000 Modesto, California, Waste Water Treatment
Facilities Revenue, Refunding (MBIA
Insured), 4.300% due 11/01/98.................. 100,120
510,000 Monrovia, California, Redevelopment Agency,
Tax Allocation Revenue (Central
Redevelopment Project) (AMBAC Insured),
3.800% due 05/01/99............................ 510,000
300,000 Mountain View, California, Commercial
Paper, 4.000% due 10/01/98..................... 300,270
Orange County, California:
Apartment Development Revenue:
1,300,000 (Harbor Pointe) Issue D,
3.300% due 12/01/06++.......................... 1,300,000
1,000,000 (Larkspur Canyon Apartments) Series A,
3.250% due 06/15/37++.......................... 1,000,000
680,000 Community Facilities Special Tax Revenue,
District No. 87-3, Series A,
8.050% due 08/15/08............................ 696,999
2,500,000 Fire Authority, TRANS, 4.250% due 09/17/98..... 2,501,769
250,000 Resources Recovery, Certificates of
Participation, Series A (MBIA Insured),
4.200% due 07/01/98............................ 250,000
5,000,000 Series C (FGIC Insured),
3.500% due 08/01/17+........................... 5,000,000
The accompanying notes are an integral part of these financial statements.
73
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
California
Tax-Free Money Fund
- ---------------------
Investments
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
California -- continued
$1,500,000 Oxnard, California, School District, TRANS,
4.500% due 08/13/98.........................$ 1,501,101
Palm Springs, California,
Community Redevelopment Agency,
Certificates of Participation:
1,400,000 District No. 2, 3.250% due 12/01/14++....... 1,400,000
300,000 District No. 11, 3.250% due 12/01/14++...... 300,000
275,000 Pinole, California, Redevelopment Agency,
Tax Allocation Revenue (Pinole Vista
Redevelopment Project), Series A
(MBIA Insured), 4.000% due 08/01/98......... 275,054
1,000,000 Plumas County, California, TRANS,
4.500% due 12/03/98......................... 1,002,985
5,947,000 Richmond, California, Joint Powers Finance
Authority, Port Terminal Lease Revenue,
3.950% due 09/01/04+........................ 5,947,000
1,000,000 Riverside Teeter, Commercial Paper,
3.750% due 07/30/98......................... 1,000,000
Sacramento, California, Municipal Utilities,
Electricity District Revenue:
1,300,000 Series V, 7.875% due 08/15/16............... 1,332,374
Series W:
345,000 7.875% due 08/15/16......................... 353,522
575,000 7.500% due 08/15/18......................... 577,513
Sacramento County, California:
2,500,000 Multi-family Housing Authority Revenue
(Stone Creek Apartments Project),
3.200% due 11/15/27++....................... 2,500,000
470,000 TRANS, 4.500% due 09/30/98.................. 470,670
1,000,000 Salinas, California, Multi-family Housing
Revenue (Brentwood Gardens), Series A,
3.200% due 05/15/27++....................... 1,000,000
San Bernardino County, California:
2,000,000 Certificates of Participation
(West Center Detention Center Project),
7.600% due 11/01/06......................... 2,065,809
Industrial Development Authority Revenue:
1,320,000 (Aqua-Serv Engineers Inc. Project)
3.400% due 05/01/09++....................... 1,320,000
440,000 (McElroy Metal Mill Inc. Project)
3.400% due 05/01/04++....................... 440,000
San Diego, California:
1,500,000 Commercial Paper, 3.600% due 08/12/98....... 1,500,000
235,000 Community College District, Certificates of
Participation (Financing Project), Refunding
(MBIA Insured), 3.600% due 12/01/98......... 235,000
Multi-family Housing Revenue:
2,000,000 (Country Hills Apartments Project)
3.700% due 08/15/13++....................... 2,000,000
500,000 (Lusk Mira Mesa Apartments Project)
Series E, 3.150% due 04/01/07++............. 500,000
$3,060,000 San Jose, California, Multi-family Housing
Revenue (Timberwood Apartments Project),
3.300% due 02/01/20++....................... 3,060,000
1,155,000 San Jose-Santa Clara, California, Water
Financing Authority, Sewer Revenue,
Series A, Refunding (AMBAC Insured),
4.250% due 11/15/98......................... 1,157,903
1,200,000 Santa Ana, California, Multi-family
Housing Authority Revenue (Vintage
Apartments Project), Series A, AMT,
3.300% due 12/01/22++....................... 1,200,000
Santa Barbara County, California:
1,000,000 School Financing Authority, TRANS,
4.500% due 06/30/99......................... 1,007,980
450,000 TRANS, Series A, 4.500% due 10/01/98........ 450,502
Santa Clara County, California:
2,500,000 Board of Education, TRANS,
4.000% due 06/30/99......................... 2,507,675
550,000 TRANS, 4.750% due 10/01/98.................. 551,122
330,000 Santa Maria Bonita, California, School
District, Certificates of Participation
(Capital Improvements & Refinancing
Project) (MBIA Insured),
4.250% due 03/01/99......................... 330,736
140,000 Santa Monica, California, Community
College District, Series A,
5.625% due 08/01/98......................... 140,205
650,000 Santa Rosa, California, Waste Water
Revenue, Series B (FGIC Insured),
5.100% due 09/01/98......................... 651,337
345,000 Snowline, California, School District,
Certificates of Participation, Series A,
Refunding (FSA Insured),
3.600% due 07/01/98......................... 345,000
South Coast Air Quality Management, California,
District Building Corporation Revenue:
135,000 Series A (MBIA Insured),
6.900% due 08/01/98......................... 135,345
1,000,000 Series B (AMBAC Insured),
9.750% due 08/01/98......................... 1,004,913
Southern California:
5,000,000 Public Power Authority Revenue (Sub-Palo
Verde Project), Series C (AMBAC Insured),
3.100% due 07/01/17++....................... 5,000,000
100,000 Rapid Transportation District,
Certificate of Participation (Workers
Compensation Funding) (MBIA Insured),
5.800% due 07/01/98......................... 100,000
745,000 Temecula, California, Community Facilities
District No. 88-12-A, 3.900% due 09/01/98... 745,000
545,000 University of California (Multiple Purposes
Project), Series D (MBIA Insured),
10.000% due 09/01/98........................ 550,485
The accompanying notes are an integral part of these financial statements.
74
<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
Principal Amount Value (Note 1)
California -- continued
$3,000,000 Vallejo, California, Multi-family
Housing Authority Revenue,
3.350% due 01/01/08++.........................$ 3,000,000
125,000 Ventura, California, School District, Series A
(FSA Insured), 8.000% due 08/01/98............ 125,418
2,500,000 West Contra Costa, California, School
District, TRANS, 4.000% due 06/30/99.......... 2,509,625
---------
207,513,745
-----------
Puerto Rico -- 1.0%
1,800,000 Commonwealth of Puerto Rico,
Highway & Transportation Revenue,
Series A (AMBAC Insured),
3.000% due 07/01/28++......................... 1,800,000
TOTAL MUNICIPAL BONDS AND NOTES.............................. 209,313,745
-----------
TOTAL INVESTMENTS -- 111.8%
(At amortized cost*)......................................... 209,313,745
OTHER ASSETS AND LIABILITIES -- (11.8%)
(Net)........................................................ (22,097,688)
-----------
NET ASSETS -- 100.0%.........................................$ 187,216,057
===========
* Aggregate cost for federal tax purposes was $209,313,745.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
GO General Obligation
MBIA Municipal Bond Investors Assurance
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.
75
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Federal
Tax-Free Money Fund
- --------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1998
MUNICIPAL BONDS AND NOTES -- 112.2%
Principal Amount Value (Note 1)
Alaska -- 0.2%
$200,000 Anchorage, Alaska, Telephone Utilities
Revenue Bonds (MBIA Insured),
4.000% due 02/01/99............................$ 200,223
Arizona -- 0.6%
700,000 Phoenix, Arizona, Civic Improvement
Corporation, Refunding, AMT,
3.625% due 07/01/98............................ 700,000
Colorado -- 1.5%
250,000 Boulder, Colorado, General Obligation
Bonds, 9.000% due 09/01/04................... 252,234
1,500,000 Colorado Health Facilities Authority
Revenue, Kaiser Permanente, Series A,
3.800% due 08/01/15++.......................... 1,500,000
---------
1,752,234
Delaware -- 4.3%
5,000,000 Delaware State, Economic Development
Authority Revenue, Gas Facilities (Delmarva
Power & Light Company Project),
4.150% due 10/01/29+........................... 5,000,000
Florida -- 11.4%
2,000,000 Eustis, Florida, Health Facilities Authority,
Revenue Bonds (Waterman Medical Center,
Inc., Project), 3.550% due 12/01/15++.......... 2,000,000
4,000,000 Florida Housing Finance Agency, Multi-family
Housing Revenue, 3.600% due 06/15/25++......... 4,000,000
400,000 Florida State, Jacksonville Tax Revenue
Anticipation Certificates, Refunding,
4.600% due 07/01/98............................ 400,000
4,000,000 Jacksonville, Florida, Revenue Bonds (Florida
First Coast Project), 3.500% due 03/01/18++.... 4,000,000
3,000,000 Lee County, Florida, Hospital Revenue,
Commercial Paper, 3.850% due 08/14/98.......... 3,000,000
---------
13,400,000
Georgia -- 2.6%
1,500,000 Albany-Dougherty County, Georgia,
Hospital Authority Revenue, Revenue
Anticipation Certificates, Refunding (AMBAC
Insured), 3.550% due 09/01/20++................ 1,500,000
1,300,000 Burke County, Georgia, Development Authority,
PCR, Georgia Power Company Plant (Vogtle
Project), 3.800% due 07/01/24+................. 1,300,000
250,000 Metropolitan Atlanta Rapid Transit Authority,
Georgia Sales Tax Revenue, Series J (FGIC
Insured), 8.000% due 07/01/18.................. 255,000
-------
3,055,000
Hawaii -- 0.6%
700,000 State of Hawaii, Housing Finance & Development
Corporation Revenue, 3.600% due 07/01/24++..... 700,000
Illinois -- 13.2%
$1,050,000 Chicago, Illinois, Public Building
Commission, Series A (FGIC Insured),
7.500% due 01/01/99............................ 1,068,436
420,000 Cook County, Illinois, Glencoe Elementary
School District No. 35, 4.050% due 12/01/98.... 420,417
3,800,000 Galesburg, Illinois, Revenue Bonds (Knox
College Project), 3.500% due 03/01/31+++....... 3,800,000
5,000,000 Illinois Development Finance Authority,
PCR, Series B, 3.900% due 06/01/28++........... 5,000,000
800,000 Illinois Health Facilities Authority Revenue
(Ancilla Systems Inc., Project), Series A,
4.250% due 07/01/98............................ 800,000
500,000 Illinois State, General Obligation Bonds,
5.900% due 12/01/98............................ 504,603
1,500,000 Jackson-Union Counties, Illinois, Regional
District, Port Facilities Revenue, Enron
Transportation Services, Refunding,
3.600% due 04/01/24++.......................... 1,500,000
1,895,000 Lombard, Illinois, Multi-family Housing
Revenue (Clover Creek Apartments Project),
4.000% due 12/15/06............................ 1,895,000
500,000 O'Hare International Airport Revenue,
Series B, 3.650% due 01/01/18++................ 500,000
-------
15,488,456
Kansas -- 0.4%
525,000 Sedgwick County, Kansas, General Obligation
Bonds, Series A, 6.100% due 08/01/02........... 525,991
Kentucky -- 0.6%
650,000 Madison County, Kentucky (Capital
Corporation Project), Revenue Bonds,
Refunding, 7.800% due 04/01/09................. 675,529
Louisiana -- 5.1%
250,000 Louisiana Stadium and Exposition District,
Hotel Occupancy Tax and Stadium
Revenue, Series B (FGIC Insured),
5.250% due 07/01/98............................ 250,000
3,700,000 Louisiana State Public Facilities Authority,
Multi-family Housing Revenue (River View
Project), 4.050% due 07/01/07+................. 3,700,000
2,000,000 Louisiana State Recovery District,
Sales Tax Revenue (MBIA Insured),
4.250% due 07/01/98............................ 2,000,000
---------
5,950,000
Maryland -- 2.3%
2,500,000 Anne Arundel County, Maryland, Port Facilities
Revenue, Baltimore Gas & Electicity Company,
3.650% due 07/17/98............................ 2,500,000
200,000 Baltimore, Maryland, Water Utility Revenue
Bonds, Series A (MBIA Insured),
6.650% due 07/01/98............................ 200,000
-------
2,700,000
The accompanying notes are an integral part of these financial statements
76
<PAGE>
--------------------
The Montgomery Funds
--------------------
Federal
Tax-Free Money Fund
--------------------
Investments
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
Massachusetts -- 0.4%
$ 200,000 Franklin, Massachusetts, General
Obligation Bonds (MBIA Insured),
5.000% due 11/15/98..............................$ 200,761
275,000 Massachusetts State, Health and Educational
Facilities Authority Revenue (Lahey Clinic
Medical Center Project), Series A (MBIA
Insured), 7.600% due 07/01/08.................... 280,500
-------
481,261
Michigan -- 3.8%
500,000 Detroit, Michigan, Water Supply System,
Revenue Bonds, 7.875% due 07/01/08............... 510,000
400,000 Kalamazoo, Michigan, City School District,
6.700% due 05/01/99.............................. 409,373
900,000 Michigan Municipal Bond Authority Revenue,
Series A, Refunding, 4.000% due 10/01/98......... 900,424
2,700,000 Michigan State, Hospital Financing Authority,
Equipment Loaning Program, Series A,
3.600% due 12/01/23++............................ 2,700,000
---------
4,519,797
Minnesota -- 1.8%
2,100,000 University of Minnesota, Revenue Bonds,
Series 1997A-144A, 0.000% due 05/18/12++......... 2,100,000
Missouri -- 3.5%
1,070,000 Missouri State, Development Financing
Board, Infrastructure Facilities Revenue
(Sci City Union Station Project), Series C,
3.800% due 12/01/03+............................. 1,070,000
1,500,000 Missouri State, Economic & Industrial
Development, Export & Infrastructure Board,
Series E, 3.750% due 09/01/10++.................. 1,500,000
1,500,000 Missouri State, Health and Educational
Authority, Health Facilities Revenue
(Francis Medical Center), Series A,
4.000% due 06/01/26+............................. 1,500,000
---------
4,070,000
Nevada -- 1.2%
1,400,000 Washoe County, Nevada, Water Facilities
Revenue (Sierra Pacific Power Company
Project), 3.900% due 12/01/20+................... 1,400,000
New Jersey -- 0.7%
New Jersey Wastewater Treatment Revenue
Bonds, Series A (MBIA Insured):
425,000 6.800% due 05/15/99.............................. 435,424
425,000 Prerefunded, 7.000% due 05/15/06................. 443,337
-------
878,761
New Mexico -- 0.7%
200,000 Los Lunas, New Mexico, School District
No. 001, General Obligation Bonds
(FGIC Insured), 6.250% due 07/15/98.............. 200,163
680,000 New Mexico State Hospital, Equipment Loan
Counciling Revenue, Catholic Health
Initiatives, Series A, 4.250% due 12/01/98....... 680,965
-------
881,128
New York -- 4.3%
Nassau County, New York, Sewer Districts
(FGIC Insured):
250,000 Series J, 7.300% due 10/15/98.................... 252,440
245,000 Series P, 6.300% due 11/01/98.................... 246,966
New York State, Dormitory Authority,
Revenue Bonds, Series A:
890,000 City University, Prerefunded,
8.125% due 07/01/07.............................. 907,800
2,545,000 City University, Unrefunded,
8.125% due 07/01/07.............................. 2,595,900
800,000 State University, 7.125% due 05/15/17............ 837,288
250,000 Triborough, New York, Bridge & Tunnel
Authority, Revenue Bonds, Series O,
7.700% due 01/01/19.............................. 258,185
-------
5,098,579
North Carolina -- 0.9%
1,000,000 North Carolina Educational Facilities,
Financing Agency Revenue, Guilford College
(MBIA Insured), 3.600% due 05/01/24++............ 1,000,000
Ohio -- 1.5%
1,400,000 Hamilton, Ohio, Electric Systems Mortgage
Revenue, Series B (FGIC Insured),
8.000% due 10/15/22.............................. 1,444,333
295,000 Montomery, Ohio, General Obligation
Bonds, 7.000% due 12/01/98....................... 298,721
-------
1,743,054
Oregon -- 4.3%
3,000,000 Oregon State, Economic Development Revenue
(Georgia-Pacific Corporation 95A Project),
Series 168, 3.850% due 12/01/25++................ 3,000,000
1,000,000 Oregon State, Economic & Industrial Development
Revenue (Eagle-Picher Industries Project),
3.700% due 12/01/04++............................ 1,000,000
1,000,000 Oregon State, General Obligation Bonds,
Series 73E, 3.500% due 12/01/16++................ 1,000,000
---------
5,000,000
Pennsylvania -- 9.4%
5,000,000 Harrisburg, Pennsylvania, Authority
Revenue Bonds, 3.600% due 07/01/21++............. 5,000,000
540,000 Littleston, Pennsylvania, Area School District,
General Obligation Bonds (FSA Insured),
4.000% due 10/01/98.............................. 540,124
5,000,000 Pennsylvania State Higher Educational
Assistance Agency, Student Loan Revenue,
Series A, 3.700% due 03/01/27++.................. 5,000,000
430,000 Pike County, Pennsylvania, General
Obligation Bonds (AMBAC Insured),
3.700% due 10/01/98.............................. 429,862
-------
10,969,986
Texas -- 17.4%
220,000 Arlington, Texas, Independent School District,
7.000% due 08/15/98.............................. 220,820
Brazos River Authority, Texas,
HBR, Commercial Paper:
2,000,000 3.900% due 07/07/98.............................. 2,000,000
1,500,000 3.850% due 09/04/98.............................. 1,500,000
The accompanying notes are an integral part of these financial statements.
77
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Federal
Tax-Free Money Fund
- --------------------
Investments
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
Texas -- continued
$ 1,200,000 Calhoun County, Texas, Naval Industrial
Development Authority, Port Revenue
(Formosa Plastics Corporation Project) (LOC:
Bank of America), 3.600% due 11/01/15++..........$ 1,200,000
Gulf Coast Waste Disposal Authority,
Environmental Facilities Revenue
(Amoco Oil Company Project):
2,400,000 3.900% due 01/01/26+............................. 2,400,000
1,800,000 3.900% due 01/01/26+............................. 1,800,000
Harris County, Texas, Health Facilities
Development Corporation, Hospital Revenue:
1,300,000 Series B, 3.400% due 06/01/24++.................. 1,300,000
2,500,000 Series C, 3.550% due 07/01/23++.................. 2,500,000
1,000,000 Lower Neches Valley Authority, Texas (Chevron
U.S.A. Inc. Project), 3.450% due 02/15/17+++..... 1,000,000
1,000,000 Mansfield, Texas, Industrial Development
Revenue (Pier 1-Imports, Texas, Inc., Project),
3.750% due 11/01/26++............................ 1,000,000
Port Corpus Christi Authority, Texas,
Nueces County:
1,500,000 Marine Terminal Revenue (Reynolds Metals
Company Project), 3.700% due 09/01/14++.......... 1,500,000
2,500,000 Solid Waste Disposal Revenue
(Koch Refining Company Project),
3.700% due 05/01/26++............................ 2,500,000
1,255,000 San Antonio, Texas, General Obligation
Bonds, Refunding, 8.000% due 08/01/98............ 1,259,245
250,000 Travis County, Texas, General Obligation
Bonds, Series B, Refunding (MBIA Insured),
5.900% due 03/01/99.............................. 253,578
-------
20,433,643
Virginia -- 7.2%
3,700,000 Chesterfield County, Virginia, Industrial
Development Authority, PCR, Virginia Electricity
& Power Company, Commercial Paper,
3.650% due 07/16/98.............................. 3,700,000
3,500,000 King George County, Virginia, Industrial
Development Authority, Exempt Facilities
Revenue (Birchwood Power Partners Project),
Series A, 4.100% due 10/01/24+................... 3,500,000
200,000 Norfolk, Virginia, General Obligation Bonds,
6.600% due 10/01/99.............................. 205,284
1,000,000 Peninsula Ports Authority, Virginia, Coal Term
Revenue Bonds (Dominion Terminal
Association Project), Series D, Refunding,
3.850% due 07/01/16+............................. 1,000,000
---------
8,405,284
Washington -- 9.7%
1,000,000 Port Seattle, Washington, Industrial
Development Corporation Revenue
(Sysco Food Services Project),
Refunding, 3.700% due 11/01/25++................. 1,000,000
1,000,000 Seattle, Washington, General Obligation Bonds,
Series B, Refunding, 4.500% due 09/01/98......... 1,001,373
815,000 Snohomish County, Washington, Everett
School District No. 2, Series A, Refunding
(MBIA Insured), 3.700% due 12/01/98.............. 815,000
Washington State, General Obligation Bonds:
200,000 Series R, Refunding, 5.100% due 09/01/98......... 200,361
150,000 Series R-89B, 7.000% due 09/01/98................ 150,839
1,000,000 Series VR 96A, 3.400% due 06/01/20++............. 1,000,000
Washington State, Housing Finance Commission:
Multi-family Mortgage Revenue:
1,375,000 (Pacific First Federation) Series A,
Refunding, 3.550% due 07/01/20++................. 1,375,000
2,225,000 (Winterhill Apartments Project) Series A,
3.700% due 07/01/28++............................ 2,225,000
Non-Profit Housing Revenue:
2,400,000 (Emerald Heights Project)
4.000% due 01/01/21+............................. 2,400,000
1,250,000 (YMCA Snohomish County Program)
4.300% due 08/01/19++............................ 1,250,000
---------
11,417,573
West Virginia -- 0.4%
500,000 West Virginia School Building Authority,
Revenue Bonds, Capital Improvement
(MBIA Insured), 6.000% due 07/01/98.............. 500,000
Wisconsin -- 2.2%
500,000 Marathon County, Wisconsin, General
Obligation Bonds, Series A, Refunding,
4.150% due 11/01/98.............................. 500,367
275,000 Milwaukee County, Wisconsin, Airport Revenue,
Series A (FGIC Insured), 5.300% due 12/01/98..... 276,452
1,800,000 Sheboygan, Wisconsin, PCR (Wisconsin Power &
Light Company Project), 3.700% due 08/01/14++.... 1,800,000
---------
2,576,819
TOTAL INVESTMENTS -- 112.2%
(At amortized cost*)............................................. 131,623,318
OTHER ASSETS AND LIABILITIES -- (12.2)%
(Net)............................................................ (14,339,848)
-----------
NET ASSETS -- 100.0%.............................................$ 117,283,470
===========
* Aggregate cost for federal tax purposes was $131,623,318.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
+++ Floating-rate note, rate resets monthly.
++++ Floating-rate note, rate resets quarterly.
+++++Floating-rate note, rate resets annually.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
GSL Guaranteed Student Loan
LOC Line of Credit
MBIA Municipal Bond Investors Assurance
PCR Pollution Control Revenue
The accompanying notes are an integral part of these financial statements.
78
<PAGE>
--------------------
The Montgomery Funds
--------------------
Annual Report
--------------------
June 30, 1998
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities.........................................80
Statements of Operations.....................................................86
Statements of Changes in Net Assets..........................................90
Statements of Cash Flows.....................................................94
Financial Highlights.........................................................96
Notes to Financial Statements...............................................104
Independent Auditors' Report................................................118
Tax Information.............................................................119
79
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Statements of
Assets and Liabilities
- ----------------------
June 30, 1998
<TABLE>
<CAPTION>
Growth
Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities ........................................................................................ $1,224,589,518
Repurchase agreements ............................................................................. 157,812,000
--------------
Total Investments .................................................................................... l,382,401,518
Cash ................................................................................................. --
Foreign currency, at value (Cost $1,661,146) ......................................................... --
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward foreign-currency exchange contracts (note 4) ............... --
Cash held as collateral for loaned securities (note 4) ............................................... 24,902,574
Receivables:
Dividends ......................................................................................... 927,710
Interest .......................................................................................... 44,130
Shares of beneficial interest sold ................................................................ 2,418,310
Investment securities sold ........................................................................ 9,885,548
Other Assets:
Deferred organization costs (note 1) .............................................................. 1,428
--------------
Total Assets 1,420,581,218
--------------
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange contracts (note 4) .............. --
Collateral on securities loaned (note 4) ............................................................. 24,902,574
Payables:
Shares of beneficial interest redeemed ........................................................... 1,969,218
Investment securities purchased .................................................................. 9,729,607
Management fees .................................................................................. 308,139
Administration fees .............................................................................. 72,627
Share marketing plan fees (Class P shares only) .................................................. 299
Custodian fees ................................................................................... 34,056
Trustees' fees and expenses ...................................................................... 1,336
Cash overdrafts payable to custodian ............................................................. 17,670
Transfer agency and servicing fees ............................................................... 227,374
Other accrued liabilities and expenses ........................................................... 246,576
--------------
Total Liabilities 37,509,476
--------------
Net Assets $1,383,071,742
--------------
Investments at identified cost ....................................................................... $1,116,121,542
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ................................ $ 4,685,889
Accumulated net realized gain on securities sold, forward foreign-currency
exchange contracts, futures contracts and foreign-currency transactions ........................... 69,662,150
Net unrealized appreciation of investments, forward foreign-currency
exchange contracts. foreign-currency transactions, equity swaps and other assets .................. 266,277,951
Shares of beneficial interest ........................................................................ 583,981
Additional paid-in capital ........................................................................... 1,041,861,771
--------------
Net Assets $1,383,071,742
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares .................................................................................... $1,382,873,827
Class P shares .................................................................................... 197,925
--------------
Net Assets $1,383,071,742
Number of Fund shares outstanding:
Class R shares .................................................................................... 58,389,780
Class P shares .................................................................................... 8,325
--------------
Total Shares 58,398, 105
Class R shares:
Net asset value, offering and redemption price per share outstanding .............................. $ 23.68
--------------
Class P shares:
Net asset value, offering and redemption price per share outstanding .............................. $ 23.77
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
80
<PAGE>
<TABLE>
<CAPTION>
Small Cap Small Cap U.S. Emerging
Assets: Opportunities Fund Growth Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ...................................................................... $202,712,029 $218,438,454 $367,648,114
Repurchase agreements ........................................................... -- 6,744,000 18,826,000
------------ ------------ ------------
Total Investments .................................................................. 202,712,029 225,182,454 386,474,114
Cash ............................................................................... -- 29,893 242
Foreign currency, at value (Cost $1,661,146) ....................................... -- -- --
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward foreign-currency exchange contracts
(note 4) ...................................................................... -- -- --
Cash held as collateral for loaned securities (note 4) ............................. 20,716,176 26,937,550 9,381,029
Receivables:
Dividends ....................................................................... 43,330 21,790 33,525
Interest ........................................................................ -- 21,747 3,176
Shares of beneficial interest sold .............................................. 47,551 188,802 794,241
Investment securities sold ...................................................... 2,626,885 -- 6,286,286
Other Assets:
Deferred organization costs (note 1) ............................................ 6,930 -- 2,194
------------ ------------ ------------
Total Assets ....................................................................... 226,152,901 252,382,236 402,974,807
------------ ------------ ------------
Liabilities:
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange contracts
(note 4) ..................................................................... -- -- --
Collateral on securities loaned (note 4) ....................................... 20,716,176 26,937,550 9,381,029
Payables:
Shares of beneficial interest redeemed ......................................... 433,195 157,472 212,839
Investment securities purchased ................................................ 225,625 143,036 1,074,327
Management fees ................................................................ 33,073 54,399 126,044
Administration fees ............................................................ 11,520 12,543 21,104
Share marketing plan fees (Class P shares only) ................................ 40 33,598 --
Custodian fees ................................................................. 9,315 14,247 13,532
Trustees' fees and expenses .................................................... 1,917 1,336 1,337
Cash overdrafts payable to custodian ........................................... 2,817,399 -- --
Transfer agency and servicing fees ............................................. 98,718 19,064 72,799
Other accrued liabilities and expenses ......................................... 58,196 24,034 98,937
------------ ------------ ------------
Total Liabilities .................................................................. 24,405,174 27,397,279 11,001,948
------------ ------------ ------------
Net Assets ......................................................................... $201,747,727 $224,984,957 $391,972,859
------------ ------------ ------------
Investments at identified cost ..................................................... $159,912,393 $172,742,178 $253,303,979
Net Assets Consist of:
Undistributed net investment income/(accumulated net investment loss) .............. $ -- $ -- $ --
Accumulated net realized gain on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions and
securities sold short ........................................................... 2,759,042 29,994,486 19,428,996
Net unrealized appreciation of investments, forward foreign-currency
exchange contracts. foreign-currency transactions, equity swaps and other assets 42,799,636 52,440,276 133,170,135
Shares of beneficial interest ...................................................... 105,306 108,651 179,071
Additional paid-in capital ......................................................... 156,083,743 142,441,544 239,194,657
------------ ------------ ------------
Net Assets $201,747,727 $224,984,957 $391,972,859
Net Assets:
Class R shares .................................................................. $201,737,621 $203,437,397 $391,972,859
Class P shares .................................................................. 10,106 21,547,560 N/A
------------ ------------ ------------
Net Assets ......................................................................... $201,747,727 $224,984,957 $391,972,859
Number of Fund shares outstanding:
Class R shares .................................................................. 10,530,114 9,815,580 17,907,127
Class P shares .................................................................. 535 1,049,566 N/A
------------ ------------ ------------
Total Shares 10,530,649 10,865,146 l7,907,127
Class R shares:
Net asset value, offering and redemption price per share outstanding ............ $ 19.16 $ 20.73 $ 21.89
------------ ------------ ------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ............ $ 18.89 $ 20.53 N/A
------------ ------------ ------------
<CAPTION>
Equity Income International International
Assets: Fund Growth Fund Small Cap Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ...................................................................... $ 42,751,188 $ 56,674,558 $ 45,710,697
Repurchase agreements ........................................................... 35,000 8,712,000 3,607,000
------------ ------------ ------------
Total Investments .................................................................. 42,786,188 65,386,558 49,317,697
Cash ............................................................................... 3,443 -- --
Foreign currency, at value (Cost $1,661,146) ....................................... -- 1,672,711 --
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward foreign-currency exchange contracts
(note 4) ...................................................................... -- 187,949 --
Cash held as collateral for loaned securities (note 4) ............................. 268,468 6,441,845 3,350,123
Receivables:
Dividends ....................................................................... 103,580 185,433 95,221
Interest ........................................................................ 8 6,045 5,194
Shares of beneficial interest sold .............................................. 22,763 254,466 68,405
Investment securities sold ...................................................... 209,037 164,729 2,698,815
Other Assets:
Deferred organization costs (note 1) ............................................ 3,602 5,568 1,483
------------ ------------ ------------
Total Assets ....................................................................... 43,397,089 74,305,304 55,536,938
------------ ------------ ------------
Liabilities:
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange contracts
(note 4)...................................................................... -- -- 2,393
Collateral on securities loaned (note 4) ....................................... 268,468 6,441,845 3,350,123
Payables:
Shares of beneficial interest redeemed ......................................... 45,976 260 39,991
Investment securities purchased ................................................ -- 2,798,666 552,895
Management fees ................................................................ 41,355 83,342 52,646
Administration fees ............................................................ 2,601 3,713 2,887
Share marketing plan fees (Class P shares only) ................................ 2,740 14 31
Custodian fees ................................................................. 5,208 24,531 13,279
Trustees' fees and expenses .................................................... 1,336 1,336 1,337
Cash overdrafts payable to custodian ........................................... -- 53,315 948,204
Transfer agency and servicing fees ............................................. 18,635 19,227 23,029
Other accrued liabilities and expenses ......................................... 31,845 54,375 54,305
------------ ------------ ------------
Total Liabilities .................................................................. 418,164 9,480,624 5,041,120
------------ ------------ ------------
Net Assets ......................................................................... $ 42,978,925 $ 64,824,680 $ 50,495,818
------------ ------------ ------------
Investments at identified cost ..................................................... $ 38,185,537 $ 56,093,174 $ 45,216,362
Net Assets Consist of:
Undistributed net investment income/(accumulated net investment loss) .............. $ -- $ (133,569) $ (252,194)
Accumulated net realized gain on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions and
securities sold short ........................................................... 3,477,362 1,558,631 284,882
Net unrealized appreciation of investments, forward foreign-currency
exchange contracts. foreign-currency transactions, equity swaps and other assets 4,600,651 9,465,842 4,085,681
Shares of beneficial interest ...................................................... 23,521 34,730 33,360
Additional paid-in capital ......................................................... 34,877,391 53,899,046 46,344,089
------------ ------------ ------------
Net Assets $ 42,978,925 $ 64,824,680 $ 50,495,818
Net Assets:
Class R shares .................................................................. $ 40,259,926 $ 64,819,609 $ 50,490,887
Class P shares .................................................................. 2,718,999 5,071 4,931
------------ ------------ ------------
Net Assets ......................................................................... $ 42,978,925 $ 64,824,680 $ 50,495,818
Number of Fund shares outstanding:
Class R shares .................................................................. 2,203,058 3,472,733 3,335,665
Class P shares .................................................................. 149,015 272 326
------------ ------------ ------------
Total Shares 2,352,073 3,473,005 3,335,991
Class R shares:
Net asset value, offering and redemption price per share outstanding ............ $ 18.27 $ 18.67 $ 15.14
------------ ------------ ------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ............ $ 18.25 $ 18.64 $ 15.13
------------ ------------ ------------
</TABLE>
81
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Statements of
Assets and Liabilities
- ----------------------
J u n e 30 , 1 9 9 8
<TABLE>
<CAPTION>
Emerging
Markets Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities ............................................................................................. $ 743,649,774
Repurchase agreements .................................................................................. 13,220,000
--------------
Total Investments .......................................................................................... 756,869,774
Cash ....................................................................................................... 2,513,544
Foreign currency, at value (Cost $6,057,792, $1,512, $1,015,779, $2,291,073 and $340, respectively) ........ 6,150,914
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward foreign-currency exchange contracts (note 4) .................... --
Cash held as collateral for loaned securities (note 4) ..................................................... --
Receivables:
Dividends .............................................................................................. 2,746,341
Interest ............................................................................................... 37,116
Expenses absorbed by Manager ........................................................................... --
Shares of beneficial interest sold ..................................................................... 1,761,475
Investment securities sold ............................................................................. 4,809,123
Other Assets:
Deferred organization costs (note 1).................................................................... --
--------------
Total Assets ............................................................................................... 774,888,287
--------------
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange contracts (note 4) .................... 4,496
Collateral on securities loaned (note 4) ................................................................... --
Payables:
Equity swaps (note 4) .................................................................................. --
Shares of beneficial interest redeemed ................................................................. 2,805,242
Investment securities purchased ........................................................................ 11,490,060
Management fees ........................................................................................ 205,618
Administration fees .................................................................................... 42,074
Share marketing plan fees (Class P shares only) ........................................................ 1,139
Custodian fees ......................................................................................... 512,862
Trustees' fees and expenses ............................................................................ 991
Cash overdrafts payable to custodian ................................................................... --
Transfer agency and servicing fees ..................................................................... 239,499
Accrued liabilities and expenses ....................................................................... 262,703
--------------
Total Liabilities .......................................................................................... 15,564,684
--------------
Net Assets ................................................................................................. $ 759,323,603
--------------
Investments at identified cost ............................................................................. $ 901,007,778
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ...................................... $ (5,228,216)
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency exchange contracts,
futures contracts, foreign-currency transactions, and equity swaps ..................................... (144,597,752)
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions, equity swaps and other assets ....................... (144,262,482)
Shares of beneficial interest .............................................................................. 770,359
Additional paid-in capital ................................................................................. 1,052,641,694
--------------
Net Assets ................................................................................................. $ 759,323,603
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ......................................................................................... $ 758,911,098
Class P shares ......................................................................................... 412,505
--------------
Net Assets ................................................................................................. $ 759,323,603
Number of Fund shares outstanding:
Class R shares ......................................................................................... 76,993,563
Class P shares ......................................................................................... 42,359
--------------
Total Shares ............................................................................................... 77,035,922
Class R shares:
Net asset value, offering and redemption price per share outstanding .................................... $ 9.86
--------------
Class P shares:
Net asset value, offering and redemption price per share outstanding .................................... $ 9.74
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
82
<PAGE>
<TABLE>
<CAPTION>
Global
Emerging Latin America Opportunities
Assets: Asia Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities .................................................................. $ 21,043,430 $ 4,436,361 $ 92,193,683
Repurchase agreements ....................................................... 2,067,000 32,000 3,581,000
------------ ------------- -------------
Total Investments ............................................................... 23,110,430 4,468,361 95,774,683
Cash ............................................................................ 322,877 328 --
Foreign currency, at value (Cost $6,057,792, $1,512, $1,015,779, $2,291,073 and
$340, respectively) ......................................................... 1,527 -- 1,031,450
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward foreign-currency exchange contracts
(note 4) ................................................................... -- -- --
Cash held as collateral for loaned securities (note 4) ...................... -- -- 16,065,047
Receivables:
Dividends ................................................................... 30,737 14,599 248,812
Interest .................................................................... 430 6 5,171
Expenses absorbed by Manager ................................................ -- -- --
Shares of beneficial interest sold .......................................... 1,032,786 2,637 404,093
Investment securities sold .................................................. 348,702 -- 859,618
Other Assets:
Deferred organization costs (note 1) ........................................ 10,698 5,561 1,450
------------ ------------- -------------
Total Assets .................................................................... 24,858,187 4,491,492 114,390,324
------------ ------------- -------------
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange contracts
(note 5) ................................................................... -- -- 4,723
Collateral on securities loaned (note 4) .................................... -- -- 16,065,047
Payables:
Equity swaps ................................................................ 5,085 -- --
Shares of beneficial interest redeemed ...................................... 142,327 2,000 283,302
Investment securities purchased ............................................. -- -- 1,376,500
Management fees ............................................................. 13,843 1,683 84,973
Administration fees ......................................................... 1,434 238 5,382
Share marketing plan fees (Class P shares only) ............................. -- -- --
Custodian fees .............................................................. 18,913 3,848 25,586
Trustees' fees and expenses ................................................. 1,289 1,212 1,322
Cash overdrafts payable to custodian ........................................ -- -- 36,972
Transfer agency and servicing fees .......................................... 27,037 2,258 25,583
Accrued liabilities and expenses ............................................ 39,895 14,861 69,320
------------ ------------- -------------
Total Liabilities ............................................................... 249,823 26,100 17,978,710
------------ ------------- -------------
Net Assets ...................................................................... $ 24,608,364 $ 4,465,392 $ 96,411,614
------------ ------------- -------------
Investments at identified cost .................................................. $ 36,818,108 $ 5,816,003 $ 82,453,889
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ........... $ (344,172) $ 136,295 $ (259,674)
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions,
securities sold short and equity swaps ........................ (11,989,919) (1,278,365) 2,816,686
Net unrealized appreciation/(depreciation) of investments, forward
foreign-currency exchange contracts, foreign-currency transactions,
equity swaps and other assets ............................................... (13,644,376) (1,347,835) 13,301,635
Shares of beneficial interest ................................................... 39,793 5,089 50,230
Additional paid-in capital ...................................................... 50,547,038 6,950,208 80,502,737
------------ ------------- -------------
Net Assets ...................................................................... $ 24,608,364 $ 4,465,392 $ 96,411,614
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares .............................................................. $ 24,608,364 $ 4,465,392 $ 96,411,614
Class P shares ............................................................. N/A N/A N/A
------------ ------------- -------------
Net Assets ...................................................................... $ 24,608,364 $ 4,465,392 $ 96,411,614
Number of Fund shares outstanding:
Class R shares .............................................................. 3,979,261 508,897 5,022,987
Class P shares .............................................................. N/A N/A N/A
------------ ------------- -------------
Total Shares .................................................................... 3,979,261 508,897 5,022,987
Class R shares:
Net asset value, offering and redemption price per share outstanding ......... $ 6.18 $ 8.77 $ 19.19
------------ ------------- -------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ......... N/A N/A N/A
------------ ------------- -------------
<CAPTION>
Global
Communications Select 50 U.S. Asset
Assets: Fund Fund Allocation Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities .................................................................. $ 258,254,307 $ 257,030,689 $ 128,184,621
Repurchase agreements ....................................................... 2,836,000 24,980,000 --
------------- ------------- -------------
Total Investments ............................................................... 261,090,307 282,010,689 128,184,621
Cash ............................................................................ 2,677 -- 180,081
Foreign currency, at value (Cost $6,057,792, $1,512, $1,015,779, $2,291,073 and
$340, respectively) ......................................................... 2,293,766 160 --
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward foreign-currency exchange contracts
(note 4) ................................................................... -- 142,810 --
Cash held as collateral for loaned securities (note 4) ...................... 37,260,315 -- --
Receivables:
Dividends ................................................................... 306,346 872,132 --
Interest .................................................................... 18,605 4,319 --
Expenses absorbed by Manager ................................................ -- -- 50,459
Shares of beneficial interest sold .......................................... 2,607,038 248,243 --
Investment securities sold .................................................. 2,868,827 10,462,560 56,115
Other Assets:
Deferred organization costs (note 1) ........................................ -- 3,948 5,228
------------- ------------- ------------
Total Assets .................................................................... 306,447,881 293,744,861 128,476,504
------------- ------------- ------------
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange contracts
(note 5) ................................................................... 10,622 -- --
Collateral on securities loaned (note 4) .................................... 37,260,315 -- --
Payables:
Equity swaps ................................................................ -- -- --
Shares of beneficial interest redeemed ...................................... 279,614 326,568 235,549
Investment securities purchased ............................................. 1,351,884 23,159,669 --
Management fees ............................................................. 95,427 101,054 --
Administration fees ......................................................... 15,044 15,341 --
Share marketing plan fees (Class P shares only) ............................. -- 208 201
Custodian fees .............................................................. 106,443 36,117 --
Trustees' fees and expenses ................................................. 1,336 1,336 837
Cash overdrafts payable to custodian ........................................ -- 29,834 --
Transfer agency and servicing fees .......................................... 93,644 234,911 64,492
Accrued liabilities and expenses ............................................ 120,665 121,566 29,430
------------- ------------- -------------
Total Liabilities ............................................................... 39,334,994 24,026,604 330,509
------------- ------------- -------------
Net Assets ...................................................................... $ 267,112,887 $ 269,718,257 $ 128,145,995
------------- ------------- -------------
Investments at identified cost .................................................. $ 174,376,563 $ 251,265,379 $ 128,627,730
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ........... $ (914,375) $ 677,989 $ 1,771,623
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions,
securities sold short and equity swaps ...................................... 9,545,422 12,061,655 19,956,327
Net unrealized appreciation/(depreciation) of investments, forward
foreign-currency exchange contracts, foreign-currency transactions,
equity swaps and other assets ............................................... 86,702,736 30,819,500 (443,109)
Shares of beneficial interest ................................................... 116,731 128,533 67,153
Additional paid-in capital ...................................................... 171,622,373 226,030,580 106,794,001
------------- ------------- -------------
Net Assets ...................................................................... $ 267,112,887 $ 269,718,257 $ 128,145,995
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Class R shares .............................................................. $ 267,112,887 $ 269,666,734 $ 128,075,020
Class P shares .............................................................. N/A 51,523 70,975
------------- ------------- -------------
Net Assets ...................................................................... $ 267,112,887 S 269,718,257 $ 128,145,995
Number of Fund shares outstanding:
Class R shares .............................................................. 11,673,068 12,850,800 6,711,450
Class P shares .............................................................. N/A 2,491 3,714
------------- ------------- -------------
Total Shares .................................................................... 11,673,068 12,853,291 6,715,164
Class R shares:
Net asset value, offering and redemption price per share outstanding ......... $ 22.88 $ 20.98 $ 19.08
------------- ------------- -------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ......... N/A $ 20.68 $ 19.11
------------- ------------- -------------
</TABLE>
83
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Statements of
Assets and Liabilities
- -----------------------
June 30, 1998
<TABLE>
<CAPTION>
Total Return
Bond Fund
Assets:
- --------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities ............................................... $ 83,663,575
Repurchase agreements .................................... 1,209,000
------------
Total Investments ............................................ 84,872,575
Cash ......................................................... 1,426
Receivables:
Dividends
Interest ................................................. 906,003
Expenses absorbed by Manager .............................
Shares of beneficial interest sold ....................... 696
Investment securities sold ............................... 2,710,121
Sale of investments under dollar roll agreements ......... 7,969
Receivable for short futures ............................. --
Other Assets:
Deferred organization costs (note 1) 14,501
------------
Total Assets 88,513,291
------------
Liabilities
- --------------------------------------------------------------------------------
Payables:
Deferred fee income on dollar roll transactions .............. 763
Deferred gain on dollar roll transactions ................ 7,969
Shares of beneficial interest redeemed ................... 95,152
Investment securities purchased .......................... 3,699,396
Reverse repurchase agreements ............................ 6,908,738
Management fees .......................................... 41,973
Administration fees ...................................... 3,152
Custodian fees ........................................... 3747
Dividends ................................................ 1,652
Trustees' fees and expenses .............................. 1,212
Cash overdrafts payable to custodian ..................... --
Transfer agency and servicing fees ....................... 2,124
Purchase of investments under dollar roll agreements ..... --
Accrued liabilities and expenses ......................... 53,653
------------
Total Liabilities 10,819,531
------------
Net Assets $ 77,693,760
------------
Investments at identified cost ............................... $ 83,039,185
Net Assets Consist of:
- --------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net
investment loss) ............................................ $ (1,652)
Accumulated net realized gain/(loss) on securities sold,
futures contracts and dollar roll agreements ............... 1,407,391
Net unrealized appreciation of investments, dollar roll
agreements and other assets ................................. 1,833,390
Shares of beneficial interest ................................ 62,469
Additional paid-in capital ................................... 74,392,162
------------
Net Assets $ 77,693,760
Net Assets:
- --------------------------------------------------------------------------------
Class R shares ........................................... $ 77,693,760
Class P shares ........................................... N/A
------------
Net Assets ................................................... $ 77,693,760
Number of Fund shares outstanding:
Class R shares ........................................... 6,246,885
Class P shares ........................................... N/A
------------
Total Shares ................................................. 6,246,885
Class R shares:
Net asset value, offering and redemption
price per share outstanding ............................. $ 12.44
------------
Class P shares:
Net asset value, offering and redemption
price per share outstanding ............................. N/A
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
84
<PAGE>
<TABLE>
<CAPTION>
Short Duration California Tax-Free
Government Intermediate Government
Bond Fund Bond Fund Reserve Fund
Assets:
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ............................................... $ 70,371,351 $ 37,505,775 $ 419,043,456
Repurchase agreements .................................... 3,822,000 -- 306,842,000
------------- ------------- -------------
Total Investments ............................................ 74,193,351 37,505,775 725,885,456
Cash ......................................................... 545,341 70,410 17,891
Receivables:
Dividends ................................................ -- -- --
Interest ................................................. 521,865 577,560 5,178,653
Expenses absorbed by Manager ............................. -- -- --
Shares of beneficial interest sold ....................... 614,134 760 20,961,048
Investment securities sold ............................... 174,771 -- 4,936
Sale of investments under dollar roll agreements ......... 19,687 -- --
Receivable for short futures ............................. 2,900 -- --
Other Assets:
Deferred organization costs (note 1) .................... -- -- --
------------- ------------- -------------
Total Assets ................................................. 76,072,049 38,154,505 752,047,984
------------- ------------- -------------
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------
Payables:
Deferred fee income on dollar roll transactions .............. 2,036 -- --
Deferred gain on dollar roll transactions ................ 21,250 -- --
Shares of beneficial interest redeemed ................... 56,454 500,000 26,923,651
Investment securities purchased .......................... 4,581,852 1,919,129 27,992,828
Reverse repurchase agreements ............................ 4,934,813 -- --
Management fees .......................................... 15,356 21,172 56,570
Administration fees ...................................... 2,594 1,463 26,475
Custodian fees ........................................... 4,061 1,026 14,073
Dividends ................................................ 49,586 2,014 117
Trustees' fees and expenses .............................. 1,336 1,336 2,918
Cash overdrafts payable to custodian ..................... -- -- --
Transfer agency and servicing fees ....................... 12,196 3,929 95,628
Purchase of investments under dollar roll agreements ..... -- -- --
Accrued liabilities and expenses ......................... 30,248 37,617 309,644
------------- ------------- -------------
Total Liabilities ............................................ 9,711,782 2,487,686 27,428,959
------------- ------------- -------------
Net Assets ................................................... $ 66,360,267 $ 35,666,819 $ 724,619,025
------------- ------------- -------------
Investments at identified cost ............................... $ 73,982,837 $ 36,612,246 $ 725,885,456
Net Assets Consist of:
Undistributed net investment income/(accumulated net
investment loss) ............................................ $ -- $ 1,374 $ (303)
Accumulated net realized gain/(loss) on securities sold,
futures contracts, dollar roll agreements and securities
sold short .................................................. 369,768 (17,719) (26,092)
Net unrealized appreciation of investments, dollar roll
agreements and other assets ................................. 210,514 893,529 --
Shares of beneficial interest ................................ 65,424 27,744 7,246,342
Additional paid-in capital ................................... 65,714,561 34,761,891 717,399,078
------------- ------------- -------------
Net Assets ................................................... $ 66,360,267 $ 35,666,819 $ 724,619,025
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------
Class R shares ............................................ $ 66,357,267 $ 35,666,819 $ 724,619,022
Class P shares ............................................ 3,000 N/A 3
------------- ------------- -------------
Net Assets ................................................... $ 66,360,267 35,666,819 $ 724,619,025
Number of Fund shares outstanding:
Class R shares ............................................ 6,542,070 2,774,418 724,634,224
Class P shares ............................................ 296 N/A 3
------------- ------------- -------------
Total Shares ................................................. 6,542,366 2,774,418 724,634,227
Class R shares:
Net asset value, offering and redemption
price per share outstanding .............................. $ 10.14 $ 12.86 $ 1.00
------------- ------------- -------------
Class P shares:
Net asset value, offering and redemption
price per share outstanding .............................. $ 10.14 N/A 1.00
------------- ------------- -------------
<CAPTION>
California Federal
Tax-Free Tax-Free
Money Fund Money Fund
Assets:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (note 1)
<S> <C> <C>
Securities ............................................. $ 209,313,745 $ 131,623,318
Repurchase agreements .................................. -- --
------------- -------------
Total Investments .......................................... 209,313,745 131,623,318
Cash ....................................................... 4,381,577 --
Receivables:
Dividends .............................................. -- --
Interest ............................................... 1,639,188 1,039,543
Expenses absorbed by Manager ........................... -- --
Shares of beneficial interest sold ..................... 32,063 1,900
Investment securities sold ............................. -- --
Sale of investments under dollar roll agreements ....... -- --
Receivable for short futures ........................... -- --
Other Assets:
Deferred organization costs (note 1) .................. -- 2,0001
------------- -------------
Total Assets ............................................... 215,366,573 132,666,762
------------- -------------
Liabilities
- ----------------------------------------------------------------------------------------------------
Payables:
Deferred fee income on dollar roll transactions ............ -- --
Deferred gain on dollar roll transactions .............. -- --
Shares of beneficial interest redeemed ................. 2,279
Investment securities purchased ........................ 12,082,009
Reverse repurchase agreements ..........................
Management fees ........................................ 75,542 77,340
Administration fees .................................... 7,792 4,948
Custodian fees ......................................... 7599 7,968
Dividends .............................................. 219
Trustees' fees and expenses ............................ 2,872 2,769
Cash overdrafts payable to custodian ................... -- 3,184,532
Transfer agency and servicing fees ..................... 6,232 5,679
Purchase of investments under dollar roll agreements ... -- --
Accrued liabilities and expenses ....................... 55,255 17,828
------------- -------------
Total Liabilities .......................................... 28,150,516 15,383,292
------------- -------------
Net Assets ................................................. $ l87,216,057 $ 117,283,470
------------- -------------
Investments at identified cost ............................. $ 209,313,745 $ 131,623,318
Net Assets Consist of:
- ----------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net
investment loss) .......................................... $ (113) $ (219)
Accumulated net realized gain/(loss) on securities sold,
futures contracts, dollar roll agreements and securities
sold short ................................................ (6,767) (1,054)
Net unrealized appreciation of investments, dollar roll
agreements and other assets ............................... -- --
Shares of beneficial interest .............................. 1,872,237 1,172,849
Additional paid-in capital ................................. 185,350,700 116,111,894
------------- -------------
Net Assets ................................................. $ 187,216,057 $ 117,283,470
Net Assets:
- ----------------------------------------------------------------------------------------------------
Class R shares .......................................... $ l87,216,057 $ 117,283,470
Class P shares .......................................... N/A N/A
------------- -------------
Net Assets ................................................. $ l87,216,057 $ 117,283,470
Number of Fund shares outstanding:
Class R shares .......................................... 187,223,714 117,284,912
Class P shares .......................................... N/A N/A
------------- -------------
Total Shares ............................................... 187,223,714 117,284,912
Class R shares:
Net asset value, offering and redemption
price per share outstanding ............................ $ 1.00 $ 1.00
------------- -------------
Class P shares:
Net asset value, offering and redemption
price per share outstanding ............................ N/A N/A
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
85
<PAGE>
- ------------------------
The Montgomery Funds
- ------------------------
Statements of Operations
- ------------------------
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Growth Small Cap Small Cap
Fund Opportunities Fund Fund
Net Investment Income:
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest ............................................................. $ 13,525,540 $ 429,354 $ 27,261
Dividends (net of foreign withholding taxes) ......................... 12,123,532 502,369 613,653
Miscellaneous income (note 4)......................................... 321,339 143,982 571,918
------------- ------------ ------------
Total Income 25,970,411 1,075,705 1,212,832
------------- ------------ ------------
Expenses:
Management fee (note 2) .............................................. 12,414,444 3,268,221 2,244,080
Custodian fee ........................................................ 87,784 26,050 36,174
Transfer agency and servicing fees ................................... 1,833,299 500,715 137,410
Administration fee (note 2) .......................................... 868,583 166,453 157,086
Share marketing plan fee (note 3) (Class P shares only) .............. 470 29 40,656
Legal and audit fees ................................................. 124,778 39,196 49,145
Trustees' fees ....................................................... 6,236 5,801 4,212
Registration fees .................................................... 113,918 22,517 13,239
Accounting expenses .................................................. 375,344 72,559 67,348
Printing fees ........................................................ 361,315 103,746 58,790
Amortization of organization expenses (note 1) ....................... 5,199 2,560 --
Other ................................................................ 73,464 17,987 13,976
Tax expense .......................................................... -- -- --
Interest expense ..................................................... 73,088 10,647 9,490
------------- ------------ ------------
Total Expenses ....................................................... 16,337,922 4,236,481 2,831,606
Fees deferred and/or expenses absorbed by Manager (note 2) ........... -- (658,481) --
------------- ------------ ------------
Net Expenses 16,337,922 3,578,000 2,831,606
------------- ------------ ------------
Net Investment Income/(Loss) 9,632,489 (2,502,295) (1,618,774)
------------- ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments:
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions and swaps ................................. 164,932,110 26,422,640 42,779,392
Forward foreign-currency exchange contracts ....................... -- -- --
Futures contracts ................................................. -- -- --
Foreign-currency transactions and other assets .................... (682) -- --
------------- ------------ ------------
Net Realized Gain/(Loss) on Investments 164,931,428 26,422,640 42,779,392
------------- ------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities and swaps............................................... 31,013,797 930,153 4,803,792
Forward foreign-currency exchange contracts ....................... -- -- --
Foreign-currency transactions and other assets .................... (1,837) -- --
------------- ------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments ............ 31,011,960 930,153 4,803,792
------------- ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments 195,943,388 27,352,793 47,583,184
------------- ------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations $ 205,575,877 $ 24,850,498 $ 45,964,410
------------- ------------ ------------
Foreign withholding taxes ............................................ $ 108,322 $ -- $ --
------------- ------------ ------------
</TABLE>
*Montgomery Latin America Fund commenced operations on June 30, 1997.
The accompanying notes are an integral part of these financial statements.
86
<PAGE>
<TABLE>
<CAPTION>
U.S. Emerging Equity Income International
Growth Fund Fund Growth Fund
Net Investment Income:
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest ............................................................. $ 1,444,190 $ 91,298 $ 182,058
Dividends (net of foreign withholding taxes) ......................... 1,208,829 1,372,181 564,162
Miscellaneous income ................................................. 79,800 2,338 29,421
------------- ------------- -------------
Total Income 2,732,819 1,465,817 775,641
------------- ------------- -------------
Expenses:
Management fee (note 2) .............................................. 4,997,558 427,314 626,903
Custodian fee ........................................................ 30,674 10,199 49,382
Transfer agency and servicing fees ................................... 329,401 101,769 61,349
Administration fee (note 2) .......................................... 250,482 32,314 29,195
Share marketing plan fee (note 3) (Class P shares only) .............. -- 4,411 13
Legal and audit fees ................................................. 44,643 18,580 29,389
Trustees' fees ....................................................... 4,451 4,091 4,073
Registration fees .................................................... 19,420 16,381 22,882
Accounting expenses .................................................. 112,317 13,204 26,492
Printing fees ........................................................ 60,000 7,231 8,619
Amortization of organization expenses (note 1) ....................... 1,346 2,643 404
Other ................................................................ 20,565 4,828 9,454
Tax expense .......................................................... -- -- 3,628
Interest expense ..................................................... 19,867 2,464 2,631
------------- ------------- -------------
Total Expenses 5,890,724 645,429 874,414
Fees deferred and/or expenses absorbed by Manager (note 2) ........... -- (246,077) (189,698)
------------- ------------- -------------
Net Expenses 5,890,724 399,352 684,716
------------- ------------- -------------
Net Investment Income/(Loss) (3,157,905) 1,066,465 90,925
------------- ------------- -------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) from:
Securities transactions and swaps ................................. 28,785,885 5,353,093 2,196,932
Forward foreign-currency exchange contracts ....................... -- -- (204,594)
Futures contracts ................................................. -- -- --
Foreign-currency transactions and other assets .................... -- -- (65,539)
------------- ------------- -------------
Net Realized Gain/(Loss) on Investments 28,785,885 5,353,093 1,926,799
------------- ------------- -------------
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................................ 44,225,233 165,897 6,014,793
Forward foreign-currency exchange contracts ....................... -- -- 190,135
Foreign-currency transactions and other assets .................... -- -- (14,252)
------------- ------------- -------------
Net Unrealized Appreciation/(Depreciation) of Investments 44,225,233 165,897 6,190,676
------------- ------------- -------------
Net Realized and Unrealized Gain/(Loss) on Investments 73,011,118 5,518,990 8,117,475
------------- ------------- -------------
Net Increase/(Decrease) in Net Assets Resulting from Operations $ 69,853,213 $ 6,585,455 $ 8,208,400
------------- ------------- -------------
Foreign withholding taxes ............................................ $ -- $ -- $ 65,317
------------- ------------- -------------
<CAPTION>
International Emerging Emerging
Small Cap Fund Markets Fund Asia Fund
Net Investment Income:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest ............................................................. $ 215,001 $ 1,976,456 $ 275,646
Dividends (net of foreign withholding taxes) ......................... 639,718 21,509,901 648,004
Miscellaneous income ................................................. 36,202 13,344 --
------------- -------------- -------------
Total Income 890,921 23,499,701 923,650
------------- -------------- -------------
Expenses:
Management fee (note 2) .............................................. 893,323 11,315,548 643,231
Custodian fee ........................................................ 45,888 1,764,392 75,005
Transfer agency and servicing fees ................................... 97,648 2,076,136 117,994
Administration fee (note 2) .......................................... 33,023 666,433 30,353
Share marketing plan fee (note 3) (Class P shares only) .............. 536 1,431 --
Legal and audit fees ................................................. 38,808 129,999 37,164
Trustees' fees ....................................................... 4,103 5,501 4,093
Registration fees .................................................... 13,006 74,250 14,524
Accounting expenses .................................................. 33,900 640,146 26,355
Printing fees ........................................................ 10,235 365,000 18,179
Amortization of organization expenses (note 1) ....................... 5,401 -- 6,643
Other ................................................................ 7,561 91,915 7,854
Tax expense .......................................................... 2,117 466,952 --
Interest expense ..................................................... 8,566 52,941 1,992
------------- -------------- -------------
Total Expenses 1,194,115 17,650,644 983,387
Fees deferred and/or expenses absorbed by Manager (note 2) ........... (286,566) -- (157,217)
------------- -------------- -------------
Net Expenses 907,549 17,650,644 826,170
------------- -------------- -------------
Net Investment Income/(Loss) (16,628) 5,849,057 97,480
------------- -------------- -------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) from:
Securities transactions and swaps ................................. 4,030,776 (130,353,184) (11,237,571)
Forward foreign-currency exchange contracts ....................... (53,137) (4,976,219) (405,833)
Futures contracts ................................................. -- -- 9,603
Foreign-currency transactions and other assets .................... (92,729) (7,842,199) (288,160)
------------- -------------- -------------
Net Realized Gain/(Loss) on Investments 3,884,910 (143,171,602) (11,921,961)
------------- -------------- -------------
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................................ (2,283,730) (370,009,477) (23,182,679)
Forward foreign-currency exchange contracts ....................... 3,418 37,508 264
Foreign-currency transactions and other assets .................... (10,983) 177,780 (372,206)
------------- -------------- -------------
Net Unrealized Appreciation/(Depreciation) of Investments (2,291,295) (369,794,189) (23,554,621)
------------- -------------- -------------
Net Realized and Unrealized Gain/(Loss) on Investments 1,593,615 (512,965,791) (35,476,582)
------------- ------------- -------------
Net Increase/(Decrease) in Net Assets Resulting from Operations $ 1,576,987 $(507,116,734) $ (35,379,102)
------------- -------------- -------------
Foreign withholding taxes ............................................ $ 66,993 $ 1,379,694 $ 46,099
------------- -------------- -------------
<CAPTION>
Latin America
Fund*
Net Investment Income:
- -----------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest ............................................................. $ 6,863
Dividends (net of foreign withholding taxes) ......................... 248,811
Miscellaneous income ................................................. --
-------------
Total Income 255,674
-------------
Expenses:
Management fee (note 2) .............................................. 92,848
Custodian fee ........................................................ 15,000
Transfer agency and servicing fees ................................... 25,401
Administration fee (note 2) .......................................... 5,201
Share marketing plan fee (note 3) (Class P shares only) .............. --
Legal and audit fees ................................................. 31,951
Trustees' fees ....................................................... 4,944
Registration fees .................................................... 13,772
Accounting expenses .................................................. 4,714
Printing fees ........................................................ 8,566
Amortization of organization expenses (note 1) ....................... 1,389
Other ................................................................ 2,673
Tax expense .......................................................... 19,612
Interest expense ..................................................... --
-------------
Total Expenses 226,071
Fees deferred and/or expenses absorbed by Manager (note 2)............ (206,462)
-------------
Net Expenses 19,609
-------------
Net Investment Income/(Loss) 236,065
-------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) from:
Securities transactions and swaps ................................. (1,180,851)
Forward foreign-currency exchange contracts ....................... (16,424)
Futures contracts ................................................. --
Foreign-currency transactions and other assets .................... 979
-------------
Net Realized Gain/(Loss) on Investments (1,196,296)
-------------
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................................ (1,347,642)
Forward foreign-currency exchange contracts ....................... --
Foreign-currency transactions and other assets .................... (193)
-------------
Net Unrealized Appreciation/(Depreciation) of Investments (1,347,835)
-------------
Net Realized and Unrealized Gain/(Loss) on Investments (2,544,131)
-------------
Net Increase/(Decrease) in Net Assets Resulting from Operations $ (2,308,066)
-------------
Foreign withholding taxes ............................................ $ 13,485
-------------
</TABLE>
*Montgomery Latin America Fund commenced operations on June 30, 1997.
The accompanying notes are an integral part of these financial statements.
87
<PAGE>
- ------------------------
The Montgomery Funds
- ------------------------
Statements of Operations
- ------------------------
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Global Global
Opportunities Communications Select 50
Net Investment Income: Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest ................................................. $ 131,518 $ 224,893 $ 997,927
Dividends (net of foreign withholding taxes) ............. 788,745 1,601,077 4,808,381
Miscellaneous income (note 4)............................. 48,360 134,928 --
------------ ------------ ------------
Total Income ............................................. 968,623 l,960,898 5,806,308
Expenses:
Management fee (note 2) .................................. 833,421 2,423,093 3,130,440
Custodian fee ............................................ 54,797 226,124 102,148
Transfer agency and servicing fees ....................... 98,538 394,390 578,917
Administration fee (note 2) .............................. 34,872 127,310 169,530
Share marketing plan fee (note 3) (Class P shares only) .. -- -- 162
Legal and audit fees ..................................... 35,035 53,061 43,785
Trustees' fees ........................................... 4,068 4,420 4,428
Registration fees ........................................ 28,950 30,093 56,440
Accounting fees .......................................... 34,601 118,147 161,222
Printing fees ............................................ 11,323 56,705 93,782
Amortization of organization expenses (note 1) ........... 5,289 9,602 1,742
Other .................................................... 9,234 12,340 13,000
Tax expense .............................................. 8,280 31,261 22,976
Interest expense ......................................... 21,936 27,606 11,684
------------ ------------ ------------
Total Expenses ........................................... l,180,344 3,514,152 4,390,256
Fees deferred and/or expenses absorbed by
Manager (note 2) ..................................... (203,595) -- --
------------ ------------ ------------
Net Expenses ............................................. 976,749 3,514,152 4,390,256
------------ ------------ ------------
Net Investment Income/(Loss) ............................. (8,126) (1,553,254) 1,416,052
Net Realized and Unrealized Gain/(Loss) on Investments:
- -------------------------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions .............................. 4,459,585 17,263,494 24,489,437
Forward foreign-currency exchange contracts .......... (248,008) (519,663) (374,550)
Futures contracts .................................... -- -- --
Foreign-currency transactions ........................ 6,605 (183,327) (494,769)
Capital-gain distributions received .................. -- -- --
------------ ------------ ------------
Net Realized Gain/(Loss) on Investments .................. 4,218,182 16,560,504 23,620,118
------------ ------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................... 8,831,416 53,637,548 3,868,069
Forward foreign-currency exchange contracts .......... (3,895) (7,768) 151,269
Foreign-currency transactions and net other assets ... (13,897) 11,377 (28,488)
------------ ------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments. 8,813,624 53,641,157 3,990,850
------------ ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments ... 13,031,806 70,201,661 27,610,968
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ..... $ 13,023,680 $ 68,648,407 $ 29,027,020
------------ ------------ ------------
Foreign withholding taxes ................................ $ 108,030 $ 147,613 $ 139,452
------------ ------------ ------------
</TABLE>
* Montgomery Total Return Bond Fund commenced operations on June 30, 1997.
The accompanying notes are an integral part of these financial statements.
88
<PAGE>
<TABLE>
<CAPTION>
Short Duration California Tax-Free
U.S. Asset Total Return Government Intermediate
Net Investment Income: Allocation Fund Bond Fund* Bond Fund Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest ................................................. $ -- $ 5,492,037 $ 3,758,777 $ 1,373,440
Dividends (net of foreign withholding taxes) ............. 4,566,573 -- -- --
Miscellaneous income ..................................... -- -- -- --
------------ ------------ ------------ ------------
Total Income ............................................. 4,566,573 5,492,037 3,758,777 1,373,440
Expenses:
Management fee (note 2) .................................. -- 386,758 269,242 235,081
Custodian fee ............................................ -- 10,673 9,047 3,300
Transfer agency and servicing fees ....................... 284,134 9,767 62,309 18,200
Administration fee (note 2) .............................. -- 38,676 26,924 14,557
Share marketing plan fee (note 3) (Class P shares only) .. 196 -- 2 --
Legal and audit fees ..................................... 15,723 25,941 16,548 21,305
Trustees' fees ........................................... 5,595 4,912 4,065 4,038
Registration fees ........................................ 32,530 64,415 20,563 6,559
Accounting fees .......................................... 10,235 21,399 17,363 8,698
Printing fees ............................................ 51,956 8,618 13,646 5,043
Amortization of organization expenses (note 1) ........... 6,404 3,621 4,278 8,497
Other .................................................... 4,504 4,202 16,261 18,284
Tax expense .............................................. -- -- -- --
Interest expense ......................................... 15,784 455,766 470,093 1,483
------------ ------------ ------------ ------------
Total Expenses ........................................... 427,061 1,034,748 930,341 345,045
Fees deferred and/or expenses absorbed by
Manager (note 2) ..................................... (71,778) (37,741) (309,397) (145,588)
------------ ------------ ------------ ------------
Net Expenses ............................................. 355,283 997,007 620,944 199,457
------------ ------------ ------------ ------------
Net Investment Income/(Loss) ............................. 4,211,290 4,495,030 3,137,833 1,173,983
Net Realized and Unrealized Gain/(Loss) on Investments:
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions .............................. 257,804 2,096,815 662,559 114,279
Forward foreign-currency exchange contracts .......... -- -- -- --
Futures contracts .................................... -- 27,946 8,438 --
Foreign-currency transactions ........................ -- -- -- --
Capital-gain distributions received .................. 29,162,297 -- -- --
------------ ------------ ------------ ------------
Net Realized Gain/(Loss) on Investments .................. 29,420,101 2,124,761 670,997 114,279
------------ ------------ ------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................... (15,356,094) 1,833,390 78,579 462,957
Forward foreign-currency exchange contracts .......... -- -- -- --
Foreign-currency transactions and net other assets ... -- -- -- --
------------ ------------ ------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments. (15,356,094) 1,833,390 78,579 462,957
------------ ------------ ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments ... 14,064,007 73,958,l5l 749,576 577,236
------------ ------------ -------------
Net Increase in Net Assets Resulting from Operations ..... $ 18,275,297 $ 8,453,181 $ 3,887,409 $ 1,751,219
------------ ------------ ------------ ------------
Foreign withholding taxes ................................ $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
<CAPTION>
California Federal
Government Tax-Free Tax-Free
Net Investment Income: Reserve Fund Money Fund Money Fund
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest ................................................. $ 36,643,502 $ 6,260,114 $ 4,574,839
Dividends (net of foreign withholding taxes) ............. -- -- --
Miscellaneous income ..................................... -- -- --
------------ ------------ ------------
Total Income ............................................. 36,643,502 6,260,114 4,574,839
Expenses:
Management fee (note 2) .................................. 2,147,103 886,895 783,661
Custodian fee ............................................ 42,059 25,052 17,384
Transfer agency and servicing fees ....................... 240,515 28,732 22,056
Administration fee (note 2) .............................. 283,260 88,361 62,074
Share marketing plan fee (note 3) (Class P shares only) .. -- -- --
Legal and audit fees ..................................... 58,530 25,395 19,000
Trustees' fees ........................................... 4,448 5,625 5,501
Registration fees ........................................ 173,295 21,471 30,339
Accounting fees .......................................... 209,006 52,914 37,807
Printing fees ............................................ 149,076 33,953 19,500
Amortization of organization expenses (note 1) ........... 1,771 906 1,086
Other .................................................... 96,496 23,675 12,871
Tax expense .............................................. -- -- --
Interest expense ......................................... -- -- --
------------ ------------ ------------
Total Expenses ........................................... 3,405,559 1,192,979 1,011,279
Fees deferred and/or expenses absorbed by
Manager (note 2) ..................................... -- (168,617) (265,710)
------------ ------------ ------------
Net Expenses ............................................. 3,405,559 1,024,362 745,569
------------ ------------ ------------
Net Investment Income/(Loss) ............................. 33,237,943 5,235,752 3,829,270
Net Realized and Unrealized Gain/(Loss) on Investments:
- ---------------------------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions .............................. 36,767 (23) 670
Forward foreign-currency exchange contracts .......... -- -- --
Futures contracts .................................... -- -- --
Foreign-currency transactions ........................ -- -- --
Capital-gain distributions received .................. -- -- --
------------ ------------ ------------
Net Realized Gain/(Loss) on Investments .................. 36,767 (23) 670
------------ ------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities ............................................ -- -- --
Forward foreign-currency exchange contracts ........... -- -- --
Foreign-currency transactions and net other assets .... -- -- --
------------ ------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments. -- -- --
------------ ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments ... 36,767 (23) 670
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ..... $ 33,274,710 $ 5,235,729 $ 3,829,940
------------ ------------ ------------
Foreign withholding taxes ................................ $ -- $ -- $ --
------------ ------------ ------------
</TABLE>
89
<PAGE>
- ------------------------
The Montgomery Funds
- ------------------------
Statements of
Changes in Net Assets
- ------------------------
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Growth Small Cap Small Cap
Increase/(Decrease) in Net Assets from Operations: Fund Opportunities Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) .............................................. $ 9,632,489 $ (2,502,295) $ (1,618,774)
Net realized gain/(loss) on securities, forward
foreign-currency exchange contracts, futures
contracts, securities sold short, equity swaps
and foreign-currency transactions during the year ...................... 164,931,428 26,422,640 42,779,392
Net unrealized appreciation/(depreciation) of
securities, forward foreign-currency exchange
contracts, equity swaps,
foreign-currency transactions and net other
assets during the year ................................................. 31,021,960 930,153 4,803,792
Net Increase/(Decrease) in Net Assets Resulting from Operations ........... 205,575,877 24,850,498 45,964,410
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net
investment income:
Class R shares ......................................................... (8,102,760) -- --
Class P shares ......................................................... (591) -- --
Distributions to shareholders in excess of net
investment income:
Glass R shares ......................................................... -- -- --
Class P shares ......................................................... -- -- --
Distributions to shareholders from net realized
gains on investments:
Class R shares ......................................................... (160,149,883) (5,324,651) (27,244,989)
Class P shares ......................................................... (20,125) (256) (2,828,409)
------------- ------------ -------------
Total distributions ....................................................... (168,273,359) (5,324,907) (30,073,398)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares ......................................................... 208,241,016 (44,104,914) (10,805,049)
Class P shares ......................................................... (27,257) (680) 14,944,224
Net Increase/(Decrease) in Net Assets ..................................... 245,516,277 (24,580,003) 20,030,187
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of Year ......................................................... 1,137,555,465 226,327,730 204,954,770
End of Year ............................................................... $ 1,383,071,742 $ 201,747,727 $ 224,984,957
Accumulated Undistributed Net Investment lncome/
(Accumulated Net Investment Loss)....................................... $ 4,685,889 $ -- $ --
</TABLE>
* Montgomery Latin America Fund commenced operations on June 30, 1997.
<TABLE>
<CAPTION>
Global Global
Opportunities Communications Select 50
Increase/(Decrease) in Net Assets from Operations: Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) .............................................. $ (8,126) $ (1,553,254) $ 1,416,052
Net realized gain/(loss) on securities, futures contracts,
and foreign-currency transactions during the year ..................... 4,218,182 16,560,504 23,620,118
Net unrealized appreciation/(depreciation) of securities,
foreign-currency transactions and net other assets during the year .... 8,813,624 53,641,157 3,990,850
Net Increase in Net Assets Resulting from Operations ...................... 13,023,680 68,648,407 29,027,020
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 ....................................................... -- -- --
Class P shares ....................................................... -- -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ....................................................... (4,796,210) (29,194,471) (20,659,018)
Class P shares ....................................................... -- -- (7,288)
------------- ------------ -------------
Total distributions ....................................................... (4,796,210) (29,194,471) (20,666,306)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares ....................................................... 55,813,221 73,703,850 88,793,607
Class P shares ....................................................... -- -- 45,960
Net Increase in Net Assets ................................................ 64,040,691 113,157,786 97,200,281
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of Year ......................................................... 32,370,923 153,955,101 172,517,976
End of Year ............................................................... $ 96,411,614 $ 267,112,882 $ 269,718,257
Accumulated Undistributed Net Investment lncome/
(Accumulated Net Investment Loss) ...................................... $ (259,674) $ (914,375) $ 677,989
</TABLE>
** Montgomery Total Return Bond Fund commenced operations on June 30, 1997.
The accompanying notes are an integral part of these financial statements.
90
<PAGE>
<TABLE>
<CAPTION>
U.S. Emerging Equity Income International
Increase/(Decrease) in Net Assets from Operations: Growth Fund Fund Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) .............................................. $ (3,157,905) $ 1,066,465 $ 90,925
Net realized gain/(loss) on securities, forward
foreign-currency exchange contracts, futures
contracts, securities sold short, equity swaps
and foreign-currency transactions during the year ...................... 28,785,885 5,353,093 1,926,799
Net unrealized appreciation/(depreciation) of
securities forward foreign-currency exchange
contracts, securities sold short, equity swaps,
foreign-currency transactions and net other
assets during the year ................................................. 44,225,233 165,897 6,190,676
Net Increase/(Decrease) in Net Assets Resulting from Operations ........... 69,853,213 6,585,455 8,208,400
Distributions to Shareholders:
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net
investment income:
Class R shares ......................................................... -- (1,024,731) (49,520)
Class P shares ......................................................... -- (41,734) --
Distributions to shareholders in excess of net
investment income:
Glass R shares ......................................................... -- -- (479)
Class P shares ......................................................... -- -- --
Distributions to shareholders from net realized
gains on investments:
Class R shares ......................................................... (19,493,315) (4,032,302) (2,206,214)
Class P shares ......................................................... -- (153,692) (291)
------------- ------------ ------------
Total distributions ....................................................... (19,493,315) (5,252,459) (2,256,504)
Beneficial Interest Transactions:
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ......................................................... 23,801,277 347,785 24,956,111
Class P shares ......................................................... -- 1,835,636 (1,025)
Net Increase/(Decrease) in Net Assets ..................................... 74,161,175 3,516,417 30,906,982
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning of Year ......................................................... 317,811,684 39,462,508 33,917,698
End of Year ............................................................... $ 391,972,859 $ 42,978,925 $ 64,824,680
Accumulated. Undistributed Net Investment lncome/
(Accumulated Net Investment Loss)....................................... $ -- $ -- $ (133,569)
* Montgomery Latin America Fund commenced operations on June 30, 1997.
</TABLE>
<TABLE>
<CAPTION>
Short Duration
U.S. Asset Total Return Government
Increase/(Decrease) in Net Assets from Operations: Allocation Fund Bond Fund** Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) .............................................. $ 4,211,290 $ 4,495,030 $ 3,137,833
Net realized gain/(loss) on securities, futures contracts,
securities sold short and foreign-currency transactions
during the year ....................................................... 29,420,101 2,124,761 670,997
Net unrealized appreciation/(depreciation) of securities,
foreign-currency transactions and net other assets during the year .... (15,356,094) 1,833,390 78,579
Net Increase in Net Assets Resulting from Operations ...................... 18,275,297 8,453,181 3,887,409
Distributions to Shareholders:
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ....................................................... (5,713,481) (4,458,508) (3,046,386)
Class P shares ....................................................... (3,135) -- (90)
Distributions to shareholders in excess of net investment income:
Class R shares ....................................................... (4,805,423) (1,652) --
Class P shares ....................................................... (2,791) -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ....................................................... (11,764,751) (775,110) (90,023)
Class P shares ....................................................... (6,851) -- --
------------- ------------ ------------
Total distributions ....................................................... (22,296,432) (5,235,270) (3,136,499)
Beneficial Interest Transactions:
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ....................................................... 4,880,875 74,475,849 18,341,846
Class P shares ....................................................... (1,740) -- 2,790
Net Increase in Net Assets ................................................ 858,000 77,693,760 19,095,546
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning of Year, ........................................................ 127,287,995 -- 47,264,721
End of Year ............................................................... $ 128,145,995 $ 77,693,760 $ 66,360,267
Accumulated Undistributed Net Investment lncome/
(Accumulated Net Investment Loss) ...................................... $ 1,771,623 $ (1,652) $ --
</TABLE>
<TABLE>
<CAPTION>
International Emerging
Increase/(Decrease) in Net Assets from Operations: Small Cap Fund Markets Fund
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) .............................................. $ (16,628) $ 5,849,057
Net realized gain/(loss) on securities, forward
foreign-currency exchange contracts, futures
contracts, securities sold short, equity swaps
and foreign-currency transactions during the year ...................... 3,884,910 (143,171,602)
Net unrealized appreciation/(depreciation) of
securities forward foreign-currency exchange
contracts, securities sold short, equity swaps,
foreign-currency transactions and net other
assets during the year ................................................. (2,291,295) (369,794,189)
Net Increase/(Decrease) in Net Assets Resulting from Operations ........... 1,576,987 (507,116,734)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net
investment income:
Class R shares ......................................................... -- (11,344,230)
Class P shares ......................................................... -- (5,297)
Distributions to shareholders in excess of net
investment income:
Glass R shares ......................................................... (338,201) --
Class P shares ......................................................... (22) --
Distributions to shareholders from net realized
gains on investments:
Class R shares ......................................................... (5,935,927) (24,396,251)
Class P shares ......................................................... (651) (14,456)
------------ -------------
Total distributions ....................................................... (6,274,801) (35,760,234)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ......................................................... 1,767,631 42,031,414
Class P shares ......................................................... (191,138) 105,227
Net Increase/(Decrease) in Net Assets ..................................... (3,121,321) (500,740,327)
Net Assets:
- ------------------------------------------------------------------------------------------------------------------
Beginning of Year ......................................................... 53,617,139 1,260,063,930
End of Year ............................................................... $ 50,495,818 $ 759,323,603
Accumulated. Undistributed Net Investment lncome/
(Accumulated Net Investment Loss)....................................... $ (252,196) $ (5,228,216)
</TABLE>
* Montgomery Latin America Fund commenced operations on June 30, 1997.
<TABLE>
<CAPTION>
California Tax-Free
Intermediate Government
Increase/(Decrease) in Net Assets from Operations: Bond Fund Reserve Fund
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) .............................................. $ 1,173,983 $ 33,237,943
Net realized gain/(loss) on securities, futures contracts,
securities sold short and foreign-currency transactions
during the year ....................................................... 114,279 36,767
Net unrealized appreciation/(depreciation) of securities,
foreign-currency transactions and net other assets during the year .... 462,957 --
Net Increase in Net Assets Resulting from Operations ...................... 1,751,219 33,274,710
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ....................................................... (1,174,001) (33,224,825)
Class P shares ....................................................... -- --
Distributions to shareholders in excess of net investment income:
Class R shares ....................................................... -- --
Class P shares ....................................................... -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ....................................................... -- --
Class P shares ....................................................... -- --
------------ -------------
Total distributions ....................................................... (1,174,001) (33,224,825)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ....................................................... 13,408,266 251,415,351
Class P shares ....................................................... -- (204)
Net Increase in Net Assets ................................................ 13,985,484 251,465,032
Net Assets:
- ------------------------------------------------------------------------------------------------------------------
Beginning of Year, ........................................................ 21,681,335 473,153,993
End of Year ............................................................... $ 35,666,819 $ 724,619,025
Accumulated Undistributed Net Investment lncome/
(Accumulated Net Investment Loss) ...................................... $ 1,374 $ (303)
</TABLE>
** Montgomery Total Return Bond Fund commenced operations on June 30, 1997.
<TABLE>
<CAPTION>
Emerging Latin America
Increase/(Decrease) in Net Assets from Operations: Asia Fund Fund*
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) .............................................. $ 97,480 $ 236,065
Net realized gain/(loss) on securities, forward
foreign-currency exchange contracts, futures
contracts, securities sold short, equity swaps
and foreign-currency transactions during the year ...................... (11,921,961) (1,196,296)
Net unrealized appreciation/(depreciation) of
securities forward foreign-currency exchange
contracts, securities sold short, equity swaps,
foreign-currency transactions and net other
assets during the year ................................................. (23,554,621) (1,347,835)
Net Increase/(Decrease) in Net Assets Resulting from Operations ........... (35,379,102) (2,308,066)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net
investment income:
Class R shares ......................................................... (552,799) (42,196)
Class P shares ......................................................... -- --
Distributions to shareholders in excess of net
investment income:
Glass R shares ......................................................... (799) --
Class P shares ......................................................... -- --
Distributions to shareholders from net realized
gains on investments:
Class R shares ......................................................... (3,025,530) (101,837)
Class P shares ......................................................... -- --
------------ -----------
Total distributions ....................................................... (3,579,128) (144,033)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ......................................................... (4,528,662) 6,917,491
Class P shares ......................................................... --
Net Increase/(Decrease) in Net Assets ..................................... (43,486,892) 4,465,392
Net Assets:
- ------------------------------------------------------------------------------------------------------------------
Beginning of Year ......................................................... 68,095,256 --
End of Year ............................................................... $ 24,608,364 $ 4,465,392
Accumulated. Undistributed Net Investment lncome/
(Accumulated Net Investment Loss)....................................... $ (344,172) $ 136,295
</TABLE>
* Montgomery Latin America Fund commenced operations on June 30, 1997.
<TABLE>
<CAPTION>
California Federal
Tax-Free Tax-Free
Increase/(Decrease) in Net Assets from Operations: Money Fund Money Fund
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) .............................................. $ 5,235,752 $ 3,829,270
Net realized gain/(loss) on securities, futures contracts,
securities sold short and foreign-currency transactions
during the year ....................................................... (23) 670
Net unrealized appreciation/(depreciation) of securities,
foreign-currency transactions and net other assets during the year .... -- --
Net Increase in Net Assets Resulting from Operations ...................... 5,235,729 3,829,940
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ....................................................... (5,235,794) (3,829,270)
Class P shares ....................................................... -- --
Distributions to shareholders in excess of net investment income:
Class R shares ....................................................... -- --
Class P shares ....................................................... -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ....................................................... -- --
Class P shares ....................................................... -- --
------------ -----------
Total distributions ....................................................... (5,235,794) (3,829,270)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ....................................................... 68,493,060 3,085,705
Class P shares ....................................................... -- --
Net Increase in Net Assets ................................................ 68,492,995 3,086,375
Net Assets:
- ------------------------------------------------------------------------------------------------------------------
Beginning of Year, ........................................................ 118,723,062 114,197,095
End of Year ............................................................... $ 187,216,057 $ 117,283,470
Accumulated Undistributed Net Investment lncome/
(Accumulated Net Investment Loss) ...................................... $ (113) $ (219)
</TABLE>
** Montgomery Total Return Bond Fund commenced operations on June 30, 1997.
The accompanying notes are an integral part of these financial statements.
91
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Statements of
Changes in Net Assets
- ----------------------
Year Ended June 30, 1997
<TABLE>
<CAPTION>
Growth Small Cap Small Cap
Increase/(Decrease) in Net Assets from Operations: Fund Opportunities Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/loss) .................................................. $ 6,885,258 $ (1,600,643) $ (1,812,573)
Netrealized gain/(loss) on securities, forward foreign-currency
exchange contracts, futures contracts, securities sold short,
equity swaps and foreign-currency transactions during the year ............ 100,249,973 (17,279,013) 29,292,354
Net unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, securities sold short,
equity swaps, foreign-currency transactions and net other
assets during the year ..................................................... 84,224,834 43,491,855 (31,258,680)
Net Increase/(Decrease) in Net Assets Resulting from Operations ............... 191,405,065 24,612,199 (3,778,899)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ............................................................ (6,881,794) (40,517) --
Class P shares ............................................................ (542) (1) --
Distributions to shareholders in excess of net investment income:
Class R shares............................................................. -- -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ............................................................ (120,827,947) -- (40,471,488)
Class P shares ............................................................ (12,739) -- (417,004)
--------------- ------------- -------------
Total distributions .......................................................... (127,723,022) (40,518) (40,888,492)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares ............................................................ 147,296,738 65,607,686 (32,078,430)
Class P shares ............................................................ 112,711 8,150 6,639,063
Net lncrease/(Decrease) in Net Assets ........................................ 211,091,492 90,187,517 (70,106,258)
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year ............................................................ 926,463,973 136,140,213 275,061,528
End of Year .................................................................. $ 1,137,555,465 $ 226,327,730 $ 204,954,770
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) ......................................... $ 3,540,859 $ -- $ --
</TABLE>
* Montgomery Emerging Asia Fund commenced operations on September 30, 1996.
<TABLE>
<CAPTION>
Global
Communications Select 50
Increase/(Decrease) in Net Assets from Operations: Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) ............................................................... $ (1,763,666) $ 44,662
Net realized gain/(loss) on securities, forward foreign-currency exchange contracts,
futures contracts, securities sold short and foreign-currency transactions
during the year ......................................................................... 26,012,894 8,490,151
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency
exchange contracts, securities sold short, foreign-currency transactions and
net other assets during the year ........................................................ (5,241,046) 20,210,696
Net Increase in Net Assets Resulting from Operations ....................................... 19,008,182 28,745,509
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .......................................................................... -- (559,887)
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 .......................................................................... (9,155,989) (2,599,004)
Class P shares .......................................................................... -- --
-------------- -------------
Total distributions ........................................................................ (9,155,9891) (3,158,891)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares .......................................................................... (62,567,827) 68,970,865
Class P shares .......................................................................... -- 5,816
Net Increase/(Decrease) in Net Assets ...................................................... (52,715,634) 94,563,299
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year .......................................................................... 206,670,735 77,954,677
End of Year ................................................................................ $ 153,955,101 $ 172,517,976
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) .......... $ (142,563) $ 4,401
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
U.S. Emerging Equity Income International
Increase/(Decrease) in Net Assets from Operations: Growth Fund Fund Growth Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/loss) .................................................. $ (2,180,171) $ 886,880 $ 138,283
Netrealized gain/(Loss) on securities, forward foreign-currency
exchange contracts, futures contracts, securities sold short,
equity swaps and foreign-currency transactions during the year ............ 17,465,531 2,720,229 1,488,363
Net unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, securities sold short,
equity swaps, foreign-currency transactions and net other
assets during the year ..................................................... 25,628,245 3,479,398 3,198,060
Net Increase/(Decrease) in Net Assets Resulting from Operations ............... 40,913,605 7,086,507 4,824,706
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ............................................................ -- (881,077) --
Class P shares ............................................................ -- (9,168) --
Distributions to shareholders in excess of net investment income:
Class R shares............................................................. -- -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ............................................................ (20,853,034) (2,229,868) (2,164,570)
Class P shares ............................................................ -- (8,635) (116)
--------------- ------------- -------------
Total distributions .......................................................... (20,853,034) (3,128,748) (2,164,686)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares ............................................................ (8,466,053) 15,381,763 12,949,863
Class P shares ............................................................ -- 809,138 3,963
Net lncrease/(Decrease) in Net Assets ........................................ 11,594,518 20,148,660 15,613,846
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year ............................................................ 306,217,166 19,313,848 18,303,852
End of Year .................................................................. $ 317,811,684 $ 39,462,508 $ 33,917,698
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) ......................................... $ -- $ -- $ 37,597
<CAPTION>
International Emerging
Increase/(Decrease) in Net Assets from Operations: Small Cap Fund Markets Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/loss) .................................................. $ (147,919) $ 4,761,171
Netrealized gain/(Loss) on securities, forward foreign-currency
exchange contracts, futures contracts, securities sold short,
equity swaps and foreign-currency transactions during the year ............ 4,581,552 46,619,998
Net unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, securities sold short,
equity swaps, foreign-currency transactions and net other
assets during the year .................................................... 2,178,127 136,556,591
Net Increase/(Decrease) in Net Assets Resulting from Operations .............. 6,611,760 l87,937,760
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ............................................................ -- (4,538,958)
Class P shares ............................................................ -- (18)
Distributions to shareholders in excess of net investment income:
Class R shares............................................................. -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ............................................................ -- --
Class P shares ............................................................ -- --
------------- --------------
Total distributions .......................................................... -- (4,538,976)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares ............................................................ 5,350,787 81,733,907
Class P shares ............................................................ 15,000 551,178
Net lncrease/(Decrease) in Net Assets ........................................ 11,977,547 265,683,869
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of year ............................................................ 41,639,592 994,380,061
End of Year .................................................................. $ 53,617,139 $1,260,063,930
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) ......................................... $ (2,447) $ 990,404
<CAPTION>
Global
Emerging* Opportunities
Increase/(Decrease) in Net Assets from Operations: Asia Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/loss) .................................................. $ (87,239) $ (181,500)
Net realized gain/(loss) on securities, forward foreign-currency
exchange contracts, futures contracts, securities sold short,
equity swaps and foreign-currency transactions during the year ............ 3,000,678 3,828,438
Net unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, securities sold short,
equity swaps, foreign-currency transactions and net other
assets during the year .................................................... 9,910,245 1,137,759
Net Increase/(Decrease) in Net Assets Resulting from Operations .............. 12,823,684 4,784,697
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............................................................. (30,694) --
Distributions to shareholders from net realized gains on investments:
Class R shares ............................................................ -- (1,395,395)
Class P shares ............................................................ -- --
----------- -----------
Total distributions .......................................................... (30,694) (1,395,395)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares ............................................................ 55,302.266 486,120
Class P shares ............................................................ -- --
Net Increase/(Decrease) in Net Assets ........................................ 68,095,256 3,875,422
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year ............................................................ -- 28,495,501
End of Year .................................................................. $ 68,095,256 $ 32,370,923
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) ......................................... $ (142,648) $ (10,145)
</TABLE>
<TABLE>
<CAPTION>
Global
U.S. Asset Asset Allocation
Allocation Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase/(Decrease) in Net Assets from Operations: ......................................... $ 3,414,645 $ 8,065
Net investment income/(loss) ............................................................... 12,083,639 19,162
Net realized gain/(loss) on securities, forward foreign-currency exchange contracts,
futures contracts, securities sold short and foreign-currency transactions
during the year ......................................................................... 2,261,570 106,277
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency
exchange contracts, securities sold short, foreign-currency transactions and
net other assets during the year ........................................................ l7,759,854 133,504
Net Increase in Net Assets Resulting from Operations ....................................... (2,906,566) --
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .......................................................................... (2,425) --
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 .......................................................................... (11,975,120) --
Class P shares .......................................................................... (3,810) --
------------- -------------
Total distributions ........................................................................ (14,887,921) --
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares .......................................................................... (8,166,667) 1,519,948
Class P shares .......................................................................... 29,395 --
Net Increase/(Decrease) in Net Assets ...................................................... (5,265,339) 1,653,452
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year .......................................................................... 132,553,334 --
End of Year ................................................................................ $ 127,287,995 $ 1,653,452
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) .......... $ 1,505,327 $ 8,065
<CAPTION>
Short Duration California Tax-Free
Government Intermediate
Bond Fund Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase/(Decrease) in Net Assets from Operations: ......................................... $ 2,282,588 $ 770,950
Net investment income/(loss) ............................................................... 99,958 27,183
Net realized gain/(loss) on securities, forward foreign-currency exchange contracts,
futures contracts, securities sold short and foreign-currency transactions
during the year ......................................................................... 198,145 359,956
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency
exchange contracts, securities sold short, foreign-currency transactions and
net other assets during the year ........................................................ 2,580,691 1,158,089
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations ....................................... (2,277,499) (771,185)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .......................................................................... (38) --
Class P shares .......................................................................... (8,172) --
Distributions to shareholders in excess of net investment income:
Class R shares
Distributions to shareholders from net realized gains on investments:
Class R shares .......................................................................... -- --
Class P shares .......................................................................... -- --
Total distributions ........................................................................ (2,285,709) (771,185)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares .......................................................................... 24,288,468 7,346,498
Class P shares .......................................................................... (710) --
Net Increase/(Decrease) in Net Assets ...................................................... 24,582,740 7,733,402
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year .......................................................................... 22,681,981 13,947,933
End of Year ................................................................................ $ 47,264,721 $ 21,681,335
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) .......... $ (45,774) $ 1,392
<CAPTION>
California
Government Tax-Free
Reserve Fund Money Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase/(Decrease) in Net Assets from Operations: ......................................... $ 24,123,314 $ 3,393,054
Net investment income/(loss) ............................................................... (28,731) --
Net realized gain/(loss) on securities, forward foreign-currency exchange contracts,
futures contracts, securities sold short and foreign-currency transactions
during the year .........................................................................
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency
exchange contracts, securities sold short, foreign-currency transactions and
net other assets during the year ........................................................ 24,094,583 3,393,054
Net Increase in Net Assets Resulting from Operations ....................................... (24,122,890) (3,393,007)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .......................................................................... (30) --
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 .......................................................................... -- --
Class P shares .......................................................................... -- --
Total distributions ........................................................................ (24,122,920) (3,393,007)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares .......................................................................... 33,759,486 20,588,996
Class P shares .......................................................................... (700) --
Net Increase/(Decrease) in Net Assets ...................................................... 33,730,449 20,589,043
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year .......................................................................... 439,423,544 98,134,019
End of Year ................................................................................ $ 473,153,993 $ 218,723,062
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) .......... $ (42,883) $ (71)
<CAPTION>
Federal
Tax-Free
Increase/(Decrease) in Net Assets from Operations: Money Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net investment income/(loss) ............................................................... $ 2,586,817
Net realized gain/(loss) on securities, forward foreign-currency exchange contracts,
futures contracts, securities sold short and foreign-currency transactions
during the year ......................................................................... (1,588)
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency
exchange contracts, securities sold short, foreign-currency transactions and
net other assets during the year ........................................................ 2,585,229
Net Increase in Net Assets Resulting from Operations ....................................... (2,586,817)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .......................................................................... --
Class P shares .......................................................................... (524)
Distributions to shareholders in excess of net investment income:
Class R shares
Distributions to shareholders from net realized gains on investments:
Class R shares .......................................................................... --
Class P shares .......................................................................... --
Total distributions ........................................................................ (2,587,341)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 7):
Class R shares .......................................................................... 114,199,207
Class P shares .......................................................................... --
Net Increase/(Decrease) in Net Assets ...................................................... 114,197,095
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year .......................................................................... --
End of Year ................................................................................ $ 114,197,095
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) .......... $ (355)
</TABLE>
<PAGE>
- ------------------------
The Montgomery Funds
- ------------------------
Statement of Cash Flows
- ------------------------
Year Ended June 30, 1998
<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND
Cash Flows from Operating Activities:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income received................................................... $ 4,995,499
Fee income received............................................... 87,402
Operating expenses paid........................................... (449,882)
Proceeds from sales of long-term securities....................... 246,491,006
Net payments for short-term securities............................ (1,411,468)
Proceeds from futures tranactions ................................ 22,477
Payments for purchases of long-term securities**.................. (267,442,822)
Cash Used by Operating Activities...................................... $ (17,707,788)
Cash Flows from Financing Activities:
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from subscriptions* *.................................... $ 52,122,242
Payments on shares redeemed....................................... (40,771,741)
Proceeds from reverse repurchase agreements....................... 6,908,738
Net dollar roll transactions...................................... 7,969
Cash dividends paid*.............................................. (102,228)
Reverse repurchase agreement interest expense..................... (455,766)
-------
Cash Provided by Financing Activities.................................. $ 17,709,214
Increase in cash....................................................... $ 1,426
Cash at beginning of year.............................................. 0
----------
Cash at end of year.................................................... $ 1,426
Reconciliation of Net Increase in Net Assets from Operations to Cash Used by Operating Activities:
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations................... $ 8,453,181
Increase in investments**........................................... $ (26,784,161)
Increase in interest and dividends receivable....................... (906,003)
Increase in deferred fee income from dollar roll transactions....... 763
Increase in other assets............................................ (14,501)
increase in receivables for investments sold and dollar roll
transactions....................................................... (2,718,090)
Increase in payable for investments purchased....................... 3,699,396
Increase in accrued expenses........................................ 105,861
Interest expense.................................................... 455,766
-------
Total adjustments...................................................... $ (26,160,969)
Cash Used by Operating Activities...................................... $ (17,707,788)
</TABLE>
Noncash activities:
* Excludes reinvestment of dividends of $5,131,390.
**Excludes contribution of securities in kind of $58,008,413.
The accompanying notes are an integral part of these financial statements.
94
<PAGE>
------------------------
The Montgomery Funds
------------------------
Statement of Cash Flows
Year Ended June 30, 1998
------------------------
SHORT DURATION GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income received.................................................... $ 3,740,792
Fee income received................................................ 15,352
Operating expenses paid............................................ (143,576)
Proceeds from sales of long-term securities and purchased options.. 265,130,534
Net payments for futures transactions.............................. (8,438)
Purchases of long-term securities and purchased options............ (288,319,692)
Net proceeds from short-term investments........................... (554,648)
Cash Used by Operating Activities....................................... $ (20,139,676)
Cash Flows from Financing Activities:
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from subscriptions........................................ $ 114,235,166
Payments on shares redeemed........................................ (98,365,383)
Net dollar roll transactions....................................... 19,375
Cash dividends paid*............................................... (594,491)
Proceeds from reverse repurchase agreements........................ (1,613,937)
Reverse repurchase agreement interest expense...................... (470,095)
-------
Cash Provided by Financing Activities................................... $ 13,210,635
Decrease in cash........................................................ $ (6,929,041)
Cash at beginning of year............................................... 7,474,382
--------------
Cash at end of year..................................................... $ 545,341
Reconciliation of Net Increase in Net Assets from Operations to Cash Provided by Operating Activities:
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations.................... $ 3,887,409
Increase in investments.............................................. $ (26,927,885)
Increase in interest receivable...................................... (3,950)
Increase in deferred fee income from dollar roll transactions........ 1,317
Decrease in other assets and short futures........................... 1,378
Increase in receivables for investments sold......................... (173,512)
Increase in payable for investments purchased........................ 2,602,477
Increase in accrued expenses......................................... 2,995
Interest expense..................................................... 470,095
-------
Total adjustments....................................................... $ (24,027,085)
Cash Used by Operating Activities....................................... $ (20,139,676)
</TABLE>
*Noncash activities include reinvestment of dividends of $1,945,173.
The accompanying notes are an integral part of these financial statements.
95
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Financial Highlights
- ---------------------
<TABLE>
<CAPTION>
GROWTH FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
---------------------------------------------------------------------
1998## 1997## 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 23.07 $ 21.94 $ 19.16 $ 15.27 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.17 0.15 0.17 0.12 0.04
Net realized and unrealized gain on investments 3.51 3.90 4.32 3.91 3.31++
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 3.68 4.05 4.49 4.03 3.35
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.15) (0.15) (0.17) (0.07) (0.01)
Distributions from net realized capital gains (2.92) (2.77) (1.54) (0.07) --
Distributions in excess of net realized capital gains -- -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (3.07) (2.92) (1.71) (0.14) (0.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 23.68 $ 23.07 $ 21.94 $ 19.16 $ 15.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 17.31% 20.44% 24.85% 26.53% 27.98%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $1,382,874 $1,137,343 $926,382 $878,776 $ 149,103
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 0.71% 0.69% 0.78% 0.98% 1.09%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- -- -- $ 0.03
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 53.68% 61.10% 118.14% 128.36% 110.65%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.20% 1.27% 1.35% 1.50% 1.49%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest and tax expenses 1.20% -- -- -- 1.79%+
Expense ratio excluding interest and tax expense 1.19% -- -- -- --
<CAPTION>
Class P Shares
Fiscal Year Ended June 30,
--------------------------------------------
1998## 1997## 1996(a)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 23.12 $ 21.94 $ 19.22
- -----------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.11 0.09 0.03
Net realized and unrealized gain on investments 3.55 3.96 2.69
- -----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 3.66 4.05 2.72
- -----------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.09) (0.10) --
Distributions from net realized capital gains (2.92) (2.77) --
Distributions in excess of net realized capital gains -- -- --
- -----------------------------------------------------------------------------------------------------------
Total distributions (3.01) (2.87) --
- -----------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 23.77 $ 23.12 $ 21.94
- -----------------------------------------------------------------------------------------------------------
Total Return** 17.09% 20.41% 14.15%
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 198 $ 212 $ 82
- -----------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 0.46% 0.44% 0.53%+
- -----------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ 0.11 -- --
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 53.68% 61.10% 118.14%
- -----------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.45% 1.52% 1.60%+
- -----------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest and tax expenses 1.45% -- --
- -----------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.44% -- --
</TABLE>
(a) The Growth Fund's Class R shares and Class P shares commenced operations on
September 30, 1993, and January 12, 1996, respectively.
(b) The Small Cap Opportunities Fund's Class R shares and Class P shares
commenced operations on December 29, 1995, and July 29, 1996, respectively.
(c) The Micro Cap Fund's Class R shares commenced operations on December 30,
1994.
<TABLE>
<CAPTION>
EQUITY INCOME FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
---------------------------------------------------------------------
1998 1997## 1996 1995(d)
Net Asset Value -- Beginning of Year $ 17.91 $ 16.09 $ 13.38 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.44 0.49 0.43 0.31
Net realized and unrealized gain/(loss) on investments 2.27 3.35 2.82 1.38
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 2.71 3.84 3.25 1.69
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.44) (0.46) (0.42) (0.31)
Distributions from net realized capital gains (1.91) (1.56) (0.12) --
Total distributions (2.35) (2.02) (0.54) (0.31)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 18.27 $ 17.91 $ 16.09 $ 13.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 15.83% 26.02% 24.56% 14.26%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 40,260 $ 38,595 $ 19,312 $ 6,383
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of investment income/(loss) to average
net assets 2.32% 2.93% 3.03% 4.06%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ 0.34 $ 0.39 $ 0.34 $ 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 68.23% 62.31% 89.77% 29.46%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.86% -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.38% 1.46% 1.45% 3.16%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.85% 0.86% 0.85% 0.84%+
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Fiscal Year Ended June 30,
--------------------------------------------
1998 1997## 1996(d)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 17.90 $ 16.09 $ 15.66
- -----------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.38 0.44 0.08
Net realized and unrealized gain/(loss) on investments 2.27 3.35 0.35
- -----------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 2.65 3.79 0.43
- -----------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.39) (0.42) --
Distributions from net realized capital gains (1.91) (1.56) --
- -----------------------------------------------------------------------------------------------------------
Total distributions (2.30) (1.98) --
- -----------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 18.25 $ 17.90 $ 16.09
- -----------------------------------------------------------------------------------------------------------
Total Return** 15.49% 25.64% 2.75%
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 2,719 $ 868 $ 2
- -----------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 2.07% 2.68% 2.78%+
- -----------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ 0.28 $ 0.34 $ 0.06
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 68.23% 62.31% 89.77%
- -----------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.11% -- --
- -----------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.63% 1.71% 1.70%+
- -----------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.10% 1.11% 1.10%+
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(d) The Equity Income Fund's Class R shares and Class P shares commenced
operations on September 30, 1994, and March 11, 1996, respectively.
(e) The Small Cap Fund's Class R shares became available for investment by the
public on July 13, 1990. The Fund's Class P shares commenced operations on
July 1, 1996.
96
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP OPPORTUNITIES FUND
Class R Shares Class P Shares
Fiscal Year Ended June 30, Fiscal Year Ended June 30,
------------------------------------------ ----------------------------
1998## 1997 1996(b)## 1998## 1997(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 17.53 $ 15.80 $ 12.00 $ 17.53 $ 14.37
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.20) (0.13) 0.02 (0.25) (0.11)
Net realized and unrealized gain/(loss) on investments 2.25 1.86 3.78++ 2.03 3.27
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 2.05 1.73 3.80 1.78 3.16
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.00)# -- -- (0.00)#
Distributions from net realized capital gains (0.42) -- -- (0.42) --
Distributions in excess of net realized capital gains -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.42) (0.00)# -- (0.42) (0.00)#
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 19.16 $ 17.53 $ 15.80 $ 18.89 $ 17.53
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return** 11.86% 10.97% 31.67% 10.26% 22.09%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 201,738 $ 226,318 $ 136,140 $ 10 $ 9
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (1.05)% (0.86)% 0.23%+ (1.30)% (1.11)%+
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ (0.26) $ (0.16) $ (0.04) $ (0.27) $ (0.14)
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 82.47% 154.50% 81.29% 82.47% 154.50%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.50% 1.50% 1.50%+ 1.75% 1.75%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.78% 1.75%+ 2.16%+ 2.03% 2.00%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.50% -- -- 1.75% --
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. EMERGING GROWTH FUND
Class R Shares
Fiscal Year Ended June 30,
----------------------------------------------------------------
1998## 1997 1996 1995(c)##
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 19.00 $ 17.82 $ 13.75 $ 12.00
- ----------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.18) (0.13) (0.04) 0.09
Net realized and unrealized gain/(loss) on investments 4.21 2.54 4.26 1.66
- ----------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 4.03 2.41 4.22 1.75
- ----------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- (0.04) --
Distributions from net realized capital gains (1.14) (1.23) (0.11) --
Distributions in excess of net realized capital gains -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (1.14) (1.23) (0.15) --
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 21.89 $ 19.00 $ 17.82 $ 13.75
- ----------------------------------------------------------------------------------------------------------------------
Total Return** 21.18% 14.77% 30.95% 14.58%
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000s) $ 391,973 $ 317,812 $ 306,217 $ 162,949
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.84)% (0.75)% (0.11)% 1.40%+
- ----------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ (0.18) -- $ (0.05) $ 0.07
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 23.63% 79.00% 88.98% 36.81%
- ----------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.57% 1.71% 1.75% 1.75%+
- ----------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.57% -- 1.79%+ 2.07%+
- ----------------------------------------------------------------------------------------------------------------------
Expense/ratio excluding interest and tax expense 1.56% -- -- --
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP FUND
Class R Shares
Fiscal Year Ended June 30,
--------------------------------------------------------------------------------
1998## 1997 1996 1995 1994
Net Asset Value -- Beginning of Year $ 19.52 $ 21.55 $ 17.11 $ 15.15 $ 16.83
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.15) (0.18) (0.09) (0.10) (0.12)
Net realized and unrealized gain/(loss) on investments 4.33 1.43 6.31 3.04 (0.47)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 4.18 1.25 6.22 2.94 (0.59)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized capital gains (2.97) (3.28) (1.78) (0.98) (1.09)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.97) (3.28) (1.78) (0.98) (1.09)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 20.73 $ 19.52 $ 21.55 $ 17.11 $ 15.15
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return** 23.23% 6.81% 39.28% 20.12% (1.59)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 203,437 $ 198,298 $ 275,062 $ 202,399 $ 209,063
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.70)% (0.78)% (0.47)% (0.57)% (0.68)%
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ (0.15) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 68.65% 58.71% 80.00% 85.07% 95.22%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.24% 1.20% 1.24% 1.37% 1.35%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.24% -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.24% -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAP FUND
Class P Shares
Fiscal Year Ended June 30,
------------------------------
1998## 1997(e)
<S> <C> <C>
Net Asset Value -- Beginning of Year $ 19.48 $ 21.73
- --------------------------------------------------------------------------------------
Net investment income/(loss) (0.20) (0.10)
Net realized and unrealized gain/(loss) on investments 4.22 1.13
- --------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 4.02 1.03
- --------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- --
Distributions from net realized capital gains (2.97) (3.28)
- --------------------------------------------------------------------------------------
Total distributions (2.97) (3.28)
- --------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 20.53 $ 19.48
- --------------------------------------------------------------------------------------
Total Return** 22.44% 5.74%
- --------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 21,548 $ 6,656
- --------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.95)% (1.03)%+
- --------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ (0.20) --
- --------------------------------------------------------------------------------------
Portfolio turnover rate 68.65% 58.71%
- --------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.49% 1.45%+
- --------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.49% --
- --------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.49% --
- --------------------------------------------------------------------------------------
</TABLE>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers 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.
97
<PAGE>
- --------------------
The Montgomery Funds
- ---------------------
Financial Highlights
- ---------------------
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
-----------------------------------------
1988## 1997## 1996(a)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 16.24 $ 15.31 $ 12.00
- -------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.04 0.08 0.02
Net realized and unrealized gain/(loss) on investments 3.48 2.53 3.29
- -------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.52 2.61 3.31
- -------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.02) -- --
Distributions in excess of net investment income (0.00)# -- --
Distributions from net realized capital gains (1.07) (1.68) --
Distributions in excess of net realized capital gains -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (1.09) (1.68) --
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Year $ 18.67 $ 16.24 $ 15.31
- -------------------------------------------------------------------------------------------------------------------
Total Return(**) 23.27% 19.20% 27.58%
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 64,820 $ 33,912 $ 18,303
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.22% 0.57% 0.26%+
- -------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.04) $ (0.02) $ (0.07)
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 127.13% 95.02% 238.91%
- -------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.66% -- --
- -------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.13% 2.37% 2.91%+
- -------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.65% 1.66% 1.65%+
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
-----------------------------------------
1998 1997## 1996(a)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 16.22 $ 15.31 $ 13.66
- -------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.01) 0.05 0.00#
Net realized and unrealized gain/(loss) on investments 3.48 2.54 1.65
- -------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.47 2.59 1.65
- -------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- --
Distributions from net realized capital gains (1.07) (1.68) --
Distributions in excess of net realized capital gains -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (1.07) (1.68) --
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Year $ 18.62 $ 16.22 $ 15.31
- -------------------------------------------------------------------------------------------------------------------
Total Return(**) 23.03% 19.13% 12.08%
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 5 $ 5 $ 1
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.03)% 0.32% 0.01%+
- -------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.08) $ (0.06) $ (0.05)
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 127.13% 95.02% 238.91%
- -------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.90% -- --
- -------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 1.91% 2.62% 3.16%+
- -------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.88% 1.91% 1.90%+
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The International Growth Fund's Class R shares and Class P shares commenced
operations on July 3, 1995, and March 11, 1996, respectively.
(b) The Emerging Markets Fund's Class R shares and Class P shares commenced
operations on March 1, 1992, and March 11, 1996, respectively.
INTERNATIONAL SMALL CAP FUND
<TABLE>
<CAPTION>
Class R Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
----------------------------------------------------------
1998## 1997 1996 1995 1994(c)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 17.16 $ 14.86 $ 11.75 $ 12.02 $12.00
Net investment income/(loss) (0.01) (0.05) 0.03 0.12 0.00#
Net realized and unrealized gain/(loss) on investments 0.31 2.35 3.10 (0.39) 0.02
- -------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.30 2.30 3.13 (0.27) 0.02
- -------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- (0.02) (0.00)# --
Distributions in excess of net investment income (0.13) -- -- -- --
Distributions from net realized capital gains (2.19) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.32) -- (0.02) (0.00)# --
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 15.14 $ 17.16 $ 14.86 $ 11.75 $ 12.02
- -------------------------------------------------------------------------------------------------------------------------------
Total Return(**) 4.46% 15.48% 26.68% (2.23)% 0.17%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $50,491 $53,602 $41,640 $28,516 $34,555
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.03)% (0.34)% 0.20% 0.95% 0.04%+
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.10) $ (0.14) $ (0.08) $ 0.05 $ (0.02)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 110.58% 84.91% 177.36% 156.13% 123.50%
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.92% -- 1.96% 1.91% 1.99%+
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.53% 2.60% 2.76% 2.50% 2.32%+
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90% 1.90% 1.90% 1.90% 1.90%+
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
--------------------------
1998## 1997(c)
Net Asset Value -- Beginning of Year $ 17.16 $16.96
- ---------------------------------------------------------------------------------------------
Net investment income/(loss) (0.05) 0.00#
Net realized and unrealized gain/(loss) on investments 0.30 0.20
- ---------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.25 0.20
- ---------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.09) --
Distributions in excess of net investment income -- --
Distributions from net realized capital gains (2.19) --
- ---------------------------------------------------------------------------------------------
Total distributions (2.28) --
- ---------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 15.13 $17.16
- ---------------------------------------------------------------------------------------------
Total Return(**) 4.13% 1.18%
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ---------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 5 $ 15
- ---------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.28)%+ (0.59)%+
- ---------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.04) $(0.01)
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 110.58% 84.91%
- ---------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 2.17%+ --
- ---------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.14%+ 2.85%+
- ---------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 2.15%+ 2.15%+
- ---------------------------------------------------------------------------------------------
</TABLE>
(c) The International Small Cap Fund's Class R shares and Class P shares
commenced operations on September 30, 1993, and June 9, 1997, respectively.
(d) The Emerging Asia Fund's Class R shares commenced operations on September
30, 1996.
(e) The Latin America Fund's Class R shares commenced operations on June 30,
1997.
(f) The Global Opportunities Fund's Class R shares commenced operations on
September 30, 1993.
98
<PAGE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
Class R Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
-----------------------------------------------------------------
1998 1997 1996 1995## 1994(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 16.85 $ 14.19 $ 13.17 $ 13.68 $ 11.07
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.07 0.07 0.08 0.03 (0.03)
Net realized and unrealized gain/(loss) on investments (6.58) 2.66 0.94 0.25++ 2.92
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (6.51) 2.73 1.02 0.28 2.89
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.15) (0.07) -- -- --
Distributions from net realized capital gains (0.33) -- -- (0.42) (0.28)
Distributions in excess of net realized capital gains -- -- -- (0.37) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.48) (0.07) -- (0.79) (0.28)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Year $ 9.86 $ 16.85 $ 14.19 $ 13.17 $ 13.68
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(**) (39.20)% 19.34% 7.74% 1.40% 26.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 758,911 $1,259,457 $ 994,378 $ 998,083 $ 654,960
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.55% 0.48% 0.58% 0.23% (0.14)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.07 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 96.76% 83.08% 109.92% 92.09% 63.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.65% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 1.65% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.60% 1.67% 1.72% 1.80% 1.85%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30,
------------------------------------
1998 1997 1996(b)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 16.77 $ 14.19 $ 12.62
- ---------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.03 0.06 0.01
Net realized and unrealized gain/(loss) on investments (6.61) 2.58 1.56
- ---------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (6.58) 2.64 1.57
- ---------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.12) (0.06) --
Distributions from net realized capital gains (0.33) -- --
Distributions in excess of net realized capital gains -- -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions (0.45) (0.06) --
- ---------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Year $ 9.74 $ 16.77 $ 14.19
- ---------------------------------------------------------------------------------------------------------
Total Return(**) (39.75)% 18.62% 12.44%
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ---------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 413 $ 607 $ 2
- ---------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.30% 0.23% 0.33%+
- ---------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.03 -- --
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate 96.76% 83.08% 109.92%
- ---------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.90% -- --
- ---------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 1.90% -- --
- ---------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.85% 1.92% 1.97%+
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EMERGING ASIA FUND LATIN AMERICA FUND
Class R Shares Class R Shares
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended June 30, Fiscal Year Ended June 30,
-------------------------- --------------------------
1998 1997(d) 1998(e)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 18.91 $ 12.00 $ 12.00
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.13 0.01 0.33
Net realized and unrealized gain/(loss) on investments (11.74) 6.95 (3.34)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (11.61) 6.94 (3.01)
- -------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) -- (0.07)
Distributions in excess of net investment income (0.00)# (0.03) --
Distributions from net realized capital gains (0.95) -- (0.15)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.12) (0.03) (0.22)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 6.18 $ 18.91 $ 8.77
- -------------------------------------------------------------------------------------------------------------------------------
Total Return(**) (63.45)% 57.80% (25.42)%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 24,608 $ 68,095 $ 4,465
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.22% (0.42)%+ 3.18%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.08 $ 0.02 $ 0.04
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 153.97% 72.18% 168.18%
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.91% 2.20%+ 0.26%
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.27% 2.69%+ 3.04%
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90% 1.80%+ 0.00%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL OPPORTUNITIES FUND
Class R Shares
Fiscal Year Ended June 30,
--------------------------------------------------------------
1998## 1997 1996 1995 1994(f)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 19.17 $ 16.96 $ 13.25 $ 12.92 $ 12.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.00# (0.11) (0.06) 0.13 0.01
Net realized and unrealized gain/(loss) on investments 3.87 3.14 3.84 0.70 0.91
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.87 3.03 3.78 0.83 0.92
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- (0.07) -- --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (3.85) (0.82) -- (0.50) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (3.85) (0.82) (0.07) (0.50) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 19.19 $ 19.17 $ 16.96 $ 13.25 $ 12.92
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return(**) 27.12% 18.71% 28.64% 6.43% 7.67%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $96,412 $32,371 $28,496 $13,677 $12,504
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.02)% (0.62)% (0.56)% 1.03% 0.02%+
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager -- $ (0.23) $ (0.16) $ (0.01) $ (0.05)
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 135.03% 117.10% 163.80% 118.75% 67.22%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.96% -- 2.05% 1.91% 1.99%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.37% 2.62% 3.10% 2.99% 2.75%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90% 1.90% 1.90% 1.90% 1.90%+
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(**) Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers 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.
99
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Financial Highlights
- --------------------
<TABLE>
<CAPTION>
GLOBAL COMMUNICATIONS FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended Fiscal Year Ended June 30,
-------------------------------------------------
1998## 1997 1996
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 19.61 $ 18.05 $ 15.42
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.17) (0.25) (0.20)
Net realized and unrealized gain/(loss) on investments 7.19 2.72 2.83
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment
operations 7.02 2.47 2.63
- ---------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- --
Distributions in excess of net investment income -- -- --
Distributions from net realized capital gains (3.75) (0.91) --
Distributions in excess of net realized capital gains -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (3.75) (0.91) --
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 22.88 $ 19.61 $ 18.05
- ---------------------------------------------------------------------------------------------------------------------------
Total Return** 45.45% 14.43% 17.06%
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $267,113 $153,955 $206,671
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.85)% (1.05)% (1.01)%
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.17) $ (0.27) $ (0.22)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 79.67% 75.79% 103.73%
- ---------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.93% -- 2.01%
- ---------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.93% 2.00% 2.11%
- ---------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.90% 1.91% 1.90%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class R Shares
Fiscal Year Ended June 30,
1995 1994
------------------------------
<S> <C> <C>
Net Asset Value -- Beginning of Year $ 14.20 $ 12.45
- --------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.03) (0.05)
Net realized and unrealized gain/(loss) on investments 1.28 1.80++
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment
operations 1.25 1.75
- --------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- --
Distributions in excess of net investment income -- --
Distributions from net realized capital gains -- --
Distributions in excess of net realized capital gains (0.03) --
- --------------------------------------------------------------------------------------------------------
Total distributions (0.03) --
- --------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 15.42 $ 14.20
- --------------------------------------------------------------------------------------------------------
Total Return** 8.83% 14.06%
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $209,644 $234,886
- --------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.10)% (0.46)%
- --------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.07) $ (0.06)
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate 50.17% 29.20%
- --------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.91% 1.94%
- --------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 2.09% 2.04%
- --------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.90% 1.90%
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECT 50 FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended Fiscal Year Ended June 30,
-------------------------------------
1998## 1997## 1996(b)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 20.01 $ 16.46 $ 12.00
- ----------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.12 0.01 0.06
Net realized and unrealized gain/(loss) on investments 2.70 4.16 4.45
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 2.82 4.17 4.51
- ----------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.10) (0.04)
Distributions in excess of net investment income -- -- --
Distributions from net realized capital gains (1.85) (0.52) --
Distributions in excess of net realized capital gains -- -- (0.01)
Distributions from capital -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total distributions (1.85) (0.62) (0.05)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 20.98 $ 20.01 $ 16.46
- ----------------------------------------------------------------------------------------------------------------
Total Return** 15.44% 26.35% 37.75%
- ----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $269,667 $172,509 $77,955
- ----------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.58% 0.04% 0.42%+
- ----------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.12 (0.01) $ 0.02
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 151.43% 157.93% 105.98%
- ----------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.81% -- --
- ----------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.81% 1.92% 2.11%+
- ----------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.80% 1.82% 1.80%+
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Fiscal Year Ended June 30,
--------------------------
1998## 1997(b)##
<S> <C> <C>
Net Asset Value -- Beginning of Year $ 19.98 $ 15.89
- ---------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.09 (0.02)
Net realized and unrealized gain/(loss) on investments 2.46 4.11
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 2.55 4.09
- ---------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- --
Distributions in excess of net investment income -- --
Distributions from net realized capital gains (1.85) --
Distributions in excess of net realized capital gains -- --
Distributions from capital -- --
- ---------------------------------------------------------------------------------------------------
Total distributions (1.85) --
- ---------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 20.68 $ 19.98
- ---------------------------------------------------------------------------------------------------
Total Return** 14.12% 25.74%
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ---------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 52 $ 9
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.34% (0.21)%+
- ---------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.09 $ (0.03)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 151.43% 157.93%
- ---------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 2.06% --
- ---------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 2.06% 2.17%+
- ---------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 2.05% 2.07%+
- ---------------------------------------------------------------------------------------------------
</TABLE>
(b) The Select 50 Fund's Class R shares and Class P shares commenced operations
on October 2, 1995, and December 12, 1996, respectively.
100
The accompanying notes are an integral part of these financial statements.
<PAGE>
U.S. ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
Class R Shares
Selected Per-Share Data for the Year or Period Ended Fiscal Year Ended June 30,
-------------------------------------------------------------
1998 1997## 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 19.89 $ 19.33 $ 16.33 $ 12.24 $12.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 1.66 0.48 0.26 0.25 0.06
Net realized and unrealized gain/(loss) on investments 0.99 2.13 3.54 4.11 0.18
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment
operations 2.65 2.61 3.80 4.36 0.24
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.93) (0.39) (0.25) (0.17) --
Distributions in excess of net investment income (0.70) -- -- -- --
Distributions from net realized capital gains (1.83) (1.66) (0.55) (0.10) --
Distributions in excess of net realized capital gains -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (3.46) (2.05) (0.80) (0.27) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 19.08 $ 19.89 $ 19.33 $ 16.33 $12.24
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return** 14.67% 14.65% 23.92% 35.99% 2.00%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $128,075 $127,214 $132,511 $60,234 $1,548
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 3.10% 2.55% 1.85% 3.43% 2.54%+
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 1.63 $ 0.47 $ 0.24 $ 0.19 $(0.11)
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 84.23% 168.51% 225.91% 95.75% 190.94%
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.26% 1.43% 1.42% 1.31% 1.43%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 0.31% 1.49% 1.55% 2.07% 9.00%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.25% 1.31% 1.30% 1.30% 1.30%+
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Fiscal Year Ended June 30,
-------------------------------------
1998 1997## 1996(a)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 19.89 $ 19.33 $ 17.86
- ------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 1.62 0.43 0.09
Net realized and unrealized gain/(loss) on investments 1.01 2.13 1.38
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment
operations 2.63 2.56 1.47
- ------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.84) (0.34) --
Distributions in excess of net investment income (0.74) -- --
Distributions from net realized capital gains (1.83) (1.66) --
Distributions in excess of net realized capital gains -- -- --
- ------------------------------------------------------------------------------------------------------------
Total distributions (3.41) (2.00) --
- ------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 19.11 $ 19.89 $ 19.33
- ------------------------------------------------------------------------------------------------------------
Total Return** 14.53% 14.35% 8.23%
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 71 $ 74 $ 43
- ------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 2.85% 2.30% 1.60%+
- ------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 1.59 $ 0.42 $ 0.08
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 84.23% 168.51% 225.91%
- ------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.51% 1.68% 1.67%+
- ------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 0.56% 1.74% 1.80%+
- ------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.50% 1.56% 1.55%+
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The U.S. Asset Allocation Fund's Class R shares and Class P shares
commenced operations on March 31, 1994, and January 2, 1996, respectively.
SHORT DURATION GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
Class R Shares
Selected Per-Share Data for the Year or Period Ended Fiscal Year Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997## 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 9.99 $ 9.92 $ 9.95 $ 9.80 $ 10.23
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.57 0.59 0.60 0.62 0.61
Net realized and unrealized gain/(loss) on investments 0.16 0.07 (0.04) 0.16 (0.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.73 0.66 0.56 0.78 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.56) (0.59) (0.59) (0.62) (0.56)
Distributions in excess of net investment income -- (0.00)# (0.00)# -- (0.07)
Distributions from net realized capital gains (0.02) -- -- -- --
Distributions in excess of net realized capital gains -- -- -- -- (0.07)
Distributions from capital -- -- -- (0.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.58) (0.59) (0.59) (0.63) (0.70)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 10.14 $ 9.99 $ 9.92 $ 9.95 $ 9.80
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 7.56% 6.79% 5.74% 8.28% 2.49%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data: $66,357 $47,265 $22,681 $17,093 $21,937
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) 5.83% 5.87% 5.88% 6.41% 5.93%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.51 $ 0.54 $ 0.52 $ 0.54 $ 0.51
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 502.23% 450.98% 349.62% 284.23% 603.07%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.15% 1.55% 1.55% 1.38% 0.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.73% 2.05% 2.31% 2.23% 1.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.28% 0.60% 0.60% 0.47% 0.25%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Fiscal Year Ended June 30,
---------------------------------
1998 1997## 1996(c)
Net Asset Value -- Beginning of Year $ 9.99 $ 9.92 $ 9.98
- ----------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.61 0.59 0.16
Net realized and unrealized gain/(loss) on investments 0.12 0.06 (0.05)
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.73 0.65 0.11
- ----------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (.57) (0.58) (0.17)
Distributions in excess of net investment income -- (0.00)# --
Distributions from net realized capital gains -- -- --
Distributions in excess of net realized capital gains -- -- --
Distributions from capital -- -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (0.57) (0.58) (0.17)
- ----------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 10.15 $ 9.99 $ 9.92
- ----------------------------------------------------------------------------------------------------------
Total Return** 7.34% 6.69% 1.12%
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data: $ 3 $ 0 $ 1
- ----------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) 5.58% 5.62% 5.63%+
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets
- ----------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager 0.55 $ 0.54 $ 0.14
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 502.23% 450.98% 349.62%
- ----------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.40% 1.80% 1.80%+
- ----------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.98% 2.30% 2.56%+
- ----------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.53% 0.85% 0.85%+
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(c) The Short Duration Government Bond Fund's Class P shares commenced
operations on March 11, 1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers 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.
101
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Financial Highlights
- --------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE MONEY FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended Fiscal Year Ended June 30,
--------------------------------------------------------
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.029 0.029 0.030 0.027
Net realized and unrealized gain/(loss) on investments 0.000 ### 0.000### 0.000### 0.000###
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.029 0.029 0.030 0.027
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.029) (0.029) (0.030) (0.027)
Distributions in excess of net investment income -- -- -- (0.000)###
Distributions from net realized gains -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.029) (0.029) (0.030) (0.027)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------
Total Return(**) 3.00% 2.95% 3.03% 2.68%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $187,216 $118,723 $98,134 $64,780
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 2.96% 2.91% 2.99% 3.55%+
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.029 $ 0.028 $ 0.028 $ 0.023
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.58% 0.58%+ 0.59% 0.33%+
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 0.68% 0.73% 0.80% 0.86%+
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.58% -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The California Tax-Free Money Fund's Class R shares commenced operations on
September 30, 1994.
(b) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
(c) The Total Return Bond Fund's Class R shares commenced operations on June
30, 1997.
<TABLE>
<CAPTION>
FEDERAL TAX-FREE MONEY FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended Fiscal Year Ended June 30,
----------------------------
1998 1997(d)
<S> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.031 0.032
Net realized and unrealized gain/(loss) on investments 0.000### 0.000###
- -----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.031 0.032
- -----------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.031) (0.032)
Distributions in excess of net investment income -- --
Distributions from net realized capital gains -- (0.000)###
- -----------------------------------------------------------------------------------------------------------------
Total distributions (0.031) (0.032)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------
Total Return(**) 3.12% 3.26%
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $117,283 $114,197
- -----------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 3.08% 3.24%+
- -----------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.031 $ 0.030
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- --
- -----------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 0.60% 0.33%+
- -----------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 0.81% 0.69%+
- -----------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 0.60% --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(d) The Federal Tax-Free Money Fund's Class R shares commenced operations on
July 15, 1996.
(e) The Global Asset Allocation Fund's Class R shares
commenced operations on December 31, 1996.
(f) The Government Reserve Fund's Class R shares and Class P shares commenced
operations on September 14, 1992, and March 11, 1996, respectively.
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Class R Shares
Fiscal Year Ended June 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 12.53 $ 12.23 $ 12.04 $11.79 $ 12.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.51 0.53 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on investments 0.33 0.30 0.19 0.25 (0.21)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.84 0.83 0.73 0.69 0.20
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.51) (0.53) (0.54) (0.44) (0.41)
Distributions in excess of net investment income -- -- -- (0.00)# --
Distributions from net realized gains -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.51) (0.53) (0.54) (0.44) (0.41)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 12.86 $ 12.53 $12.23 $12.04 $ 11.79
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return(**) 6.85% 6.91% 6.11% 6.03% 1.65%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $35,667 $21,681 $13,948 $5,153 $ 11,556
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.03% 4.27% 4.34% 3.71% 3.44%+
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.44 $ 0.47 $0.43 $ 0.34 $ 0.25
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 42.36% 25.60% 58.11% 37.93% 77.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.69% 0.68% 0.61% 0.56% 0.23%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.19% 1.18% 1.43% 1.41% 1.63%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.68% -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL RETURN BOND FUND
Class R Shares
Fiscal Year Ended June 30,
---------------------------
1998(c)
<S> <C>
Net Asset Value -- Beginning of Year $ 12.00
- --------------------------------------------------------------------------------------------------
Net investment income 0.72
Net realized and unrealized gain/(loss) on investments 0.56
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 1.28
- --------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.72)
Distributions in excess of net investment income (0.00)#
Distributions from net realized gains (0.12)
- --------------------------------------------------------------------------------------------------
Total distributions (0.84)
- --------------------------------------------------------------------------------------------------
Net Asset Value-- End of Period $ 12.44
- --------------------------------------------------------------------------------------------------
Total Return(**) 10.92%
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $77,694
- --------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 5.81%
- --------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.71
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate 390.08%
- --------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.29%
- --------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.34%
- --------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.70%
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE FUND
Class R Shares
Fiscal Year Ended June 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.052 0.049 0.052 0.049 0.029
Net realized and unrealized gain/(loss) on investments 0.000### 0.000### 0.000### 0.000### 0.000###
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.052 0.049 0.052 0.049 0.029
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.052) (0.049) (0.052) (0.049) (0.029)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.052) (0.049) (0.052) (0.049) (0.029)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(**) 5.27% 5.03% 5.28% 4.97% 2.96%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $724,619 $473,154 $439,423 $258,956 $211,129
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.15% 4.93% 5.17% 4.92% 2.99%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.052 $ 0.049 $ 0.050 $ 0.047 $ 0.028
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.53% -- -- 0.63% --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 0.48% 0.62% 0.74% 0.79% 0.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.53% 0.60% 0.60% 0.60% 0.60%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Fiscal Year Ended June 30,
--------------------------------------------
1998 1997 1996(f)
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.049 0.048 0.014
Net realized and unrealized gain/(loss) on investments 0.000### 0.000### 0.000###
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.049 0.048 0.014
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.049) (0.048) (0.014)
Distributions in excess of net investment income -- -- --
Distributions from net realized capital gains -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.049) (0.048) (0.014)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------------------
Total Return(**) 5.00% 4.88% 1.38%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) $ 0 -- $ 1
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 4.90% 4.68% 4.91%+
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.049 $ 0.048 $ 0.013
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.78% -- --
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 0.73% 0.87% 0.99%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.78% 0.85% 0.85%+
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(**) Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
# Amount represents less than $0.01 per share.
## Per-share numbers 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.
### Amount represents less than $0.001 per share.
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
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, 1998, the Trusts had 23 publicly offered
series (individually, a "Fund" and, collectively, the "Funds"). The Montgomery
Funds included the following: Montgomery Growth Fund, Montgomery Small Cap
Opportunities Fund, Montgomery Small Cap Fund, Montgomery U.S. Emerging Growth
Fund (formerly Montgomery Micro Cap Fund), Montgomery Equity Income Fund,
Montgomery International Growth Fund, Montgomery International Small Cap Fund,
Montgomery Emerging Markets Fund, Montgomery Emerging Asia Fund, Montgomery
Latin America Fund, Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery Select 50 Fund, Montgomery Total Return Bond
Fund, Montgomery Short Duration Government Bond Fund, Montgomery California
Tax-Free Intermediate Bond Fund, Montgomery Government Reserve Fund, Montgomery
California Tax-Free Money Fund and Montgomery Federal Tax-Free Money Fund. The
Montgomery Funds II included the following: Montgomery U.S. Asset Allocation
Fund (formerly Montgomery Asset Allocation Fund), Montgomery Emerging Markets
Focus Fund, Montgomery Global Long-Short Fund and Montgomery Institutional
Series: Emerging Markets Portfolio.
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.
1. SIGNIFICANT ACCOUNTING POLICIES:
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
Emerging Markets Focus Fund, Montgomery Global Long-Short Fund and Montgomery
Institutional Series: Emerging Markets Portfolio, which are presented under
separate cover.
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 ask prices.
Portfolio securities that 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 or on the Nasdaq national 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, California Tax-Free Money Fund and the Federal
Tax-Free Money Fund, portfolio securities are valued at amortized cost, which
approximates market value.
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision of
the Trusts' officers in accordance with methods authorized by the Trusts' Board
of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.
b. Forward Foreign-Currency Exchange Contracts
Certain Funds may engage in forward foreign-currency exchange contracts (forward
contract) as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. A forward contract is a commitment
to purchase or sell a foreign currency at the settlement date at a negotiated
rate.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies, and unrealized gain/(loss) is recorded daily. Realized
and unrealized gains and losses that represent the difference between the value
of the forward contract to buy and the forward contract to sell are included in
net realized and unrealized gain/(loss) from foreign-currency related
transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, a Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
c. Foreign Currency
The accounting records of the Funds are maintained in U.S. dollars. Investment
securities and all other assets and liabilities of the Funds denominated in a
foreign currency are translated into U.S. dollars at the exchange rate each day.
Purchases and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the exchange rate in effect on the date of the
respective transactions.
The Funds do not isolate the portion of the fluctuations on investments
resulting from changes in foreign-currency exchange rates from the fluctuations
in market prices of investments held. Such fluctuations are included with the
net realized gain or loss and unrealized appreciation or depreciation from
investments.
d. Repurchase Agreements
Each Fund may engage in repurchase agreement transactions either individually or
jointly through a joint repurchase account with other series of the Trusts
pursuant to a joint repurchase agreement.
104
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
Under the terms of a typical repurchase agreement, a Fund takes possession of a
government debt obligation as collateral. The Fund also agrees with the
counterparty to allow the counterparty to repurchase, and the Fund to resell,
the obligation 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 obligation, 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 the 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 the 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 that involve 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 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 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. 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. A reverse repurchase agreement involves a sale by the Fund of
securities that it holds with an agreement by the Fund to repurchase 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
establishes a segregated account with its custodian in which the Fund maintains
cash, U.S. government securities or other high-grade liquid debt obligations
equal in value to its obligations with respect to reverse repurchase agreements.
g. 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.
h. Equity Swaps
Certain Funds may enter into equity swap agreements in order to participate in
foreign markets not currently accessible to the Fund. Pursuant to these
agreements, the Fund pays a swap fee in cash which is equal to a fixed
percentage of the cost for the underlying security (the "notional amount").
Additionally, the Fund will make semiannual payments to the swap counterparty
equal to any capital depreciation on the underlying security, plus a
floating-rate payment based on the notional amount and the six-month LIBOR rate.
The swap counterparty will make semiannual payments to the Fund equal to any
capital appreciation and any dividends received on the underlying security.
During the terms of the agreements, changes in the underlying value of the swaps
are recorded as unrealized gains or losses and are based on changes in the value
of the underlying security. Amounts received from (paid to) the swap
counterparty representing capital appreciation (depreciation) are recorded as
realized gain (loss), while dividends on the underlying security are recorded
when received. The Fund is exposed to credit risk in the event of
non-performance by the swap counterparty; the Fund does not anticipate
non-performance by the counterparty, however.
i. Dividends and Distributions
Dividends from net investment income of the Growth Fund, Small Cap Opportunities
Fund, Small Cap Fund, U.S. Emerging Growth Fund, International Growth Fund,
International Small Cap Fund, Emerging Markets Fund, Emerging Asia Fund, Latin
America Fund, Global Opportunities Fund, Global Communications Fund, Select 50
Fund and U.S. Asset Allocation Fund are declared and paid at least annually.
Dividends from net investment income of the Total Return Bond Fund, Short
Duration Government Bond Fund, California Tax-Free Intermediate Bond Fund,
Government Reserve Fund, California Tax-Free Money Fund and Federal 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.
105
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
Distributions of net realized capital gains (including net 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% 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, 1998, the following Funds recharacterized from
realized gains to net investment income as follows:
Fund Amount
- --------------------------------------------------------------------------------
Emerging Markets Fund............................................ $ 9,046
During the year ended June 30, 1998, the following Funds recharacterized from
net investment income to realize gains as follows:
Fund Amount
- --------------------------------------------------------------------------------
International Small Cap Fund .................................... $ 974
Latin America Fund .............................................. 2,198
Total Return Bond Fund .......................................... 30,097
Short Duration Government Bond Fund.............................. 90,023
Permanent differences incurred during the year ended June 30, 1998, resulting
from differences in book and tax accounting that have been reclassified at year
end to undistributed net investment income, accumulated net realized gain/(loss)
and paid-in capital were as follows:
Undistributed Accumulated
Net Net
Paid-in Investment Realized
Name of Fund Capital Income Gain/(Loss)
- --------------------------------------------------------------------------------
Growth Fund .................. $ 4,260,292 $ (384,108) $(3,876,184)
Small Cap Opportunities Fund . (2,502,295) 2,502,295 --
Small Cap Fund ............... 972 1,618,774 (1,619,746)
U.S. Emerging Growth Fund .... -- 3,157,905 (3,157,905)
International Growth Fund .... (58,690) (212,092) 270,782
International Small Cap Fund . (4) 105,104 (105,100)
Emerging Markets Fund ........ (2) (718,150) 718,152
Emerging Asia Fund ........... (186,773) 254,594 (67,821)
Latin America Fund ........... 37,806 (57,574) 19,768
Global Opportunities Fund .... -- (241,403) 241,403
Global Communications Fund ... (1,295,887) 781,442 514,445
Select 50 Fund ............... -- (742,464) 742,464
U.S. Asset Allocation Fund ... 2 6,579,836 (6,579,838)
Total Return Bond Fund ....... (21,218) (36,522) 57,740
Short Duration
Government Bond Fund ...... -- (45,583) 45,583
Government Reserve Fund ...... (21,502) 29,462 (7,960)
California Tax-Free Money Fund (1) -- 1
Federal Tax-Free Money Fund .. (136) 136 --
j. Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis (date the order to
buy or sell is executed). Interest income is accrued daily and includes
amortization of premium and accretion of discount on investments. Realized gain
and loss from securities transactions are recorded on the specific identified
cost basis. Dividend income is recorded on the ex-dividend date, except that
certain dividends from foreign securities are recorded as soon as the Funds are
informed of the ex-dividend date. Interest income, including, where applicable,
accretion/amortization of discount/premium on short-term investments, is
recognized on the accrual basis. Each Fund's investment income and realized and
unrealized gains and losses are allocated among its classes based on the
relative net assets of each class of shares.
k. Federal Income Taxes
Each Fund has elected and qualified, and it is the intention of each Fund to
continue to qualify, 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. Therefore, no federal income or excise tax provision is
applicable.
The Funds may be subject to foreign taxes on income, gains on investments or
currency repatriation, a portion of which may be recoverable. The Funds will
accrue such taxes and recoveries as applicable, based upon their current
interpretation of tax rules and regulations that exist in the markets in which
they invest.
l. Organization Costs
Expenses incurred in connection with the organization of each Fund are amortized
on a straight-line basis over a period of five years from the commencement of
operations.
m. Cash
Cash, as used in the Statements of Cash Flows, is the amount reported in the
Statements 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 Statements of
Changes in Net Assets. Information on cash payments is presented in the
Statements of Cash Flows. Accounting practices that do not affect reporting
activities on a cash basis include unrealized gain or loss on investment
securities, accretion income recognized on investment securities and
amortization of organization costs.
n. Expenses
General expenses of the Trusts are allocated to the relevant Funds based upon
relative net assets. Operating expenses directly attributable to a Fund or a
class of shares are charged to that Fund's or class' operations. Expenses of
each Fund not directly attributable to the operations of any Fund or class of
shares are prorated among the classes based on the relative average net assets
of each Fund or class of shares.
106
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
2. MANAGEMENT FEES AND OTHER
TRANSACTIONS WITH AFFILIATES AND
OTHER CONTRACTUAL COMMITMENTS:
a. Montgomery Asset Management, LLC, is the Funds' Manager (the "Manager"). The
Manager, a Delaware limited liability company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The Manager is a
subsidiary of Commerzbank AG.
Pursuant to Investment Management Agreements (the "Agreements") between the
Manager and the Trusts with respect to each Fund ("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 the Agreements. 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 Rule
12b-1 fees, dividend expense, interest, extraordinary expenses and taxes at or
below the following percentages of each Fund's average net assets: 1.50% for the
Growth Fund; 1.50% for the Small Cap Opportunities Fund; 1.40% for the Small Cap
Fund; 1.75% for the U.S. Emerging Growth Fund; 0.85% for the Equity Income Fund;
1.65% for the International Growth Fund; 1.90% for the International Small Cap
Fund, the Emerging Markets Fund, the Emerging Asia Fund, the Latin America Fund,
the Global Opportunities Fund and the Global Communications Fund; 1.80% for the
Select 50 Fund; 0.25% for the U.S. Asset Allocation Fund (excluding expenses
relating to the underlying funds or 1.30% including total expenses of the
underlying funds); 0.70% for the Total Return Bond Fund, the Short Duration
Government Bond Fund and the California Tax-Free Intermediate Bond Fund; and
0.60% for the Government Reserve Fund, the California Tax-Free Money Fund and
the Federal Tax-Free Money Fund. Any reductions or absorptions made to a Fund by
the Manager are subject to recovery within the following three years, provided a
Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Manager may terminate these reductions or
absorptions at any time.
Montgomery Asset Management, LLC, 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 on the average daily net assets of each Fund. The
following effective management fee 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:
Management
Effective Fee Including Effective
Management Effect of Administration
Name of Fund Fee Fees Reduced Fee
- --------------------------------------------------------------------------------
Growth Fund ................ 0.91% 0.91% 0.06%
Small Cap Opportunities Fund 1.37 1.10 0.07
Small Cap Fund ............. 1.00 1.00 0.07
U.S. Emerging Growth Fund .. 1.33 1.33 0.07
Equity Income Fund ......... 0.93 0.39 0.07
International Growth Fund .. 1.52 1.06 0.07
International Small Cap Fund 1.89 1.29 0.07
Emerging Markets Fund ...... 1.06 1.06 0.06
Emerging Asia Fund ......... 1.48 1.12 0.07
Latin America Fund ......... 1.25 0.00 0.07
Global Opportunities Fund .. 1.67 1.26 0.07
Global Communications Fund . 1.33 1.33 0.07
Select 50 Fund ............. 1.29 1.29 0.07
U.S. Asset Allocation Fund . -- -- --
Total Return Bond Fund ..... 0.50 0.45 0.05
Short Duration
Government Bond Fund ..... 0.50 0.00 0.05
California Tax-Free
Intermediate Bond Fund ... 0.81 0.31 0.05
Government Reserve Fund .... 0.33 0.33 0.04
California Tax-Free
Money Fund ............... 0.50 0.41 0.05
Federal Tax-Free Money Fund 0.63 0.42 0.05
The Manager recouped previously deferred fees and/or absorbed expenses during
the year ended June 30, 1998. These amounts have been included with current
annual management fees in the Statement of Operations and are part of the
effective management fee shown. The amounts recouped during the year ended June
30, 1998, were $452,538, $150,340, $174,274, $303,672, $101,227, $210,682,
$149,697, $103,117, $89,493, $105,801, $180,007 and $287,066 for the Small Cap
Opportunities Fund, Equity Income Fund, International Growth Fund, International
Small Cap Fund, Emerging Asia Fund, Global Opportunities Fund, Global
Communications Fund, Select 50 Fund, California Tax-Free Intermediate Bond Fund,
Government Reserve Fund, California Tax-Free Money Fund and Federal Tax-Free
Money Fund, respectively. For the year ended June 30, 1998, the Global
Communications Fund also waived fees of $14,687.
For the year ended June 30, 1998, the Manager has deferred fees and/or absorbed
expenses and has deferred management fees and absorbed expenses subject to
recoupment as follows:
107
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
Deferred
Management Fees
and Absorbed
Expenses
Fees Expenses Subject to
Reduced Absorbed Recoupment
- --------------------------------------------------------------------------------
Small Cap Opportunities Fund ... $658,481 -- $658,481
Equity Income Fund ............. 246,077 -- 363,742
International Growth Fund ...... 189,698 -- 189,698
International Small Cap Fund ... 286,566 -- 286,566
U.S. Asset Allocation .......... -- 71,778 160,233
Emerging Asia Fund ............. 157,217 -- 157,217
Latin America Fund ............. 92,848 113,614 206,462
Global Opportunities Fund ...... 203,595 -- 203,595
Total Return Bond Fund ......... 37,741 -- 37,741
Short Duration
Government Bond Fund ......... 269,242 40,155 503,922
California Tax-Free Intermediate
Bond Fund .................... 145,588 -- 226,787
California Tax-Free Money Fund . 168,617 -- 168,617
Federal Tax-Free Money Fund .... 265,710 -- 265,710
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 Trusts advised by
the Manager ($25,000 of which will be allocated to the Montgomery Funds and
$5,000 to the Montgomery Funds II).
c. 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 to shareholder servicing and record-keeping and
are reflected in the Funds' financial statement as "servicing fees." The
Manager, out of its own resources, may make additional payments to financial
intermediaries and recordkeepers in connection with the Funds' participation in
these programs. The following Funds participate in one or more of these
programs: Growth Fund, Small Cap Opportunities Fund, Small Cap Fund, U.S.
Emerging Growth Fund, Equity Income Fund, International Growth Fund,
International Small Cap Fund, Emerging Markets Fund, Emerging Asia Fund, Latin
America Fund, Global Opportunities Fund, Global Communications Fund, Select 50
Fund, U.S. Asset Allocation Fund, Total Return Bond Fund, Short Duration
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 (the "Rule"). Pursuant to that Rule,
the Trusts' Board of Trustees has approved, and each Fund has entered into, the
Plan with Funds Distributor, Inc., the Funds' distributor (the "Distributor"),
as the distribution coordinator, for the Class P shares. Under the Plan, each
Fund will pay distribution fees to the Distributor at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to its Class
P shares, to reimburse the Distributor for its distribution costs with respect
to that class (the "Class").
The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to, (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to the 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 in 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, paid
monthly and charged as expenses of the Class P shares as accrued.
4. 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,
1998, were:
Fund Purchases Sales
- --------------------------------------------------------------------------------
Growth Fund ................ $ 682,184,933 $600,517,516
Small Cap Opportunities Fund 188,286,639 230,533,334
Small Cap Fund ............. 150,327,379 181,467,649
U.S. Emerging Growth Fund .. 171,817,661 169,997,636
Equity Income Fund ......... 29,833,393 31,468,746
International Growth Fund .. 61,126,212 44,869,987
International Small Cap Fund 48,031,722 54,505,653
Emerging Markets Fund ...... 1,045,526,583 976,128,736
Emerging Asia Fund ......... 61,018,962 61,585,186
Latin America Fund ......... 17,960,012 10,995,157
Global Opportunities Fund .. 113,383,841 65,837,359
Global Communications Fund . 184,459,575 137,999,036
Select 50 Fund ............. 402,639,316 334,894,961
U.S. Asset Allocation Fund . 256,354,308 113,109,340
Short Duration
Government Bond Fund ..... 288,319,692 265,130,534
Total Return Bond Fund ..... 267,442,822 246,491,006
California Tax-Free
Intermediate Bond Fund ... 46,404,001 61,981,423
108
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
The aggregate amount of purchases and sales of long-term U.S. government
securities, during the year ended June 30, 1998, were:
Fund Purchases Sales
- --------------------------------------------------------------------------------
Total Return Bond Fund.................. $270,611,029 $264,006,757
Short Duration
Government Bond Fund.................. 285,973,769 254,617,508
b. At June 30, 1998, 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 were as follows:
<TABLE>
<CAPTION>
Tax Basis Tax Basis Net Tax Basis Cost for
Unrealized Unrealized Unrealized Appreciation Federal Tax
Fund Appreciation Depreciation (Depreciation) Purposes
- ---- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C>
Growth Fund ................................. $307,521,808 $ 56,979,696 $ 250,542,112 $1,131,859,406
Small Cap Opportunities Fund ................ 46,998,433 4,909,819 42,088,614 160,623,415
Small Cap Fund .............................. 63,694,606 11,445,834 52,248,772 172,933,682
U.S. Emerging Growth Fund ................... 143,179,014 10,194,736 132,984,278 253,489,836
Equity Income Fund .......................... 5,311,747 754,040 4,557,707 38,228,481
International Growth Fund ................... 11,314,289 2,056,336 9,257,953 56,128,605
International Small Cap Fund ................ 7,722,142 3,805,491 3,916,651 45,401,046
Emerging Markets Fund ....................... 55,649,518 202,057,101 (146,407,583) 903,277,357
Emerging Asia Fund .......................... 264,948 14,142,928 (13,877,980) 36,988,410
Latin America Fund .......................... 16,698 1,426,677 (1,409,979) 5,878,340
Global Opportunities Fund ................... 15,816,521 3,017,780 12,798,741 82,975,942
Global Communications Fund .................. 90,625,717 4,340,956 86,284,761 174,805,546
Select 50 Fund .............................. 39,369,293 11,256,730 28,103,563 253,907,126
U.S. Asset Allocation Fund .................. 1,603,639 2,923,149 (1,319,520) 129,504,131
Total Return Bond Fund ...................... 1,887,108 67,460 1,819,648 83,052,927
Short Duration Government Bond Fund ......... 248,935 43,564 205,371 73,987,980
California Tax-Free Intermediate Bond Fund .. 917,375 23,846 893,529 36,612,246
</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
Fund the Year 6/30/98 the Year the Year the Year Earned
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Return Bond Fund .................. $12,210,000 $1,526,250 $5,895,411 5,860,986 $1.01 $88,679
Short Duration Government Bond Fund ..... 4,081,250 4,085,568 1,148,777 5,271,528 0.22 14,035
</TABLE>
The average amount outstanding during the year 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, 1998.
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
Fund the Year the Year the Year the Year Rate Expense
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Return Bond Fund .................. $19,092,925 $6,056,319 5,860,986 $ 1.03 3.75% $455,766
Short Duration Government Bond Fund ..... 20,310,000 5,740,192 5,271,528 1.09 4.00 467,241
</TABLE>
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, 1998.
Reverse repurchase agreements outstanding at June 30, 1998:
Total Return Bond Fund:
$6,908,738 Reverse repurchase agreement with BZW Securities, dated
06/30/98 bearing 5.75%, to be repurchased at $6,909,841,
collateralized by U.S government securities
having various maturities and interest rates $6,908,738
Short Duration Government Bond Fund:
$4,934,813 Reverse repurchase agreement with BZW Securities dated
06/30/98 bearing 5.75%, to be repurchased at $4,935,601,
collateralized by U.S. government securities having
various maturities and interest rates $4,934,813
109
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
e. The schedule of forward foreign-currency exchange contracts at June 30, 1998,
were as follows:
<TABLE>
<CAPTION>
Foreign-Currency Net Unrealized
Amount Settlement Date In Exchange for (US$) Appreciation/(Depreciation)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund:
Forward Foreign-Currency Exchange Contracts to Receive
306,976 British Pound 07/01/98 $ 511,360 $ 1,197
509,873,505 Italian Lira 07/01/98 288,536 (1,567)
1,857,439 French Franc 07/31/98 309,367 (1,532)
------- ------
Total $1,109,263 $ (1,902)
--------- ------
Forward Foreign-Currency Exchange Contracts to Deliver
28,012 British Pound 07/02/98 $ 46,478 $ (295)
66,646 British Pound 07/03/98 110,579 (700)
138,000,000 Japanese Yen 09/08/98 1,120,220 111,726
108,000,000 Japanese Yen 09/08/98 868,377 79,120
------- ------
Total $2,145,654 $ 189,851
--------- -------
Net Unrealized Appreciation $ 187,949
-------
International Small Cap Fund:
Forward Foreign-Currency Exchange Contracts to Receive
364,442,663 Italian Lira 07/01/98 $ 206,200 $ (1,083)
312,518 Australian Dollar 07/02/98 190,199 3,796
54,602,292 Italian Lira 07/02/98 30,581 151
20,686 Australian Dollar 07/03/98 12,505 336
162,748 Australian Dollar 07/06/98 101,148 (131)
------- ----
Total $ 540,633 $ 3,069
------- -----
Forward Foreign-Currency Exchange Contracts to Deliver
294,229 British Pound 07/01/98 $ 490,461 $ (814)
52,542 French Franc 07/01/98 8,744 54
896,850 Japanese Yen 07/01/98 6,267 (219)
174,115 British Pound 07/02/98 288,892 (1,829)
409,212 Finnish Markka 07/02/98 74,362 (311)
163,876 British Pound 07/03/98 271,905 (1,723)
224,467,410 Italian Lira 07/03/98 125,717 (620)
------- ----
Total $1,266,348 $ (5,462)
--------- ------
Net Unrealized Depreciation $ (2,393)
------
Emerging Markets Fund:
Forward Foreign-Currency Exchange Contracts to Deliver
2,209,882 Brazilian Real 07/01/98 $1,907,486 $ (3,216)
338,079 Egyptian Pound 07/01/98 98,709 (398)
944,964 Brazilian Real 07/02/98 816,172 (882)
------- ---
Total $2,822,367 $ (4,496)
--------- -----
Net Unrealized Depreciation $ (4,496)
-----
</TABLE>
110
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
<TABLE>
<CAPTION>
Foreign-Currency Net Unrealized
Amount Settlement Date In Exchange for (US$) Appreciation/(Depreciation)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Opportunities Fund:
Forward Foreign-Currency Exchange Contracts to Receive
647,161,819 Italian Lira 07/01/98 $ 366,162 $ (1,923)
102,652,309 Italian Lira 07/02/98 57,492 283
------ ---
Total $ 423,654 $ (1,640)
======== ======
Forward Foreign-Currency Exchange Contracts to Deliver
176,237 British Pound 07/01/98 $ 293,576 $ (687)
64,301 British Pound 07/02/98 106,690 (676)
4,591,341 Spanish Peseta 07/02/98 29,866 (74)
156,556 British Pound 07/03/98 259,758 (1,646)
------- ------
Total $ 689,890 $ (3,083)
======= ======
Net Unrealized Depreciation $ (4,723)
======
Global Communications Fund:
Forward Foreign-Currency Exchange Contracts to Deliver
273,525 British Pound 07/01/98 $ 455,639 $ (1,067)
1,297,400 Finnish Markka 07/01/98 235,164 (1,586)
171,259 British Pound 07/02/98 284,154 (1,799)
512,890 British Pound 07/03/98 973,770 (6,170)
------- ------
Total $1,948,727 $(10,622)
========= =======
Net Unrealized Depreciation $(10,622)
=======
Select 50 Fund:
Forward Foreign-Currency Exchange Contracts to Receive
303,790,998,000 Turkish Lira 07/01/98 $1,140,741 $ 43
558,501,712 Portuguese Escudo 07/03/98 3,022,032 3,487
119,010,000 Thai Baht 07/20/98 2,866,329 (70,480)
--------- -------
Total $7,029,102 $(66,950)
========= =======
Forward Foreign-Currency Exchange Contracts to Deliver
168,412 British Pound 07/03/98 $ 280,845 $ (356)
119,010,000 Thai Baht 07/20/98 3,000,000 204,150
8,555,200 French Franc 07/31/98 1,423,865 5,966
--------- -----
Total $4,704,710 $209,760
========= =======
Net Unrealized Appreciation $142,810
=======
</TABLE>
f. Certain Funds have entered into equity swap agreements with Robert Fleming &
Co. Limited, London ("Fleming"), with respect to the holdings of foreign equity
securities. Each equity swap is for a period of three years. At June 30, 1998,
the Emerging Asia Fund had the following open equity swap agreement:
<TABLE>
<CAPTION>
Swap Floating Termination Unrealized
Underlying Security Notional Amount Fee Rate Rate Date Appreciation/(Depreciation)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hindustan Petroleum ........ $14,646 1.50% LIBOR + 0.50% 07/12/00 $ (3,010)
</TABLE>
111
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
g. Certain Funds may lend securities to brokers, dealers and other financial
organizations. Each security loan is collateralized with collateral assets in an
amount equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in collateral should the borrower
fail financially.
At June 30, 1998, the Funds had outstanding loans of securities to certain
brokers, dealers or other financial institutions for which each Fund has
segregated cash equivalent to 102% of the market value of loans of domestic
securities and 105% for loans of international securities as collateral with the
Funds' custodian. At June 30, 1998, the following Funds had securities on loan:
Market Value of Market Value
Fund Loaned Securities of Collateral
- --------------------------------------------------------------------------------
Growth Fund ............................. $24,414,288 $24,902,574
Equity Income Fund ...................... 263,204 268,468
Small Cap Opportunities Fund............. 20,309,976 20,716,176
Small Cap Fund .......................... 26,409,363 26,937,550
U.S. Emerging Growth Fund ............... 9,197,088 9,381,029
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Amount Maximum Average Average Debt
Fund Outstanding Debt Outstanding Interest Rate Average Shares per Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Communications Fund ........... $2,658,065 $12,700,000 8.5% 9,097,448 $0.29
Global Opportunities Fund ............ 2,920,000 9,100,000 8.5 2,700,098 1.08
International Growth Fund ............ 500,000 500,000 8.5 2,486,747 0.20
International Small Cap Fund ......... 2,328,571 3,400,000 8.5 3,096,907 0.75
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. FOREIGN SECURITIES:
Certain Funds may purchase securities on foreign security exchanges. Securities
of foreign companies and foreign governments involve 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 potential future adverse political and
economic developments. These risks are heightened for investments in emerging
markets 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.
Market Value of Market Value
Fund Loaned Securities of Collateral
- --------------------------------------------------------------------------------
International Growth Fund ................. 6,135,091 6,441,845
International Small Cap Fund............... 3,190,594 3,350,123
Global Communications Fund ................ 35,486,014 37,260,315
Global Opportunities Fund ................. 15,300,045 16,065,047
Income earned from securities lending transactions is included in miscellaneous
income on the Statements of Operations.
h. Under an unsecured Revolving Credit Agreement with Deutsche Bank (New York),
each of the Funds of The Montgomery Funds and The Montgomery Funds II may, for
one year starting August 6, 1997, borrow (consistent with applicable law and its
investment policies) up to one-third of its net asset value (or such lower limit
applicable to such Fund), provided that the aggregate funds do not exceed
$250,000,000. At June 30, 1998, there were no loans outstanding under this
agreement. For the year ended June 30, 1998, borrowings by the Funds under the
agreement were as follows:
6. ILLIQUID AND SPECIAL SITUATION SECURITIES:
Each Fund may not invest more than 15% (10% for the Government Reserve Fund,
California Tax-Free Money Fund and Federal Tax-Free Money Fund) of its net
assets in illiquid securities. The securities shown in the following table 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 the security at June 30, 1998. These securities are valued in good
faith by the Board of Trustees.
112
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
<TABLE>
<CAPTION>
Acquisition 6/30/98 Value per % of Total
Security Date Shares Market Value Share Cost Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Small Cap Fund:
InMedia Presentations, Inc.......... 10/01/97 196,096 $ 113,268 $ 0.58 $ 177,771 0.22%
Emerging Markets Fund:
Bajaj Auto Ltd...................... 02/18/98 2,720 $ 36,694 $13.49 $ 37,102 0.00%#
BSES Ltd............................ 02/17/98 8,950 32,929 3.68 41,951 0.00#
Castrol (India) Ltd................. 06/20/97 57 802 14.07 812 0.00#
Central Asia Growth Fund............ 06/17/98 240,806 1,806,048 7.50 2,480,000 0.24
Central Pattana Public Company, Ltd. 03/28/96 50,000 32,500 0.65 50,000 0.00#
Central Pattana Public Company, Ltd. 06/26/97 2,660,000 1,729,000 0.65 2,677,145 0.23
Ceske Radiokomunikace, GDR.......... 06/18/98 174,900 3,747,233 21.43 3,313,862 0.49
Engro Chemicals Pakistan............ 08/21/95 204 219 1.07 649 0.00#
Fauji Fertilizer Company Ltd........ 10/20/97 840,200 911,096 1.08 1,686,686 0.12
Global Telesystems Group Inc., ADR 03/13/98 69,583 3,315,803 47.65 497,026 0.44
Highstone Property Fund............. 09/19/95 5,895,000 1,565,704 0.27 3,119,736 0.21
Hindustan Petroleum Corporation Ltd. 06/12/97 3,500 32,235 9.21 45,883 0.00#
Housing Development and Finance
Corporation....................... 02/18/98 10 93 9.30 730 0.00#
Indian Hotels Company Ltd........... 07/23/97 150 1,520 10.13 2,674 0.00#
ITC Ltd............................. 09/15/97 8,946 137,566 15.38 139,028 0.02
Keppel Philippines Holdings, Inc.,
Class B........................... 12/15/97 78,038 1,909 0.02 24,900 0.00#
Mahanagar Telephone Nigam Ltd....... 09/02/97 100 420 4.20 678 0.00#
Oil and Natural Gas Corporation Ltd. 09/19/97 200 847 0.24 2,014 0.00#
Pakistan State Oil.................. 12/24/97 274,389 440,092 1.60 2,235,924 0.06
Pepsi International Bottlers........ 03/20/97 32,000 2,784,000 87.00 3,200,000 0.38
Romania Growth Fund PLC............. 08/21/97 168,811 759,649 5.00 1,718,000 0.10
State Bank of India................. 03/26/96 100 498 4.98 672 0.00#
Tan Chong International Ltd. Berhad 04/16/98 9,888,000 1,381,854 0.14 1,039,573 0.18
Teleceara Celular SA, Series D...... 04/23/97 4,556,835 236,401 0.05 670,599 0.03
Uralmas Zavody, ADR................. 10/28/97 302,100 1,963,650 6.50 2,582,955 0.26
Uraltelecom, ADR.................... 02/20/98 24,725 247,250 10.00 726,049 0.03
------- ----
$21,166,012 2.79%
Emerging Asia Fund:
Tan Chong International Ltd......... 03/06/98 225,000 $ 31,444 $ 0.14 $ 21,049 0.13%
Global Communications Fund:
Global Telesystems Group, Inc., ADR 04/22/94 676,480 $32,235,963 $47.65 $ 3,876,498 12.07%
Russian Telecommunications
Development Corporation........... 12/22/93 200,000 1,381,124 6.91 2,000,000 0.52
--------- ----
$33,617,087 12.59%
</TABLE>
Certain of the Funds hold foreign currency at June 30, 1998, which may be
illiquid because conversion to U.S. dollars could take more than seven days.
7. TRANSACTIONS IN SHARES OF 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 Government Reserve Fund, the
California Tax-Free Money Fund and the Federal 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 per
share, the numbers of shares represented by such sales, reinvestments and
redemptions are the same as the dollar amounts shown for such transactions.
113
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
TRANSACTIONS IN SHARES WITH A BENEFICIAL INTEREST
<TABLE>
<CAPTION>
GROWTH FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 16,507,063 $ 403,921,271 14,533,171 $ 306,808,623
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 7,601,712 163,436,074 6,074,664 124,941,420
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (15,029,335) (359,116,329) (13,524,409) (284,453,305)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 9,079,440 $ 208,241,016 7,083,426 $ 147,296,738
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 3,130 $ 75,468 5,296 $ 109,131
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 949 20,488 589 12,069
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (4,943) (123,213) (419) (8,489)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (864) $ (27,257) 5,466 $ 112,711
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EQUITY INCOME FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 1,554,094 $ 28,652,451 1,908,279 $ 31,459,740
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 265,748 4,707,487 182,143 2,889,405
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,772,223) (33,012,153) (1,135,568) (18,967,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 47,619 $ 347,785 954,854 $ 15,381,763
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 101,466 $ 1,859,907 49,516 $ 829,352
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 10,850 195,396 1,088 17,834
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (11,769) (219,667) (2,243) (38,048)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 100,547 $ 1,835,636 48,361 $ 809,138
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EMERGING MARKETS FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 64,252,253 $ 870,111,228 34,686,183 $ 519,924,852
- ------------------------------------------------------------------------------------------------------------------------------------
Issued in exchange for shares of the Montgomery
Advisors Emerging Markets Fund -- -- 486,078 6,576,635
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 2,665,847 33,243,134 313,619 4,247,945
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (64,669,860) (861,322,948) (30,814,815) (449,015,525)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 2,248,240 $ 42,031,414 4,671,065 $ 81,733,907
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 27,137 $ 398,184 38,561 $ 588,778
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,597 19,750 2 18
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (22,590) (312,707) (2,504) (37,618)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 6,144 $ 105,227 36,059 $ 551,178
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. EMERGING GROWTH FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 2,587,843 $ 57,987,143 2,139,966 $ 35,696,484
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 966,775 19,005,916 1,256,280 20,414,858
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (2,378,282) (53,191,782) (3,847,189) (64,577,395)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 1,176,336 $ 23,801,277 (450,943) $ (8,466,053)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Small Cap Opportunities, Small Cap, International Small Cap and Select 50
Funds' Class P shares commenced operations on July 29, 1996; July 1, 1996;
June 9, 1997; and December 12, 1996, respectively.
** The Emerging Asia and Latin America Funds' Class R shares commenced
operations on September 30, 1996, and June 30, 1997, respectively.
114
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP OPPORTUNITIES FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 5,720,009 $ 110,725,377 10,983,697 $ 171,594,561
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 293,588 5,193,514 2,521 39,628
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (8,394,502) (160,023,805) (6,691,938) (106,026,503)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (2,380,905) $ (44,104,914) 4,294,280 $ 65,607,686
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- -----------------------------------------------------------------------------------------------------------------------------------
Sold 225 $ 3,638 558 $ 8,550
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 14 254 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (238) (4,572) (25) (400)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 1 $ (680) 533 $ 8,150
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAP FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 697,973 $ 14,438,171 1,765,254 $ 33,679,540
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,320,879 24,450,884 1,995,154 37,911,061
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (2,362,125) (49,694,104) (6,366,339) (103,669,031)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (343,273) $(10,805,049) (2,605,931) $ (32,078,430)
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- -----------------------------------------------------------------------------------------------------------------------------------
Sold 943,236 $ 20,198,104 359,494 $ 6,929,517
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 154,148 2,828,622 22,222 418,949
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (389,596) (8,082,502) (39,938) (709,403)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 707,788 $ 14,944,224 341,778 $ 6,639,063
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL GROWTH FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 4,351,572 $ 75,095,191 2,118,300 $ 31,194,055
- ----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 95,761 1,401,682 69,551 948,742
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemed (3,062,252) (51,540,762) (1,295,308) (19,192,934)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase 1,385,081 $ 24,956,111 892,543 $ 12,949,863
- ----------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- ----------------------------------------------------------------------------------------------------------------------------------
Sold 121 $ 2,000 335 $ 5,001
- ----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends -- -- 9 116
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemed (184) (3,025) (78) (1,154)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (63) $ (1,025) 266 $ 3,963
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL SMALL CAP FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 2,996,436 $ 44,417,251 2,921,746 $ 44,958,978
- ----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 478,710 6,026,955 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemed (3,262,988) (48,676,575) (2,601,160) (39,608,191)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase 212,158 $ 1,767,631 320,586 $ 5,350,787
- ----------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- ----------------------------------------------------------------------------------------------------------------------------------
Sold 87,254 $ 1,157,000 855 $ 15,000
- ----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 53 674 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemed (87,867) (1,348,812) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (560) $ (191,138) 855 $ 15,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECT 50 FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 9,976,256 $ 210,226,345 7,588,001 $ 130,776,571
- ---------------------------------------------------------------------------------------------------------------------------------
Issued in exchange for shares of the Montgomery
Advisors Emerging Markets Fund -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,052,393 19,382,808 194,339 3,061,479
- ---------------------------------------------------------------------------------------------------------------------------------
Redeemed (6,797,972) (140,815,546) (3,899,388) (64,867,185)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 4,230,677 $ 88,793,607 3,882,952 $ 68,970,865
- ---------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- ---------------------------------------------------------------------------------------------------------------------------------
Sold 3,967 $ 82,688 3,579 $ 58,050
- ---------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 223 4,054 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Redeemed (2,131) (40,782) (3,147) (52,234)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 2,059 $ 45,960 432 $ 5,816
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. ASSET ALLOCATION FUND
Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 2,182,888 $ 44,133,894 2,671,291 $ 50,247,753
- ---------------------------------------------------------------------------------------------------------------------------------
Issued in exchange for shares of the Montgomery
Advisors Emerging Markets Fund -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,217,904 21,581,251 789,255 14,511,412
- ---------------------------------------------------------------------------------------------------------------------------------
Redeemed (3,086,435) (60,834,270) (3,918,381) (72,925,832)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 314,357 $ 4,880,875 (457,835) $ (8,166,667)
- ---------------------------------------------------------------------------------------------------------------------------------
P Shares:*
- ---------------------------------------------------------------------------------------------------------------------------------
Sold 334 $ 6,400 1,378 $ 26,534
- ---------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 720 12,778 253 4,643
- ---------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,074) (20,918) (97) (1,782)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (20) $ (1,740) 1,534 $ 29,395
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EMERGING ASIA FUND LATIN AMERICA FUND
Year Ended 6/30/98 Year Ended 6/30/97 Year Ended 6/30/98
R Shares: Shares Dollars Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 15,482,971 $ 169,893,174 6,926,941 $ 108,517,381 1,867,516 $ 21,898,525
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 289,356 2,751,873 2,124 29,137 12,581 132,228
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (15,395,025) (177,173,709) (3,327,106) (53,244,252) (1,371,200) (15,113,262)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 377,302 $ (4,528,662) 3,601,959 $ 55,302,266 508,897 $ 6,917,491
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
115
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
TRANSACTIONS IN SHARES WITH A BENEFICIAL INTEREST
<TABLE>
<CAPTION>
GLOBAL OPPORTUNITIES FUND CALIFORNIA TAX-FREE MONEY FUND
Year Ended 6/30/98 Year Ended 6/30/97 Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars Shares and Dollars Shares and Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 6,526,549 $ 115,648,814 1,552,210 $ 26,712,712 $ 1,344,581,138 $ 800,562,011
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 328,896 4,693,347 78,091 1,291,178 5,033,519 3,271,172
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (3,521,069) (64,528,940) (1,621,968) (27,517,770) (1,281,121,597) (783,244,187)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 3,334,376 $ 55,813,221 8,333 $ 486,120 $ 68,493,060 $ 20,588,996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL COMMUNICATIONS FUND FEDERAL TAX-FREE MONEY FUND*
Year Ended 6/30/98 Year Ended 6/30/97 Year Ended 6/30/98 Year Ended 6/30/97
R Shares:* Shares Dollars Shares Dollars Shares and Dollars Shares and Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 10,480,584 $ 216,384,607 1,553,395 $ 27,424,685 $ 1,183,904,180 $ 697,918,747
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 1,826,761 27,927,779 527,423 8,880,420 3,577,816 2,441,561
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (8,484,435) (170,608,536) (5,680,057) (98,872,932) (1,184,396,291) (586,161,101)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 3,822,910 $ 73,703,850 (3,599,239) $(62,567,827) $ 3,085,705 $ 114,199,207
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT DURATION GOVERNMENT BOND FUND GOVERNMENT RESERVE FUND
Year Ended 6/30/98 Year Ended 6/30/97 Year Ended 6/30/98 Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars Shares and Dollars Shares and Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 11,317,233 $ 114,184,061 5,462,262 $ 54,326,915 $ 5,085,349,172 $ 3,645,527,042
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 251,170 2,538,235 195,195 1,945,143 31,642,805 22,892,029
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (9,757,162) (98,380,450) (3,214,013) (31,983,590) (4,865,576,626) (3,634,659,585)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 1,811,241 $ 18,341,846 2,443,444 $ 24,288,468 $ 251,415,351 $ 33,759,486
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 296 $ 2,999 -- $ -- $ 282 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends -- 5 3 30 4 29
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (21) (214) (74) (740) (490) (729)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 275 $ 2,790 (71) $ (710) $ (204) $ (700)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND TOTAL RETURN BOND FUND*
Year Ended 6/30/98 Year Ended 6/30/97 Year Ended 6/30/98
R Shares: Shares Dollars Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 1,962,625 $ 25,203,200 1,175,026 $ 14,606,989 9,144,322 $ 110,211,352
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 75,599 969,104 36,878 457,824 416,875 5,131,390
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (994,510) (12,764,038) (621,747) (7,718,315) (3,314,312) (40,866,893)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 1,043,714 $ 13,408,266 590,157 $ 7,346,498 6,246,885 $ 74,475,849
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Total Return Bond and Federal Tax-Free Money Funds' Class R shares
commenced operations on June 30, 1997, and July 15, 1996, respectively.
The accompanying notes are an integral part of these financial statements.
116
<PAGE>
------------------------
The Montgomery Funds
------------------------
Notes
------------------------
to Financial Statements
8. CAPITAL LOSS CARRYFORWARDS:
At June 30, 1998, the following Funds had available for federal tax purposes
unused capital losses as follows:
<TABLE>
<CAPTION>
Fund Expiring in 2003 Expiring in 2004 Expiring in 2005 Expiring in 2006
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emerging Asia Fund................................. -- -- -- $ 3,385,829
Emerging Markets Fund.............................. -- -- -- 83,822,425
California Tax-Free Intermediate Bond Fund......... $17,719 -- -- --
Government Reserve Fund............................ $20,714 $5,378 -- --
California Tax-Free Money Fund..................... -- 6,745 -- 23
Federal Tax-Free Money Fund........................ -- -- -- 873
</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 ended June 30, 1998. The following Funds elected to defer losses
occurring between November 1, 1997, and June 30, 1998, under these rules as
follows:
Fund Amount
- ---------------------------------------------
Emerging Markets Fund ........ $63,465,119
Emerging Asia Fund ........... 8,794,617
Global Communications Fund ... 494,506
International Small Cap Fund.. 81,074
Latin America Fund ........... 1,216,108
Such deferred losses will be treated as arising on the first day of the fiscal
year ending June 30, 1999.
117
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Independent
Auditors' Report
- --------------------
To the Board of Trustees and the Shareholders of The Montgomery Funds and The
Montgomery Funds II:
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios investments, and the related statements of operations, of changes
in net assets, and of cash flows and the financial highlights present fairly, in
all material respects, the financial position of Montgomery Growth Fund,
Montgomery Small Cap Opportunities Fund, Montgomery Small Cap Fund, Montgomery
U.S. Emerging Growth Fund (formerly Montgomery Micro Cap Fund), Montgomery
Equity Income Fund, Montgomery International Growth Fund, Montgomery
International Small Cap Fund, Montgomery Emerging Markets Fund, Montgomery
Emerging Asia Fund, Montgomery Latin America Fund, Montgomery Global
Opportunities Fund, Montgomery Global Communications Fund, Montgomery Select 50
Fund, Montgomery Total Return Bond Fund, Montgomery Short Duration Government
Bond Fund, Montgomery Government Reserve Fund, Montgomery California Tax-Free
Intermediate Bond Fund, Montgomery California Tax-Free Intermediate Bond Fund,
Montgomery California Tax-Free Money Fund, Montgomery Tax-Free Money Fund (all
portfolios of The Montgomery Funds) and Montgomery U.S. Asset Allocation Fund (a
portfolio of The Montgomery Funds II) (collectively the "Funds") at June 30,
1998, the results of each their operations, the changes in each of their net
assets, their cash flows and the financial highlights for the periods ended June
30, 1998, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1998, by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
The financial statements of the Funds for the periods preceding July 1, 1997,
were audited by other independent accountants whose report dated August 8, 1997,
expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
San Francisco, CA
August 14, 1998
118
<PAGE>
- -------------------------------
The Montgomery Funds
- -------------------------------
Tax Information
- -------------------------------
Fiscal Year Ended June 30, 1998
The amounts of long-term capital gains paid for the fiscal year ended June 30,
1998, were as follows:
Growth Fund............................ $138,057,661
Small Cap Opportunities Fund........... 8,794,971
Small Cap Fund......................... 35,072,755
U.S. Emerging Growth Fund.............. 25,084,631
Equity Income Fund..................... 4,409,812
International Growth Fund.............. 1,171,257
International Small Cap Fund........... 2,130,824
Global Opportunities Fund.............. 3,363,179
Global Communications Fund............. 17,264,977
Select 50 Fund......................... 10,777,935
U.S. Asset Allocation Fund............. 5,919,445
Total Return Bond Fund................. 352,377
Short Duration Government Bond Fund.... 96,392
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................. 100.00%
California Tax-Free Money Fund......... 99.90
Federal Tax-Free Money Fund............ 99.92
Of the distributions made from investment income, the following percentages may
be subject to the alternative minimum tax:
California Tax-Free
Intermediate Bond Fund................. 4.78%
California Tax-Free Money Fund......... 13.06
Federal Tax-Free Money Fund............ 16.71
Please consult your personal tax advisor.
Of the distributions made by the following Funds, the corresponding percentage
represents the amount of each distribution that will qualify for the
dividends-received deduction available to corporate shareholders:
Growth Fund............................ 21.04%
Small Cap Fund......................... 13.12
U.S. Emerging Growth Fund.............. 100.00
Equity Income Fund..................... 54.91
International Growth Fund.............. 5.83
International Small Cap Fund........... 1.52
Emerging Markets Fund.................. 3.01
Emerging Asia Fund..................... 0.63
Latin America Fund..................... 5.63
Global Opportunities Fund.............. 9.86
Global Communications Fund............. 16.15
Select 50 Fund......................... 14.22
U.S. Asset Allocation Fund............. 5.21
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:
Government Reserve Fund................ 47.49%
Short Duration Government Bond Fund.... 34.36
Total Return Bond Fund................. 35.24
U.S. Asset Allocation Fund............. 14.70
For the fiscal year ended June 30, 1998, foreign income and foreign taxes paid
relating to foreign sources and possessions in the United States on a per-share
basis, were as follows:
Foreign Foreign
Income Taxes
- -------------------------------------------------------------------------------
International Growth Fund ......... $ 0.1689 $ 0.0168
International Small Cap Fund....... 0.2023 0.0209
Emerging Markets Fund ............. 0.2445 0.0256
Emerging Asia Fund ................ 0.1490 0.0138
Latin America Fund ................ 0.4221 0.0607
Global Opportunities Fund ......... 0.1677 0.0185
Global Communications Fund ........ 0.1295 0.0135
Select 50 Fund .................... 0.1944 0.0091
The above figures may differ from those cited elsewhere in this report due to
differences in the calculation of income and capital gains for Securities and
Exchange Commission (book) purposes and Internal Revenue Service (tax) purposes.
119
<PAGE>
- -------------------------------
The Montgomery Funds
- -------------------------------
Tax Information
- -------------------------------
Fiscal Year Ended June 30, 1998
<TABLE>
<CAPTION>
The percentages of total net assets invested in U.S. government and U.S. government agency obligations at March 31, 1998, and June
30, 1998, were as follows:
9/30/97 12/31/97 3/31/98 6/30/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Bond Fund:
Federal Home Loan Bank ..................................... 8.1% 12.8% 17.6% 13.4%
Federal Home Loan Mortgage Corporation ..................... 19.5 27.2 19.9 14.4
Federal National Mortgage Association ...................... 16.0 20.8 27.3 29.2
Government National Mortgage Association ................... -- 0.8 0.6 0.6
Union Acceptance Corporation ............................... 0.5 -- 0.2 0.1
U.S. Treasury Bonds ........................................ 12.5 14.2 12.1 15.2
U.S. Treasury Notes ........................................ 30.0 0.2 0.5 7.8
Short Duration Government Bond Fund:
Federal Home Loan Bank ..................................... 24.9% 15.6% 23.3% 18.2%
Federal Home Loan Mortgage Corporation ..................... 52.8 50.2 28.9 27.9
Federal National Mortgage Association ...................... 4.6 24.5 34.9 34.4
Government National Mortgage Association ................... 0.2 0.0# 0.0# 0.0#
Union Acceptance Corporation ............................... 0.3 0.1 0.1 --
U.S. Treasury Inflationary Index ........................... -- -- -- 1.5
U.S. Treasury Notes ........................................ 21.5 9.0 12.5 19.6
# Amount represents less than 0.1%
Government Reserve Fund:
Federal Farm Credit Bank ................................... 7.7% 9.1% 15.1% 10.2%
Federal Home Loan Bank ..................................... 33.4 34.7 27.9 35.0
Federal Home Loan Mortgage Corporation ..................... 4.4 2.6 0.5 0.4
Federal National Mortgage Association ...................... 5.4 5.8 3.2 2.5
Student Loan Marketing Association ......................... 11.2 15.0 10.3 9.3
Tennessee Valley Authority ................................. 0.2 0.7 0.4 0.4
U.S. Sovereign Bonds ....................................... 0.1 0.1 0.1 0.1
</TABLE>
120
<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 Federal Deposit
Insurance Corporation (FDIC)
or any other agency and are
subject to investment risk,
including the possible loss of
principle. Neither
The Montgomery Funds nor
Montgomery Asset Management is
a bank.
For more information on any
Montgomery Fund, including
charges and expenses, visit our
Web site at
www.montgomeryfunds.com or call
(800) 572-FUND [3863] for a
free prospectus. Read it
carefully before you invest
or send money.
Funds Distributor, Inc 8/98
<PAGE>
--------------
Bulk Rate
[LOGO OF THE U.S. POSTAGE
MONTGOMERY FUNDS PAID
APPEARS HERE] Hudson, MA
Permit No. 19
701 California Street --------------
San Francisco, CA 94111
