<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO HIGHLIGHTS
JUNE 30, 1996
<TABLE>
<CAPTION>
INCEPTION
ONE YEAR 12/17/93
ENDED THROUGH
PORTFOLIO MANAGEMENT TOTAL RETURN ANALYSIS 6/30/96/1/ 6/30/96/1/
-------------------- --------------------- ---------- ----------
<C> <C> <S> <C> <C>
Josephine Montgomery Institutional
Jimenez......... Senior Portfolio Manager Series:
Emerging Markets
Bryan Sudweeks... Senior Portfolio Manager Portfolio............... 10.14% (0.68)%
IFC Global Composite
Thomas Haslett... Senior Portfolio Manager Index................... 8.45% (0.43)
Lipper Emerging Markets
Angeline Ee...... Portfolio Manager Funds Average........... 11.94% (2.59)
</TABLE>
INVESTMENT REVIEW
Q: RETURNS FOR THE MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
WERE BETTER THAN THE IFC GLOBAL COMPOSITE INDEX AND SOMEWHAT LOWER THAN THE
LIPPER EMERGING MARKETS FUNDS AVERAGE. WHAT DROVE THE FUND'S PERFORMANCE LAST
YEAR?
A: We constantly survey the world's emerging markets, looking for markets we
believe may offer the best relative value around the world. In fiscal 1996,
the Fund's geographical weightings played the biggest role in driving returns.
Q: WHAT REGIONS PERFORMED BEST FOR THE FUND AND WHY?
A: The best region for the Fund during the year was Latin America, and the
Fund was overweight in its exposure to Brazil and Mexico (relative to the
index), both of which turned in strong results in the first six months of
1996. Brazil, which we believe has great promise and potential, is finally
beginning to deliver on that promise. Inflation is low and seems under
control, and the political situation is relatively stable. The country is
getting its act together, and its stock market began to reflect that over the
period. Mexico also began to recover during the year, and its economy is
showing real strength. Some Asian markets in the portfolio, particularly the
Philippines, also proved to be strong performers during the year.
Q: AND WHICH MARKETS WERE POOR PERFORMERS?
A: As we entered the fiscal year, the Montgomery Institutional Series:
Emerging Markets Portfolio had a strategic overweighting in North Asia,
including Korea and Taiwan, but both markets were poor performers for much of
the year. In Taiwan, for example, the specter of the Chinese military
maneuvers drove investors away, and that market did not begin to recover until
the second quarter of 1996. The situation there is stabilizing, however, and
investors are beginning to return to this market.
Q: DID THE FUND'S STRATEGY CHANGE DURING THE YEAR?
A: The strategy for the Fund in terms of geographic sectors changes constantly
as our macroeconomic analysis suggests new opportunities in the world's
emerging markets. We also made shifts in terms of the kind of stocks we invest
in, favoring large companies over smaller ones for much of the year. This
shift was based on our belief that the larger, more established companies
would be most attractive as investment capital returned to the emerging
markets, generating a wave of liquidity. This shift led to a reduced exposure
in consumer stocks, which tend to be smaller companies, in favor of the
generally larger companies like financial services firms which should also
benefit from the ebbing of inflation in the emerging markets.
In terms of portfolio diversification, we continue to stress a high degree of
diversity. As of June 30, 1996, the portfolio was exposed to approximately 30
different emerging markets with positions in about 163 different companies.
1
<PAGE>
Q: HOW HAVE YOU POSITIONED THE FUND FOR THE YEAR AHEAD?
A: One guide for our investing in the year ahead is low inflation. In the
aggregate, inflation rates have declined to less than 10% annually. That may
seem high among emerging markets compared to inflation in the developed
economies, but it's very low on a historical basis in the emerging markets and
demonstrates the remarkable progress some of these economies have made in
recent years. Relatively low inflation suggests that high real interest rates
could decline in these markets, and that could be a positive for stocks.
We also believe that economic growth will continue at a sustainable pace in
the United States, Europe and Japan, which would be a positive for emerging
market companies with significant exports. On a regional basis, we remain
overweighted in Latin America, with a focus on Brazil and Mexico.
Q: WHY SHOULD AN INVESTOR CONSIDER THE MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO NOW?
A: For long-term investors who are comfortable with the volatility that is
characteristic of the emerging markets, there are three reasons to invest.
First, these markets offer, in general, very good valuations. Our projections
for the stocks in our portfolio indicate aggregate growth of over 25% per
year, but they are only trading at approximately 15 to 16 times 1996 earnings.
Second, the liquidity wave continues. Capital is flowing into the emerging
markets both from foreign and domestic investors, particularly in light of
declining inflation and the possibility of lower interest rates. Finally, the
political turmoil in many large countries seems to have eased. Relations
between Taiwan and China are calmer; Yeltzin's presidential victory
ameliorates concerns of Russia's regressing and India and Brazil are also
demonstrating a more benign political environment.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
IFC GLOBAL COMPANY, LIPPER EMERGING
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
INSTITUTIONAL
SERIES:
Measurement Period EMERGING IFC GLOBAL LIPPER
(Fiscal Year Covered) MARKETS COMPANY EMERGING
- ------------------- ------------- ---------- -----------
<S> <C> <C> <C>
Measurement Pt- 12/93 $ 10,000 $ 10,000 $ 10,000
FYE 3/94 $ 9,010 $ 9,120 $ 9,262
FYE 6/94 $ 8,742 $ 9,240 $ 8,781
FYE 9/94 $ 10,416 $ 11,239 $ 10,172
FYE 12/94 $ 9,215 $ 9,949 $ 8,830
FYE 3/95 $ 8,172 $ 8,673 $ 7,882
FYE 6/95 $ 8,924 $ 9,124 $ 8,580
FYE 9/95 $ 8,752 $ 8,991 $ 8,649
FYE 12/95 $ 8,558 $ 8,723 $ 8,349
FYE 3/96 $ 9,105 $ 9,280 $ 9,054
FYE 6/96 $ 9,830 $ 9,895 $ 9,626
</TABLE>
- --------
/1/ Average Annual Total Return
/2/ The IFC Global Composite Index is comprised of over 1,200 individual stocks
from 25 developing countries in Asia, Latin America, Middle East, Africa and
Europe.
/3/ Lipper's Emerging Markets Funds Average universe consists of 31 funds.
Note: The performance shown represents past performance and is not a guarantee
of future results.
2
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
COMMON STOCKS--77.8%
ARGENTINA--3.4%
41,700 Banco Frances, ADR (Banks)..................... $ 1,198,875
256,150 Central Costanera (Electric Utilities)......... 942,986
181,200 C.I.A. Interam de Automo S.A. (Auto/Auto
Parts)........................................ 1,259,812
871,500 Cresud S.A.+ (Real Estate) .................... 1,743,654
119,282 Inversiones Y Representaciones (Real Estate)... 399,745
3,954 Inversiones Y Representaciones, GDR (Real
Estate)....................................... 133,448
342,384 Perez Companc, "B" Shares (Oil)................ 2,243,457
492,800 Siderar S.A.+ (Steel) ......................... 1,266,971
------------
9,188,948
------------
BANGLADESH--0.1%
17,400 Apex Tannery (Apparel and Textiles) ........... 249,214
17,000 Eastern Housing, Ltd. (Real Estate)............ 37,575
------------
286,789
------------
BRAZIL--1.4%
19,700 Telebras, ADR (Telephone/Networks) ............ 1,371,613
42,350,000 Telec Brasileiras-Telebras ON
(Telephone/Network)........................... 2,488,323
143,153 Telec de Minas Gerais S.A.
(Telephone/Regional--Local)................... 11,690
170,996 Telec de Sao Paulo S.A. (Telephone/Regional--
Local)........................................ 30,141
------------
3,901,767
------------
CHILE--2.0%
24,400 Compania de Telefonos de Chile, ADR
(Telecommunications/Wireless)................. 2,394,250
45,700 Enersis, S.A., ADR (Electric Utilities) ....... 1,416,700
7,534 Sociedad Quimica Minera de Chile (Chemicals) .. 408,720
40,968 The Chile Fund, Inc. (Mutual Funds) ........... 1,003,716
26,620 The Moneda Chile Fund, Ltd. (Mutual Funds)..... 226,270
------------
5,449,656
------------
CHINA--3.5%
1,321,250 Guangdong Investment Holdings, Ltd. (Real
Estate)....................................... 836,369
68,200 Guanshen Railway Company, Ltd., ADR+
(Railroad).................................... 1,304,325
34,700 Huaneng Power International, ADS+ (Electric
Utilities).................................... 620,263
511,120 Johnson Electric Holdings, Ltd., (Electronics). 1,148,918
4,351,000 M.C. Packaging of Hong Kong, Ltd. (Containers
and Packaging)................................ 1,840,846
1,220,100 Shangri-La Asia (Lodging)...................... 1,710,181
1,819,000 Tian An China Investments Company (Real
Estate)....................................... 246,740
5,926,120 Yue Yuen Industrial Holdings (Footwear)........ 1,684,264
------------
9,391,906
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
CZECH REPUBLIC--3.1%
2,997 Cokoladovny (Food and Beverage)................ $ 413,935
80,400 Komercni Banka I.F. (Mutual Funds) ............ 2,255,981
26,100 Komercni Banka, GDR (Banks).................... 704,700
51,594 PIF (Mutual Funds)............................. 1,023,892
15,439 SPT Telecom A.S. (Telephone/Networks).......... 1,885,474
105,000 The Czech Value Fund (Mutual Funds)............ 997,500
103,126 Vseobecny I.F. (Mutual Funds).................. 528,580
123,165 Vynosovy I.F. (Mutual Funds)................... 667,507
------------
8,477,569
------------
EGYPT--0.3%
47,800 Amreya Cement (Cement)......................... 649,231
15,000 Tora Cement (Cement) .......................... 196,325
------------
845,556
------------
GREECE--0.3%
52,210 Aegek (Heavy Construction)..................... 347,242
51,230 The Greek Progress Fund (Mutual Funds)......... 452,524
------------
799,766
------------
HONG KONG--2.5%
1,536,000 ASM Pacific Technology (Semiconductor)......... 1,210,425
150,000 Cheung Kong Holdings (Real Estate)............. 1,080,322
312,000 Guoco Group, Ltd. (Diversified Financial
Services)..................................... 1,487,298
158,000 Henderson Land Development Company (Real
Estate)....................................... 1,183,865
70,000 HSBC Holdings (Banks).......................... 1,058,037
2,458,000 Joyce Boutique Holdings (Apparel and Textiles) 825,605
------------
6,845,552
------------
HUNGARY--0.1%
12,000 Borsodchem, GDR*** (Chemicals)................. 234,000
------------
INDIA--4.9%
500 Arvind Mills, Ltd.** (Apparel and Textiles) ... 1,987
68,950 Bajaj Auto, Ltd. (Auto/Auto Parts) ............ 1,937,078
215,250 Carrier Aircon, Ltd.** (Home Appliance) ....... 1,548,847
378,000 Floatglass** (Chemicals)....................... 341,734
27,750 Grasim Industries, Ltd.** (Conglomerates)...... 450,751
45,000 HDFC Bank, Ltd.**+ (Banks)..................... 49,816
20,725 Housing Development and Finance Corporation
(Banks)....................................... 1,728,358
23,100 Indian Hotels, GDS+ (Lodging).................. 658,350
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
INDIA--(CONTINUED)
13,600 Indian Hotels, GDS***+ (Lodging)............... $ 387,600
70,800 Industrial Credit & Investment Corporation**
(Banks)....................................... 180,869
3,000 Larsen & Toubro, Ltd., GDS*** (Heavy
Construction)................................. 56,250
20,600 Larsen & Toubro, Ltd. New, GDR (Heavy
Construction)................................. 386,250
257,900 Mahanagar Telephone Nigam, Ltd.** (Electric
Utilities).................................... 1,857,568
168,000 State Bank of India**+ (Banks)................. 1,431,791
122,800 Tata Engineering & Locomotive Company, Ltd.**
(Auto/Auto Parts)............................. 1,812,546
5,095 Tata Iron & Steel Company, Ltd.** (Steel) ..... 35,034
15,800 The Indian Hotels Company, Ltd.** (Lodging).... 370,446
------------
13,235,275
------------
INDONESIA--3.6%
474,000 Aneka Kimia Raya (F) (Chemicals)............... 794,243
415,000 Asahimas Flat Glass (F) (Glass) ............... 436,842
150 Bank Bali (F) (Banks) ......................... 330
754,000 Bimantara (F) (Conglomerates).................. 947,562
78,000 Ciputra Development (Heavy Construction)....... 158,346
190,000 Hanjaya Mandala Sampoerna (F) (Tobacco)........ 2,163,265
300 Indorama (F) (Apparel and Textiles) ........... 760
1,071,500 Mulia Industrindo (F)** (Building Materials) .. 1,588,260
480 Pabrik Kertas Tjiwa Kimia (F) (Pulp and Paper). 490
403,500 Sekar Bumi (F) (Food and Beverage) ............ 242,707
299,500 Semen Gresik (F) (Building Materials) ......... 871,799
42,000 Tambang Timah (F) (Metals and Mining) ......... 77,594
42,100 Tambang Timah, GDR*** (Metals and Mining)...... 764,115
46,900 Telekomunikas Indonesia, ADR
(Telephone/Regional--Local)................... 1,395,275
135,000 Telekomunikas Indonesia (F)
(Telephone/Regional--Local)................... 204,458
------------
9,646,046
------------
ISRAEL--0.6%
4,771 ECI Telecommunications, Ltd., ADR
(Telecommunications/Other).................... 110,628
12,200 Koor Industries, ADR (Holding) ................ 210,450
26,000 Osem Investment, Ltd. (Food and Beverage)...... 153,694
563 Teva Pharmaceuticals (Pharmacy/Drugs) ......... 212,737
21,797 Teva Pharmaceuticals, ADR (Pharmacy/Drugs)..... 826,924
------------
1,514,433
------------
JORDAN--0.1%
36,300 Dar Al Dawa Development & Inv. (Health Care) .. 232,791
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
KOREA--4.7%
40 Han Sol Paper, GDR (Pulp and Paper)............ $ 795
71,300 Korea Electric Power Corporation (Electric
Utilities).................................... 2,887,545
8,200 Korea Housing Bank New (Banks)................. 191,050
2,165 Korea Mobile Telecommunications
(Telephone/Wireless).......................... 2,647,535
15,460 Pohang Iron & Steel Company, Ltd. (Steel)...... 1,260,304
3,600 Pohang Iron & Steel Company, Ltd., ADR (Steel). 87,750
30,057 Samsung Company, Ltd.+ (Holding)............... 641,009
926 Samsung Company, Ltd. (Holding)................ 18,761
10,999 Samsung Company, Ltd., GDS+ (Holding).......... 64,619
45,425 Samsung Company, Ltd., GDS+*** (Holding)....... 266,872
23,536 Samsung Company, Ltd. Sponsored, GDS+***
(Holding)..................................... 138,274
5,992 Samsung Electric Company (Electronics)......... 476,435
87 Samsung Electric Company, GDR+***
(Electronics)................................. 4,459
2,350 Samsung Electric Company, GDR*** (Electronics). 55,278
1,096 Samsung Electric Company, GDR*** (Electronics). 54,485
784 Samsung Electric Company, GDR*** (Electronics). 18,442
126 Samsung Electric Company, GDR*** (Electronics). 6,264
7,800 Samsung Electric Company, GDS+***
(Electronics)................................. 189,150
38 Samsung Electric Company New, GDS+
(Electronics)................................. 1,948
308 Samsung Electronics, Ltd. (F)+ (Electronics)... 25,857
2,600 Samsung Electronics, Ltd., GDS+***
(Electronics)................................. 63,050
125,576 Shinhan Bank (Banks)........................... 2,949,767
26,000 Yukong, Ltd. (Oil)............................. 762,821
------------
12,812,470
------------
MALAYSIA--8.3%
1,195,000 Arab Malaysian Corporation (Diversified
Financial Services)........................... 4,694,728
140,000 Arab Malaysian Finance (F) (Diversified
Financial Services)........................... 611,746
855,000 Development & Commercial Bank Holdings
Corporation (Banks)........................... 2,930,547
25,000 Edaran Otomobil Nasional Berhad** (Auto/Auto
Parts)........................................ 239,527
1,556,000 IJM Corporation Berhad (Heavy Construction).... 2,694,696
2,751,000 IOI Corporation Oxygen, Inc. (Chemicals)....... 3,815,779
396,000 Metacorp Berhad (Chemicals) ................... 1,142,995
262,000 New Straits Time (Newspaper/Publishing) ....... 1,365,404
736,000 Petronas Gas (Oil)............................. 3,157,025
297,000 Resorts World Berhad (Leisure Time)............ 1,702,586
------------
22,355,033
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
COMMON STOCKS--(CONTINUED)
<C> <S> <C>
MEXICO--9.1%
1,206,585 Alfa S.A. de C.V. (Steel)..................... $ 5,416,509
1,253,300 Cementos Mexicanos S.A. (Building Materials).. 4,444,795
782,000 Cementos Mexicanos S.A., Class B (Building
Materials)................................... 3,036,243
672,000 Empresas La Moderna S.A. de C.V. (Tobacco).... 2,998,972
1,916,000 Grupo Financiero Banamex, Series B (Banks).... 3,981,036
701,250 Grupo Financiero Banamex, Series L (Banks) ... 1,331,312
329,306 Industrias Penoles CPO (Metals and Mining).... 1,506,515
60,000 Kimberly Clark de Mexico, Class A (Pulp and
Paper)....................................... 1,091,628
136,000 San Luis Corporacion S.A. de C.V. (Metals and
Mining)...................................... 835,544
------------
24,642,554
------------
MOROCCO--0.2%
46,000 Banque Marocaine de Commerce, GDR+*** (Banks). 655,500
------------
PAKISTAN--0.2%
7,831 Adamjee Insurance Company** (Insurance)....... 31,097
4,700 Dandot Cement**+ (Building Materials)......... 826
33,500 DG Khan Cement**+ (Building Materials)........ 13,302
7,416 Engro Chemical Pakistan** (Chemicals)......... 34,321
95,700 ICI Pakistan (Chemicals) ..................... 147,220
28,205 Nishat Textile Mills**+ (Apparel and Textiles) 11,280
17,158 Pakistan State Oil** (Oil) ................... 202,435
------------
440,481
------------
PERU--1.7%
34,100 Buenaventura, ADR+ (Metals and Mining) ....... 677,737
103,149 Credicorp, Ltd. (Banks) ...................... 2,050,086
332,117 Enrique Ferreyros S.A. (Holding).............. 475,812
756,782 Telefonica del Peru, Class B
(Telephone/Networks)......................... 1,536,487
------------
4,740,122
------------
PHILIPPINES--3.8%
4,726,640 Aboitiz Equity Ventures+ (Conglomerates) ..... 883,990
87 Ayala Land Inc., Class B (Real Estate)........ 156
93 Bacnotan Cement (Building Materials).......... 71
1,186,000 C & P Homes (Real Estate)..................... 1,029,828
2,520,000 DMCI Holdings (Building Materials) ........... 1,803,435
4,281,750 Filinvest Land, Inc. (Real Estate) ........... 1,756,825
342,282 Keppel Philippine Shipyards, Inc., Class B
(Shipping)................................... 100,594
369,730,911 Manila Mining, Class B (Metals and Mining).... 366,909
6,843,350 Metro Pacific Inc., Class B (Conglomerates) .. 2,037,333
7,700 Philippine Long Distance Telephone
(Telephone/Long Distance).................... 458,473
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
PHILIPPINES--(CONTINUED)
3,333 Philippine Long Distance Telephone, ADR
(Telephone/Long Distance)..................... $ 193,731
68,700 Philippine National Bank (Banks) .............. 1,147,185
1,240,000 Republic Glass (Glass)......................... 473,282
------------
10,251,812
------------
PORTUGAL--2.5%
14,880 Capital Portugal Fund (Mutual Funds) .......... 1,468,515
87,390 Electricas Empresa Fabril de Maquinas
(Electrical Equipment)........................ 820,590
259,300 Portucel Industries Empresa (Pulp and Paper) .. 1,661,309
110,580 Sonae Investmentos (Conglomerates)............. 2,874,868
------------
6,825,282
------------
RUSSIA--1.4%
9,152 Global Telesystems Group, Inc.**
(Telephone/Networks).......................... 148,906
40 Irkuskenegro, RDC*** (Oilfield Equipment)...... 1,040,000
25 LukOil, RDC*** (Oil)........................... 1,359,062
18,300 Mosenergo, ADS*** (Electric Utilities)......... 521,550
21,100 Mosenergo, Sponsored ADS (Electric Utilities).. 601,350
------------
3,670,868
------------
SINGAPORE--0.7%
1,191,020 CDL Hotels International, Ltd. (Real Estate) .. 653,920
235,000 Far East Levingston (Heavy Construction) ...... 1,299,079
620 United Overseas Bank (F) (Banks)............... 5,932
------------
1,958,931
------------
SOUTH AFRICA--5.3%
14,100 Anglo American Gold Investment Company (Metals
and Mining)................................... 1,223,540
12,300 Anglovaal, Ltd. (Diversified Financial
Services)..................................... 448,511
24,430 Barlow, Ltd. (Building Materials) ............. 255,125
691,800 Clinic Holdings (Health Care).................. 842,198
1,700,000 Highstone Property Fund (Real Estate).......... 561,043
816,400 Lonrho (Conglomerates)......................... 2,308,078
9,000 Pepsi International Bottlers**+ (Food and
Beverage)..................................... 914,228
178,800 Randgold and Exploration Company (Metals and
Mining)....................................... 940,835
111,700 Sappi, Ltd. (Pulp and Paper) .................. 1,234,810
192,011 Sasol, Ltd. (Metals and Mining)................ 2,082,741
136,000 Servgro International, Ltd. (Consumer
Services)..................................... 800,369
2,513,890 South Africa Iron & Steel Industrial
Corporation (Steel)........................... 1,966,787
269,575 Waltons Stationary Company (Retail Trade)...... 715,466
------------
14,293,731
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
SRI LANKA--0.1%
38,900 Aitken Spence and Company (Conglomerates)...... $ 111,433
21,600 Development Finance Corporation of Ceylon+
(Banks)....................................... 117,135
------------
228,568
------------
TAIWAN--4.2%
577,959 ASE, Ltd.** (Semiconductor).................... 953,464
235,680 Cathay Life Insurance** (Insurance)............ 1,661,407
2,800,000 China Steel Corporation** (Steel) ............. 2,930,233
16,090 China Steel Corporation, ADS*** (Steel)........ 410,295
1,618,100 Pacific Construction**+ (Heavy Construction)... 1,599,285
355,040 Taiwan Mask** (Semiconductor) ................. 954,686
645,160 Taiwan Semiconductor Company** (Semiconductor) 1,347,991
382,200 Yageo Corporation** (Electronics) ............. 584,688
74,461 Yageo Corporation, GDR (Electronics)........... 581,913
41,665 Yageo Corporation, GDR*** (Electronics)........ 325,612
------------
11,349,574
------------
THAILAND--8.3%
126,980 Ban Pu Coal Public Company, Ltd. (F) (Coal).... 3,661,153
77,800 Bangkok Bank Public Company, Ltd., SER 1 (F)
(Banks)....................................... 735,210
356,100 Bangkok Bank Public Company, Ltd., SER 2 (F)
(Banks)....................................... 3,365,145
25,200 Bangkok Insurance Public Company, Ltd. (F)
(Insurance)................................... 472,475
94,000 Central Pattana Public Company, Ltd. (F) (Real
Estate)....................................... 436,899
149,100 CH Karnchang Public Company (F) (Heavy
Construction)................................. 1,033,622
237,000 Dhana Siam Finance and Securities Public
Company (F) (Diversified Financial Services).. 1,316,252
480,500 Electricity Generating Company of Thailand (F)
(Electric Utilities).......................... 1,674,974
270,200 Phatra Thanakit Company, Ltd. (F) (Diversified
Financial Services)........................... 1,821,148
33,000 Phatra Thanakit Finance & Security Company (F)
(Securities Brokerage)........................ 230,069
63,100 PTT Exploration and Production Public Company,
Ltd. (F) (Oil)................................ 924,579
62,900 Regional Container Lines (F) (Shipping)........ 921,648
33,000 Serm Suk Public Company, Ltd., SER 1 (Food and
Beverage)..................................... 764,298
18,700 Siam Cement Public Company, Ltd. (Building
Materials).................................... 860,387
19,600 Siam Cement Public Company, Ltd. (F) (Building
Materials).................................... 961,935
24,700 Thai Farmers Bank Public Company, Ltd., SER 1
(F) (Banks)................................... 183,027
414,700 Thai Farmers Bank Public Company, Ltd., SER 2
(F) (Banks)................................... 3,072,927
250,100 Wongpaitoon Footwear Public Company, Ltd. (F)
(Footwear).................................... 135,453
------------
22,571,201
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
TURKEY--1.3%
598,000 Alarko Holding (Holding) ..................... $ 109,230
1,326,588 Cimentas A.S., ORD (Building Materials)....... 290,777
907,100 Efes Sinai Yatrium ve Ticaret** (Food and
Beverage).................................... 62,366
36,900 Erciyas Biracilik ve Malt, ADS (Food and
Beverage).................................... 415,125
2,678,100 Koc Holding (Holding)......................... 652,241
843,702 Tat Konserve (Food and Beverage).............. 197,775
13,347,631 Trakya Cam Sanayil (Glass).................... 731,422
4,020,000 Turk Sise ve Cam (Glass)...................... 318,193
23,405,000 Yapi ve Kredi Bankasi A.S. (Banks)............ 662,648
6,520,500 Yapi ve Kredi Bankasi A.S. New (Banks)........ 175,379
------------
3,615,156
------------
VIETNAM--0.1%
10,800 Southeast Asia Frontier Fund (Mutual Funds) .. 56,700
7,000 The Vietnam Frontier Fund (Mutual Funds)...... 80,500
------------
137,200
------------
TOTAL COMMON STOCKS
(Cost $192,285,038).......................... 210,598,537
------------
PREFERRED STOCKS--14.9%
BRAZIL--14.2%
803,299,110 Banco Bradesco (Banks)........................ 6,559,829
2,940,000 Brahma (Food and Beverage).................... 1,753,782
82,200,000 Cia Energetica de Minas Gerais (Electric
Utilities)................................... 2,185,670
1,255,000 Cimento Itau (Building Materials)............. 354,947
2,482,956 Coteminas (Apparel and Textiles).............. 980,423
22,225,000 Electrobras, "B" (Electric Utilities)......... 6,352,213
14,715,000 Industrias Romi S.A. (Machinery and Tools) ... 224,942
9,400 Kepler Weber S.A. (Machinery and Tools)....... 51,486
18,300,000 Lojas Americanas (Retail Trade)............... 360,842
21,340,000 Lojas Renner S.A. (Retail Trade).............. 1,126,346
3,720,000 Marcopolo S.A., Series B (Auto/Auto Parts) ... 800,199
4,760,000 Metalurgica E Shultz S.A. (Steel)............. 75,845
35,560,286 Petroleo Brasileiros (Oil).................... 4,373,545
353,710,500 Randon Participacoes (Auto/Auto Parts)........ 186,692
482,500 Sadia Condordia (Food and Beverage)........... 336,354
80,053,872 Telebras (Telephone/Networks)................. 5,588,584
10,600,000 Telec de Minas Gerais S.A.
(Telephone/Regional--Local).................. 1,092,671
3,990,000 Telec de Sao Paulo S.A. (Telephone/Regional--
Local)....................................... 854,305
19,849,150 Telec do Rio Janeiro S.A. (Telephone/Networks) 2,233,684
4,470,000 Uniao de Bancos Brasileiros (Banks)........... 121,037
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ------------
<C> <S> <C>
PREFERRED STOCKS--(CONTINUED)
BRAZIL--(CONTINUED)
90,056 Vale do Rio Doce (Metals and Mining)........... $ 1,744,350
2,628,000 Weg S.A. (Furniture) .......................... 1,223,512
------------
38,581,258
------------
KOREA--0.1%
1,096 Samsung Electronics, Ltd. (Electronics)........ 43,301
3,638 Samsung Electronics, Ltd.+ (Electronics)....... 154,571
------------
197,872
------------
PHILIPPINES--0.6%
5,600 Philippine Long Distance Telephone,
(Telephone/Long Distance)..................... 305,200
35,700 Philippine Long Distance Telephone, Convertible
Preferred,
5.750% 12/31/49 (Telephone/Long Distance)..... 1,205,857
------------
1,511,057
------------
TOTAL PREFERRED STOCKS
(Cost $34,364,502)............................ 40,290,187
------------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
CONVERTIBLE BONDS--1.7%
MALAYSIA--0.0%#
$ 22,666 AMLN Loan Stock, 7.500% due 12/31/99
(Diversified Financial Services).............. 14,266
109,000 AMMB Loan Stock, 7.500% due 12/31/99
(Diversified Financial Services).............. 66,418
------------
80,684
------------
PHILIPPINES--0.2%
515,000 Metro Pacific, Inc., 2.500% due 04/11/03
(Conglomerates)............................... 578,087
------------
SOUTH AFRICA--0.3%
590,000 Barlow, Ltd., 7.000% due 09/20/04*** (Building
Materials).................................... 722,750
------------
TAIWAN--0.4%
1,050,000 Pacific Construction, 2.125% due 10/01/98
(Heavy Construction).......................... 977,550
------------
THAILAND--0.8%
1,315,000 Bangkok Bank Public Company, Ltd., 3.250% due
03/03/04*** (Banks)........................... 1,497,127
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
--------- ------------
<C> <S> <C>
CONVERTIBLE BONDS--(CONTINUED)
THAILAND--(CONTINUED)
$550,000 Central Pattana Public Company, Ltd., 2.750%
due 04/10/01 (Real Estate).................... $ 602,250
180,000 Siam Sindhorn, 2.000% due 07/31/00*** (Real
Estate)....................................... 126,225
------------
2,225,602
------------
TOTAL CONVERTIBLE BONDS
(Cost $4,267,035)............................. 4,584,673
------------
<CAPTION>
SHARES
------
<C> <S> <C>
WARRANTS--0.6%
CZECH REPUBLIC--0.0%#
21,000 The Czech Value Fund, Warrants, Expire
09/13/98+ (Mutual Funds)...................... 36,750
------------
INDONESIA--0.0%#
300 Bank Bali, Warrants, Expire 08/29/00+ (Banks).. 161
------------
MALAYSIA--0.6%
1,223,000 Development and Commercial Bank Holdings
Corporation, Warrants, Expire 12/27/99+
(Banks)....................................... 1,608,114
19,000 Petronas Gas Warrants, Expire 08/17/00+ (Oil).. 41,892
------------
1,650,006
------------
TOTAL WARRANTS
(Cost $1,467,788)............................. 1,686,917
------------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
CORPORATE BOND--0.1% (Cost $366,605)
PHILIPPINES--0.1%
$425,000 Ayala Land, Inc., Zero Coupon due 12/08/00
(Real Estate)................................. 376,125
------------
<CAPTION>
SHARES
------
<C> <S> <C>
RIGHTS--0.1%
PAKISTAN--0.0%#
311,025 ICI Pakistan, Rights, Expire 11/21/96**+
(Chemicals)................................... 88,852
------------
TURKEY--0.1%
632,792 Tat Konserve, Rights, Expire 07/24/96+ (Food
and Beverage)................................. 93,743
------------
TOTAL RIGHTS
(Cost $134,417)............................... 182,595
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
--------- ------------
<C> <S> <C>
REPURCHASE AGREEMENTS--3.9%
$5,323,000 Agreement with Barclays de Zoete Wedd Tri-
Party, 5.600% dated 06/28/96, to be
repurchased at $5,325,484, on 07/01/96,
collateralized by $5,429,460 market value
of U.S. Government securities, having
various maturities and various interest
rates..................................... $ 5,323,000
5,323,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be repurchased
at $5,325,484, on 07/01/96, collateralized
by $5,952,321 market value of U.S.
Government securities, having various
maturities and various interest rates..... 5,323,000
------------
TOTAL REPURCHASE AGREEMENTS
(Cost $10,646,000)........................
10,646,000
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $243,531,385*)...................... 99.1% 268,365,034
OTHER ASSETS AND LIABILITIES (Net).......................... 0.9 2,512,926
----- ------------
NET ASSETS.................................................. 100.0% $270,877,960
===== ============
</TABLE>
- --------
* Aggregate cost for Federal tax purposes was $244,107,492.
** Illiquid Security or Special Situation Security (See Note 5 to Financial
Statements).
*** Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte and Touche
LLP.
Abbreviations:
ADR--American Depositary Receipt
ADS--American Depositary Share
(F)--Foreign or alien share.
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.
13
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Identified cost $243,531,385)
(Note 1)............................................ $ 268,365,034
Cash................................................. 868,540
Foreign currency (Cost $2,825,842)................... 2,818,274
Receivable for forward foreign currency exchange con-
tracts to sell (Note 3)............................. 3,479,225
Forward foreign currency exchange contracts to buy,
at value
(Contract cost $1,558,183) (Note 3)................. 1,557,495
Receivables:
Investment securities sold......................... 3,797,485
Dividends.......................................... 1,291,434
Interest........................................... 109,544
Other Assets:
Organization costs (Note 1)........................ 16,134
-------------
Total Assets......................................... 282,303,165
LIABILITIES:
Forward foreign currency exchange contracts to sell,
at value
(Contract cost $3,479,225) (Note 3)................. $3,487,110
Payable for forward foreign currency exchange con-
tracts to buy (Note 3).............................. 1,558,183
Payables:
Investment securities purchased.................... 6,146,675
Custodian fees..................................... 99,298
Management fee..................................... 47,168
Administration fee................................. 3,076
Trustees' fees and expenses........................ 1,700
Transfer agency and servicing fees................. 1,046
Accrued liabilities and expenses................... 80,949
----------
Total Liabilities.................................... 11,425,205
-------------
NET ASSETS........................................... $ 270,877,960
=============
NET ASSETS CONSIST OF:
Undistributed net investment income.................. $ 1,194,794
Accumulated net realized loss on securities sold,
forward foreign currency exchange contracts and
foreign currency transactions....................... (13,469,275)
Net unrealized appreciation on securities, forward
foreign currency exchange contracts, foreign
currency transactions and net other assets.......... 24,800,767
Shares of beneficial interest........................ 55,180
Additional paid-in capital........................... 258,296,494
-------------
NET ASSETS........................................... $ 270,877,960
=============
Net Asset Value, per share outstanding*.............. $ 49.09
=============
Maximum offering price per share (Note 4)
($49.09 / .9925) (based on maximum investment
expense reimbursement fee of 0.75% of the offering
price).............................................. $ 49.46
=============
Number of Fund shares outstanding.................... 5,518,032
=============
</TABLE>
- --------
* Redemption price per share is equal to Net Asset Value less any applicable
investment expense reimbursement fee (Note 4).
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$479,754).............................................. $ 4,747,372
Interest (net of foreign withholding taxes of $833)..... 747,906
-----------
Total Income.......................................... 5,495,278
EXPENSES:
Management fee (Note 2)................................. $ 2,827,007
Custodian fees.......................................... 592,963
Legal and audit fees.................................... 78,223
Administration fee (Note 2)............................. 112,077
Amortization of organization costs (Note 1)............. 9,389
Trustees' fees and expenses............................. 8,249
Transfer agency and servicing fees...................... 3,198
Other................................................... 180,167
-----------
Total Expenses........................................ 3,811,273
Fees deferred and/or waived by Manager and/or
administrator (Note 2)................................. (909,034)
-----------
Net Expenses.......................................... 2,902,239
-----------
NET INVESTMENT INCOME................................... 2,593,039
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain/(loss) from:
Securities transactions................................ 1,344,485
Forward foreign currency exchange contracts............ (723,442)
Foreign currency transactions.......................... (96,704)
-----------
Net realized gain on investments during the year........ 524,339
-----------
Net change in unrealized appreciation/(depreciation) of:
Securities............................................. 23,229,184
Forward foreign currency exchange contracts............ (5,281)
Foreign currency and net other assets.................. (20,924)
-----------
Net unrealized appreciation of investments during the
year................................................... 23,202,979
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS......... 23,727,318
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.... $26,320,357
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
06/30/96 06/30/95
------------ ------------
<S> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income.............................. $ 2,593,039 $ 427,096
Net realized gain/(loss) on securities
transactions, forward foreign currency exchange
contracts and foreign currency transactions during
the year.......................................... 524,339 (10,528,300)
Net unrealized appreciation of securities, forward
foreign currency exchange contracts, foreign
currency and net other assets during the year..... 23,202,979 12,656,445
------------ ------------
Net increase in net assets resulting from
operations........................................ 26,320,357 2,555,241
Distributions to shareholders from net investment
income............................................ (169,409) (40,810)
Net increase from beneficial interest transactions
(Note 4).......................................... 58,061,496 57,066,548
------------ ------------
Net increase in net assets......................... 84,212,444 59,580,979
NET ASSETS:
Beginning of year.................................. 186,665,516 127,084,537
------------ ------------
End of year (including undistributed net investment
income/(accumulated net investment loss) of
$1,194,794 and $(484,317), respectively).......... $270,877,960 $186,665,516
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA FOR THE YEAR OR PERIOD ENDED:
<TABLE>
<CAPTION>
06/30/96 06/30/95++ 06/30/94*
-------- ---------- ---------
<S> <C> <C> <C>
Net asset value--beginning of year............. $ 44.61 $ 43.71 $ 50.00
-------- -------- --------
Net investment income.......................... 0.50 0.13 0.09
Net realized and unrealized gain/(loss) on
investments................................... 3.93 0.67 (6.67)
-------- -------- --------
Net increase/(decrease) in net assets resulting
from investment operations.................... 4.43 0.80 (6.58)
-------- -------- --------
Effect of redemption expense reimbursement fee. 0.09 0.11 0.29
Distributions from net investment income....... (0.04) (0.01) --
-------- -------- --------
Net asset value--end of year................... $ 49.09 $ 44.61 $ 43.71
======== ======== ========
Total return**................................. 10.14% 2.09% (12.58)%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............. $270,878 $186,666 $127,085
Ratio of net investment income to average net
assets........................................ 1.16% 0.29% 0.47%+
Ratio of net expenses to average net assets.... 1.29% 1.40% 1.40%+
Portfolio turnover rate........................ 88% 101% 33%
Average commission rate paid(a)................ $ 0.0007 N/A N/A
Net investment income/(loss) before deferral
and/or waiver of fees by Manager and/or
administrator................................. $ 0.33 $ (0.05) $ 0.01
Ratio of expenses before deferral and/or waiver
of fees by Manager and/or administrator....... 1.70% 1.79% 1.81%+
</TABLE>
- --------
* The Montgomery Institutional Series: Emerging Markets Portfolio commenced
operations on December 17, 1993.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ Per share numbers have been calculated using the monthly average shares
method, which more appropriately represent the per share data for the year
since the use of the undistributed method did not accord with results of
operations.
(a) Average commission rate paid per share of securities purchased and sold by
the Fund.
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
THE MONTGOMERY FUNDS II
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Funds II (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end
management investment company. As of June 30, 1996, the Trust had two publicly
offered series, the Montgomery Asset Allocation and the Montgomery
Institutional Series: Emerging Markets Portfolio.
The Montgomery Funds II were organized as a Delaware business trust on
September 8, 1993 and commenced operations with the Montgomery Institutional
Series: Emerging Markets Portfolio. Prior to the public offerings of shares of
each Fund, a limited number of shares were sold to Montgomery Asset
Management, L.P. and/or affiliated persons of Montgomery Asset Management in
private placement offerings. Otherwise, no Fund had any significant operations
prior to the date on which it commenced operations (i.e., commenced selling
shares to the public).
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. Information
presented in these financial statements pertains only to the Montgomery
Institutional Series: Emerging Markets Portfolio (the "Fund"). The financial
statements for the Montgomery Asset Allocation Fund have been presented under
separate cover.
The following is a summary of significant accounting policies.
a. PORTFOLIO VALUATION--The Fund's 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 between the closing bid and asked price.
Securities and assets for which market quotations are not readily available
(including restricted securities which are subject to limitations as to their
sale) are valued at fair value as determined in good faith by or under the
supervision of the Trust in accordance with methods which are authorized by
the Trust's Board of Trustees.
Securities denominated in foreign currencies and traded on foreign exchanges
or in foreign markets will have their value translated into U.S. dollars at
the last price of their respective currency denomination against U.S. dollars
quoted by a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good faith by
the Board of Trustees. Because the value of securities denominated in foreign
currencies must be translated into U.S. dollars, fluctuations in the value of
such currencies in relation to the U.S. dollar may affect the net asset value
of Fund shares even if there has not been any change in the foreign-currency
denominated value of such securities.
Short-term securities with maturities of 60 days or less are valued at
amortized cost as reflecting fair value.
b. REPURCHASE AGREEMENTS--The Fund may engage in repurchase agreements
individually or jointly through a joint repurchase account with other series
of the Trust pursuant to a joint repurchase agreement. Under the terms of a
typical repurchase agreement, the Fund writes a financial contract with a
counterparty and takes possession of a government or other debt obligation as
collateral. The Fund also agrees with the counterparty to allow the
counterparty to repurchase the financial contract at a specified date and
price, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is
at least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right to use the collateral to offset losses incurred. There is potential loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities,
18
<PAGE>
THE MONTGOMERY FUNDS II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
including the risk of a possible decline in the value of the underlying
securities during the period in which 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 Fund may also participate on an individual or
joint basis in tri-party repurchase agreements which involve a counterparty
and a custodian bank.
c. FOREIGN CURRENCY--Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates prevailing
at the end of the period, and purchases and sales of investment securities,
income and expenses are translated on the respective dates of such
transactions. Unrealized gains and losses that result from changes in foreign
currency exchange rates on investments have been included in the unrealized
appreciation/(depreciation) of securities. Net realized foreign currency gains
and losses resulting from movement in exchange rates include foreign currency
gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the
Fund and the amount actually received and the portion of foreign currency
gains and losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date.
d. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--Forward foreign currency
exchange contracts are valued at the forward rate and are marked-to-market
daily. The change in market value is recorded by the Fund as an unrealized
gain or loss.
When the contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed. Forward foreign currency exchange
contracts have been used solely to establish a rate of exchange for settlement
of transactions. Although forward foreign currency contracts limit the risk of
loss due to a decline in the value of the hedged currency, they also limit any
potential gain that might result should the value of the currency increase. In
addition, the Fund could be exposed to risks if the counterparties to the
contracts are unable to meet the terms of their contracts.
e. DIVIDENDS AND DISTRIBUTIONS--Dividends from net investment income of the
Fund are declared and paid annually.
Distributions of any short-term capital gains earned by the Fund are
distributed no less frequently than annually. Additional distributions of net
investment income and capital gains for the 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 the Fund, timing differences and
differing characterization of distributions made by the Fund.
Permanent differences incurred during the year ended June 30, 1996,
resulting from differences in book and tax accounting have been reclassified
at year end to reflect a decrease to undistributed net investment income of
$744,519, an increase to accumulated realized gain/(loss) of $748,134 and a
decrease to additional paid-in capital of $3,615.
f. SECURITIES TRANSACTIONS AND INVESTMENT INCOME--Securities transactions
are recorded on a trade-date basis. Realized gain and loss from securities
transactions are recorded on the specific identified cost basis. Dividend
income is recognized on the ex-dividend date and interest income, including,
where applicable, amortization of discount on short-term investments, is
recognized on an accrual basis. Dividend income on foreign securities is
recognized as soon as the Fund is informed of the ex-dividend date.
19
<PAGE>
THE MONTGOMERY FUNDS II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
g. FEDERAL INCOME TAXES--The Fund has qualified and it is the intention of
the Fund to continue to qualify and elect treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Code, and to make
distributions of taxable income to shareholders sufficient to relieve the Fund
from all or substantially all federal income taxes.
h. ORGANIZATION COSTS--Expenses incurred in connection with the organization
of the Fund are amortized on a straight-line basis over a period of five years
from the commencement of operations.
i. EXPENSES--Most expenses of the Trust can be directly attributed to a
Fund. Expenses which cannot be directly attributed are apportioned between the
Funds in the Trust.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
a. Montgomery Asset Management, L.P. is the Fund's Manager (the "Manager").
The Manager, a California limited partnership, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The general partner of
the Manager is Montgomery Asset Management, Inc. The sole limited partner of
the Manager is Montgomery Securities, the Fund's principal underwriter and
distributor. Under the Advisers Act, both Montgomery Asset Management, Inc.
and Montgomery Securities may be deemed controlling persons of the Manager.
Although the operations and management of the Manager are independent from
those of Montgomery Securities, it is expected that the Manager may draw upon
the research and administrative resources of Montgomery Securities at its
discretion in a manner consistent with applicable regulations.
Pursuant to an investment management agreement ("Investment Management
Agreement"), the Manager provides the Fund with advice on buying and selling
securities, manages the investments of the Fund including the placement of
orders for portfolio transactions, furnishes the Fund with office space and
certain administrative services, and provides the personnel needed by the
Trust with respect to the Manager's responsibilities under such agreement. As
compensation, the Fund pays the Manager a monthly management fee (accrued
daily) based upon the average daily net assets of the Fund, at an effective
annual rate of 1.26% of average daily net assets before any deferral of fees
for the year ending June 30, 1996 (the effective rate including the effect of
current year fee deferral was 0.89% for the year ending June 30, 1996.) The
Manager has agreed to reduce some or all of its management fee or absorb Fund
expenses if necessary to keep the Fund's annual operating expenses (on a
calendar year), exclusive of interest or taxes, at or below the lesser of
1.25% of average daily net assets or the maximum allowed by applicable state
expense limitations. Prior to November 1, 1995, the Manager had agreed to
reduce some or all of its management fee or absorb Fund expenses if necessary
to keep the Fund's annual operating expenses, exclusive of interest or taxes,
at or below 1.40% of average daily net assets. Any reductions made for the
Fund by the Manager in its fees are subject to recovery within the following
three years provided the Fund is able to affect such reimbursement and remain
in compliance with applicable expense limitations. Any of the Manager's
voluntary absorptions are also subject to recovery. For the year ending June
30, 1996, the Manager recouped fees of $584,622, which were deferred during
the prior fiscal year. These amounts have been included with current year
management fees in the Statement of Operations and are part of the effective
rate above.
For the year ended June 30, 1996, the Manager has deferred fees as follows:
<TABLE>
<CAPTION>
FEES
DEFERRED
--------
<S> <C>
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio.................................... $828,433
</TABLE>
20
<PAGE>
THE MONTGOMERY FUNDS II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of June 30, 1996, the deferred management fee subject to recoupment is
$828,433.
b. Montgomery Asset Management, L.P., serves as the Fund's administrator
(the "Administrator"). The Administrator performs services with regard to
various aspects of the Fund's administrative operations. As compensation, the
Fund pays the Administrator a monthly fee at an annual rate of 0.05% of
average daily net assets. For the year ended June 30, 1996, the Administrator
has voluntarily waived fees of $80,601. This waiver is not recoupable by the
Administrator.
c. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or principal underwriter, "affiliated persons" as defined
in the 1940 Act. Each Trustee of the Montgomery Funds II who is not an
"affiliated person" receives an annual retainer and quarterly meeting fees
totalling $30,000 per annum, as well as reimbursement for expenses, for
service as a Trustee of all three Trusts advised by the Manager ($5,000 of
which was allocated to the Montgomery Funds II and the Montgomery Funds III,
together).
d. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees to its distributor. Therefore, Montgomery Securities has received no
direct compensation for serving as the Fund's principal underwriter and
distributor.
e. For the year ended June 30, 1996, the Fund's securities transactions
generated commissions of $2,251,340, none of which was paid to Montgomery
Securities.
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of investment securities,
other than short-term securities, for the year ended June 30, 1996, was as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio................... $262,045,186 $197,293,911
b. At June 30, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there was an excess
of tax cost over value for federal income tax purposes were as follows:
<CAPTION>
TAX BASIS TAX BASIS
UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio................... $33,994,127 $9,736,585
</TABLE>
c. The Fund regularly trades forward foreign currency exchange contracts
with off-balance sheet risk in the normal course of its investing activities
in order to manage exposure to market risks such as interest rates and foreign
currency exchange rates.
The contractual amounts of these instruments represent the investment the
Fund has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement
21
<PAGE>
THE MONTGOMERY FUNDS II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered. Summaries of obligations
under these financial instruments at June 30, 1996, are as follows:
<TABLE>
<CAPTION>
CONTRACT VALUE
VALUE DATE (NOTE 1)
---------- ----------
<C> <S> <C> <C>
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO:
Forward Foreign Currency Exchange Contracts to Buy:
351,900,000 Indonesian Ruppee....... 07/01/96 $ 151,178
11,019,400 Korean Wan.............. 07/01/96 13,584
1,958,249 Hong Kong Dollars....... 07/02/96 252,980
South African Commercial
3,854,393 Rand.................... 07/02/96 889,332
116,074 Swiss Franc............. 07/02/96 92,860
South African Commercial
683,935 Rand.................... 07/08/96 157,561
----------
Total Forward Foreign Currency Exchange
Contracts to Buy
(Contract cost $1,558,183).................... $1,557,495
==========
Forward Foreign Currency Exchange Contracts to Sell:
56,825 Brazilian Real.......... 07/01/96 $ 56,590
11,154,420 Czech Koruna............ 07/01/96 405,424
21,530,200 Portuguese Escudo....... 07/01/96 137,526
317,875 Brazilian Real.......... 07/02/96 316,562
3,364,755 Malaysian Ringgit....... 07/02/96 1,348,809
South African Commercial
846,517 Rand.................... 07/02/96 195,318
9,415,113 Czech Koruna............ 07/03/96 342,206
1,708,048 Malaysian Ringgit....... 07/03/96 684,675
----------
Total Forward Foreign Currency Exchange
Contracts to Sell
(Contract cost $3,479,225).................... $3,487,110
==========
</TABLE>
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of beneficial
interest for the periods indicated below were:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
MONTGOMERY INSTITUTIONAL SE-
RIES:
EMERGING MARKETS PORTFOLIO:
Shares Sold.................. 1,525,175 $66,963,824 1,300,698 $58,240,514
Issued as reinvestment of
dividends................... 3,176 129,186 719 32,717
Shares redeemed.............. (194,803) (9,031,514) (24,246) (1,206,683)
--------- ----------- --------- -----------
Net Increase................. 1,333,548 $58,061,496 1,277,171 $57,066,548
========= =========== ========= ===========
</TABLE>
To the extent consistent with certain tax requirements, investment expense
reimbursement fees and redemption expense reimbursement fees of 0.75% may be
imposed on the purchase or redemption of Fund shares. Payment of such fees
reflected in the dollar amount above are paid in cash. This adjustment is not
a sales charge. It is kept in the Fund for the benefit of all shareholders.
The purpose of the adjustment is to prevent the performance of the Fund from
being adversely affected by the transaction costs created by the investment of
cash received by the Fund or the sale of securities to obtain cash.
22
<PAGE>
THE MONTGOMERY FUNDS II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. ILLIQUID AND SPECIAL SITUATION SECURITIES:
The Fund may not invest more than 15% of its net assets in illiquid
securities. The following securities have been determined by the Manager to be
illiquid because they are restricted or there is an exceptionally low trading
volume in the primary trading market for the security at June 30, 1996.
<TABLE>
<CAPTION>
06/30/96
ACQUISITION MARKET VALUE % OF TOTAL
SECURITY DATE SHARES VALUE PER SHARE COST NET ASSETS
- -------- ----------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASE, Ltd. .............. 11/17/94 557,959 $ 953,464 $ 1.71 $ 617,549 0.35%
Cathay Life Insurance... 06/07/94 235,680 1,661,407 7.05 1,004,285 0.61
China Steel Corporation. 09/12/94 2,800,000 2,930,233 1.05 2,551,759 1.08
Efes Sinai Yatrium ve
Ticaret................ 02/07/95 907,100 62,366 0.07 108,860 0.02
Global Telesystems
Group, Inc. ........... 06/17/94 9,152 148,906 16.27 98,177 0.06
Pacific Construction.... 07/10/95 1,618,100 1,599,285 0.99 1,211,068 0.59
Pepsi International
Bottlers............... 12/27/95 9,000 914,228 101.58 900,000 0.34
Taiwan Mask............. 11/11/94 355,040 954,686 2.69 738,479 0.35
Taiwan Semiconductor
Company................ 11/11/94 645,160 1,347,991 2.09 1,400,359 0.50
Yageo Corporation....... 08/15/95 382,200 584,688 1.53 499,029 0.22
----------- ----
$11,157,254 4.12%
=========== ====
</TABLE>
In addition, certain of the foreign currency at June 30, 1996, may be
illiquid because conversion to U.S. dollars could take more than seven days.
The following securities held by the Fund on June 30, 1996 are generally
unrestricted securities for which reliable market prices can be established.
These securities are valued at their market prices. However, because the
process of re-registering foreign securities in the Fund's name can take more
than seven days, the following shares of each of these securities were deemed
restricted or illiquid in the hands of the Fund at June 30, 1996. The Fund
bears the cost of re-registering these securities:
<TABLE>
<CAPTION>
06/30/96
ACQUISITION MARKET VALUE % OF TOTAL
SECURITY DATE SHARES VALUE PER SHARE COST NET ASSETS
- -------- ----------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Adamjee Insurance
Company................ 12/31/93 5,924 $ 23,524 $3.97 $19,993 0.01%
Arvind Mills, Ltd....... 06/19/95 300 1,192 3.97 1,389 0.00#
Carrier Aircon, Ltd..... 06/07/94 6,375 45,872 7.20 31,531 0.02
Dandot Cement........... 12/31/93 4,000 703 0.18 13,528 0.00#
DG Khan Cement.......... 12/31/93 33,500 13,302 0.40 33,735 0.00#
Edaran Otomobil Nasional
Berhad................. 05/21/96 25,000 239,527 9.58 227,414 0.09
Engro Chemical Pakistan. 12/31/93 7,416 34,321 4.63 33,735 0.01
Floatglass.............. 07/14/95 6,400 5,786 0.90 8,279 0.00#
Grasim Industries, Ltd.. 07/14/95 124 2,014 16.24 2,504 0.00#
HDFC Bank, Ltd. ........ 06/28/96 279 309 1.11 304 0.00#
ICI Pakistan, Rights,
Expire 11/21/96........ 06/11/96 311,025 88,852 0.29 0 0.03
Industrial Credit &
Investment Corporation. 05/01/93 64,240 164,110 2.55 205,975 0.06
Mahanogar Telephone
Nigam, Ltd............. 10/16/95 96,000 691,456 7.20 477,973 0.26
Mulia Industrindo (F)... 03/19/96 207,000 306,831 1.48 334,496 0.11
Nishat Textile Mills.... 12/31/93 6,255 2,502 0.40 5,876 0.00#
Pakistan State Oil...... 12/28/93 4,000 47,193 11.80 29,832 0.02
State Bank of India..... 02/09/96 40,459 344,814 8.52 277,165 0.13
Tata Engineering &
Locomotive
Company, Ltd........... 02/09/96 56,200 829,520 14.76 721,644 0.31
Tata Iron & Steel
Company, Ltd. ......... 07/18/95 1,384 9,517 6.88 10,525 0.00#
The Indian Hotels
Company, Ltd........... 04/10/96 15,800 370,446 23.45 357,827 0.14
---------- ----
$3,221,791 1.19%
========== ====
</TABLE>
- --------
# Amount represents less than 0.01%.
23
<PAGE>
THE MONTGOMERY FUNDS II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. FOREIGN SECURITIES:
The Fund purchases securities in emerging market countries. Securities of
foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies and
the U.S. government. These risks include re-evaluation of currencies, less
reliable information about issuers, different securities transactions
clearance and settlement practices, and future adverse political and economic
developments. These risks are heightened for investments in emerging market
countries. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more
volatile than those securities of comparable U.S. companies and the U.S.
government.
7. CAPITAL LOSS CARRYFORWARD:
At June 30, 1996, the Fund had available for federal income tax purposes
unused capital losses of $4,067,977 expiring in 2002 and $8,872,589 expiring
in 2004.
Under current tax law, net capital and currency losses realized after
October 31 may be deferred and treated as occurring on the first day of the
following fiscal year. In the fiscal year ended June 30, 1996, the Fund
elected to defer losses of $703,814 occurring between November 1, 1995 and
June 30, 1996.
Such deferred losses will be treated as arising on the first day of the
fiscal year ending June 30, 1997.
24
<PAGE>
THE MONTGOMERY FUNDS II
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Montgomery Funds II and the Shareholders of
Montgomery Institutional Series: Emerging Markets Portfolio:
We have audited the accompanying statement of assets and liabilities,
including the portfolio investments, of the Montgomery Institutional Series:
Emerging Markets Portfolio (a portfolio of The Montgomery Funds II) as of June
30, 1996, and the related statement of operations for the year then ended, the
statements of changes in net assets for the years ended June 30, 1996 and
1995, and financial highlights for each of the years ended June 30, 1996 and
1995 and for the period from December 17, 1993 (commencement of operations) to
June 30, 1994. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at June 30, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Montgomery
Institutional Series: Emerging Markets Portfolio as of June 30, 1996, the
results of its operations, the changes in its net assets, and its financial
highlights for the respective stated periods, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
August 16, 1996
25
<PAGE>
THE MONTGOMERY FUNDS II
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED JUNE 30, 1996
For the fiscal year ended June 30, 1996, foreign income and foreign taxes
paid relating to foreign sources and possessions in the United States, on a
per share basis were as follows:
<TABLE>
<CAPTION>
FOREIGN FOREIGN
INCOME TAXES
------- -------
<S> <C> <C>
Montgomery Institutional Series: Emerging Markets Portfo-
lio....................................................... $0.7092 $0.0666
</TABLE>
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.
26
