<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
PORTFOLIO HIGHLIGHTS
June 30, 1997
Q: HOW DID THE PORTFOLIO PERFORM FROM JULY 1, 1996, THROUGH JUNE 30, 1997?
A: The portfolio gained 20.45% on a net basis over that period, outpacing
its benchmark, the IFC Global Composite Index, by a considerable margin.
Q: WHAT WERE SOME OF THE MOST POSITIVE FACTORS BEHIND THAT PERFORMANCE?
A: We made some very rewarding decisions in terms of both country and stock
selection over the past year.
Our decision in early 1996 to increase the portfolio's weighting in Brazil
paid off handsomely throughout the past fiscal year. Market sentiment in
Brazil has been bolstered by the country's progress on privatization and the
resolution of issues surrounding President Cardoso's ability to stand for re-
election in 1998. The portfolio also benefited from several of our stock
choices in Brazil. One of our largest holdings there, Telebras (the country's
monopoly telephone operator), has had a tremendous performance. There is a
great deal of pent-up demand for telecommunications in Brazil, and we believe
Telebras will continue to benefit from it.
The Brazilian market became more volatile in July 1997, due to concerns about
the stability of its currency. We think the downturn will be short-lived,
however, as the strong economic fundamentals that have been driving Brazil
over the past two years are still in place. Brazil's foreign reserves stood
at nearly US$60 billion in mid-1997, up from only $36 billion in 1994. The
country's foreign reserves also cover one year of imports and are greater
than its monetary base. This means that Brazil can "dollarize" its economy,
in the same manner as Argentina. Although Brazil's trade balance has
deteriorated due to increased imports of capital equipment, its current
account deficit, at 4% of GDP, is fairly well contained. Adjusting for one
year's current account deficit, Brazil's foreign reserve coverage of its
monetary base remains impressive at 80%, suggesting no danger at all to
Brazil's currency.
The portfolio also profited from its overweighting in Russia relative to its
benchmark index (and to many of its competitors). This market has grown
dramatically over the past year, and it continues to attract strong
international capital inflows. Both the political and economic situations
there appear to be stabilizing, though of course, considerable risk remains.
Despite its rally over the past year, we continue to see phenomenal asset
values in the Russian market.
Q: WERE THERE ANY DISAPPOINTMENTS?
A: Although we have gradually reduced the portfolio's exposure to Southeast
Asian markets over the past year, the portfolio's weighting there, though
Portfolio Management
- --------------------------------------------
Josephine S. Jimenez, CFA ..................
Senior Portfolio Manager
Bryan S. Sudweeks, Ph.D., CFA ..............
Senior Portfolio Manager
Angeline Ee............... Portfolio Manager
Frank Chiang ............. Portfolio Manager
Jesus Duarte ............. Portfolio Manager
- --------------------------------------------
Fund Performance
- --------------------------------------------
Average annual total returns for the periods
ended 6/30/97
- --------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
Since inception (12/17/93)............ 4.90%
1 year............................... 20.45%
3 years.............................. 10.63%
IFC GLOBAL COMPOSITE INDEX
Since (12/1/93)....................... 7.92%
1 year............................... 11.32%
3 years............................... 6.04%
- --------------------------------------------
Past performance is no guarantee of future
results. Net asset value, investment return
and principal value will fluctuate so that
shares, when redeemed, may be worth more or
less than their original cost.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
Montgomery Institutional Series:
Emerging Markets Portfolio IFC Gobal Composite Index*
-------------------------------- --------------------------
<S> <C> <C>
12/20/93 10000
12/93 10154 10000
03/94 9010 9120
06/94 8742 9240
09/94 10416 11238
12/94 9215 9947
03/95 8172 8671
06/95 8924 9123
09/95 8752 8989
12/95 8558 8721
03/96 9105 9257
06/96 9830 9898
09/96 9583 9572
12/96 9675 9409
03/97 10567 10312
06/97 11838 11019
</TABLE>
* The IFC Global Composite Index is comprised of more than 1,200 individual
stocks from 25 developing countries in Asia, Latin America, Middle East, Africa
and Europe.
<PAGE>
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
- -------------------------------------------------------------------------------
Portfolio Highlights
June 30, 1997
light, continued to work against us. These markets have been grappling with
structural problems in their economic and political systems, which led to
concerns about the stability of their currencies. That, among other things, has
depressed Southeast Asian stock markets, but we believe that the problems will
begin to ease in the coming year. That said, we are taking a cautious stance
toward these markets for the time being.
Q: WHAT IS YOUR OUTLOOK FOR THE EMERGING MARKETS OVER THE COMING YEAR?
A: In Latin America we believe that Brazil (the region's largest economy) will
continue to drive performance. Mexico, the other major Latin American
economy, appears to be in good shape, as well. We are encouraged by the
results of the recent election, which signal a move towards a more democratic
political system.
We have a mixed outlook for Asian markets, but believe that China/Hong Kong
is poised to grow rapidly, with inflation under control. Investors will
undoubtedly watch it carefully in the coming year to see whether China lives
up to its promise of maintaining "one country, two systems."
Emerging Europe should benefit from economic recovery in Germany, a major
trading partner of many countries in the region. As always, politics will
continue to dictate the mood of Middle Eastern stock markets. We see some
dynamic opportunities in North Africa (such as the cement industry in Egypt),
but remain cautious on South Africa. Its economy suffers from a dangerously
low level of foreign reserves, and corporate profits are being hurt by lower
gold prices.
We are continually impressed with the strides that developing economies are
making and we expect to see more progress in the future. These countries are
restructuring their economies and laying the foundations for future growth.
TOP FIVE COUNTRIES
(AS A PERCENTAGE OF TOTAL NET ASSETS):
---------------------------------------------------------
Brazil........................................... 21.2%
Taiwan........................................... 8.8
Malaysia......................................... 7.4
Russia........................................... 7.4
Mexico........................................... 6.7
---------------------------------------------------------
TOP TEN HOLDINGS
(AS A PERCENTAGE OF TOTAL NET ASSETS):
---------------------------------------------------------
Petroleo Brasileiro.............................. 2.8%
Telebras......................................... 2.7
Alfa S.A. de C.V................................. 2.5
Tatneft, Sponsored ADS........................... 2.3
Electrobras, "B"................................. 2.1
Banco Bradesco................................... 1.9
Irkutskenegro, RDC............................... 1.7
Telefonos de Mexico S.A., ADR.................... 1.7
Telec Brasileiras-Telebras ON.................... 1.7
Korea Electric Power Corporation, ADR............ 1.7
--------------------------------------------------------
2
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments
June 30, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--81.2% VALUE
SHARES (NOTE 1)
<C> <S> <C>
ARGENTINA--2.3%
57,755 Banco Frances del Rio de la Plata, ADR (Banks) $ 1,877,037
548,700 Cresud S.A.+ (Real Estate) 1,223,791
160,582 Inversiones y Representaciones (Real Estate) 698,640
3,954 Inversiones y Representaciones, GDR (Euro) (Real Estate) 172,988
394,100 Siderar S.A. (Steel) 1,620,002
63,100 Telefonica de Argentina, Sponsored ADR (Telephone/Networks) 2,184,838
------------
7,777,296
------------
BANGLADESH-- 0.1%
17,400 Apex Tannery (Apparel and Textiles) 262,842
------------
BRAZIL--4.5%
5,618,000 Cia Saneamento Basico Estado (Water Utilities) 1,711,675
520,000 Electrobras (Electric Utilities) 290,781
1,200 Electrobras, GDS***+ (Electric Utilities) 168,525
200,000 Souza Cruz S.A. (Tobacco) 2,108,588
3,470 Telebras, ADR (Telephone/Networks) 526,573
42,350,000 Telec Brasileiras-Telebras ON (Telephone/Networks) 5,743,440
1,293,081 Telec de Ceara S.A.+ (Telecommunications Equipment) 528,699
170,996 Telec de Sao Paulo S.A. (Telephone/Regional - Local) 50,431
104,100 Uniao de Bancos Brasileriros S.A.- Unibanco GDR+ (Banks) 3,864,713
------------
14,993,425
------------
CHILE--1.3%
18,150 Compania de Telefonos de Chile, ADR (Telecommunications/Wireless) 598,950
76,300 Empresa Nacional Electricidad S.A., ADR (Electric Utilities) 1,721,519
13,334 Sociedad Quimica y Minera de Chile (Chemicals) 881,711
60,000 Supermercados Unimarc S.A.+ (Retail Trade) 1,125,000
------------
4,327,180
------------
CHINA/HONG KONG--5.0%
4,174,000 Beijing Yanhua Petrochemical Company Ltd. (Chemicals) 905,131
143,000 Cheung Kong Holdings (Real Estate) 1,412,040
422,000 China Light and Power Company (Electric Utilities) 2,391,259
378,000 China Resources Enterprises Ltd. (Holding) 1,854,065
230,000 Citic Pacific Ltd. (Holding) 1,436,888
53,200 HSBC Holdings (Banks) 1,599,990
173,000 Hutchison Whampoa Ltd. (Conglomerates) 1,496,134
337,000 New World Development Company Ltd. (Holding) 2,009,655
160,000 Shanghai Industrial Holdings Ltd. (Conglomerates) 995,444
96,000 Sun Hung Kai Properties Ltd. (Real Estate) 1,155,499
470,000 Union Bank of Hong Kong Ltd. (Banks) 1,358,925
------------
16,615,030
------------
</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, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--(continued) VALUE
SHARES (NOTE 1)
<C> <S> <C>
COLOMBIA--0.7%
246,000 Almacenes Exito S.A.(Retail Trade) $ 901,925
205,100 Bavaria (Food and Beverage) 1,471,983
------------
2,373,908
CZECH REPUBLIC--1.7%
29,300 Komercni Banka, GDR+ (Banks) 610,173
13,000 Komercni Banka, GDR ***+(Banks) 270,725
93,900 Komercni Banka I.F. (Mutual Funds) 1,396,003
84,633 PIF (Mutual Funds) 991,966
200,000 The Czech Value Fund+ (Mutual Funds) 1,276,000
213,126 Vseobecny I.F. (Mutual Funds) 440,569
137,165 Vynosovy I.F. (Mutual Funds) 693,842
------------
5,679,278
------------
EGYPT--0.8%
31,900 Al-Ahram Beverages Company, GDR (Food and Beverage) 653,153
23,000 Al-Ahram Beverages Company, GDR***+ (Food and Beverage) 470,925
37,800 Amreya Cement (Cement) 920,880
22,700 Tora Cement** (Cement) 574,388
------------
2,619,346
------------
HUNGARY--0.2%
70,500 Zalakeramia Rt., GDR*** (Building Materials). 551,663
------------
INDIA--6.0%
103,550 Bajaj Auto, Ltd.** (Auto/Auto Parts) 2,663,954
200,000 Bharat Petroleum Corporation Ltd. (Oil) 2,513,966
225,250 Carrier Aircon, Ltd. (Home Appliance) 1,541,515
49,800 Castrol (India) Ltd.** (Chemicals) 724,047
600 HDFC Bank, Ltd.**(Banks) 1,035
3,000 Hindustan Lever Ltd.** (Retail Trade) 120,628
125,000 Hindustan Petroleum Corporation Ltd.** (Oil) 1,585,195
14,575 Housing Development and Finance Corporation** (Banks) 1,662,181
41,206 Indian Hotels Company, Ltd.+(Lodging) 750,456
13,600 Indian Hotels, GDS*** (Lodging) 323,000
23,100 Indian Hotels, GDS (Euro) (Lodging) 548,625
406 Industrial Credit and Investment Corporation** (Banks) 887
2,320 Madras Cement Ltd.** (Cement) 523,296
580,500 Mahanagar Telephone Nigam, Ltd.** (Telephone/Regional -Local) 4,925,332
35,000 Oil and Natural Gas Corporation Ltd.**+ (Oil). 362,954
1,150 State Bank of India**+ (Banks) 10,930
1,030 Tata Engineering & Locomotive Company, Ltd.** (Auto/Auto Parts) 13,004
8,200 Videsh Sanchar Nigam Ltd.** (Telephone/Long Distance) 265,698
68,200 Videsh Sanchar Nigam Ltd., GDR***+ (Telephone/Long Distance) 1,420,265
------------
19,956,968
------------
</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, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--(continued) VALUE
SHARES (NOTE 1)
<C> <S> <C>
INDONESIA--3.2%
694,000 Bimantara (F) (Conglomerates) $ 1,212,788
356,000 Hanjaya Mandala Sampoerna (F) (Tobacco) 1,357,689
480 Indorama (F) (Apparel and Textiles) 434
987,000 Lippo Bank (F) (Banks) 1,014,597
1,130,000 Lippo Securities** (Diversified Financial Services) 801,501
145,500 London Sumatra Indonesia (Agricultural Commodities) 460,670
1,080,000 Matahari Putra Prima (F) (Retail Trade) 2,175,987
2,260,000 Mulia Industrindo (F)** (Glass) 1,184,827
281,500 Putra Surya Multidana (F)**+ (Diversified Financial Services) 448,525
499,500 Semen Gresik (F)** (Building Materials) 1,119,356
33,700 Telekomunikas Indonesia, ADR (Telephone/Regional - Local) 1,095,250
------------
10,871,624
------------
ISRAEL--1.1%
436,500 Supersol Ltd. (Retail Trade) 1,400,540
30,800 Teva Pharmaceuticals (Pharmacy/Drugs) 1,991,823
3,500 Teva Pharmaceuticals, ADR (Pharmacy/Drugs) 226,844
------------
3,619,207
------------
KOREA--6.5%
160,000 Daewoo Corporation (Conglomerates) 1,300,901
72,000 Dongwon Securities (Securities Brokerage) 948,649
80,887 Hanwha Chemical Corporation+ (Chemicals) 637,623
72,000 Hyundai Engineering and Construction Company (Heavy Construction) 1,848,649
40,000 Hyundai Merchant Marine+ (Shipping) 752,252
269 Kookmin Bank (Banks) 5,030
185,200 Korea Electric Power Corporation, ADR (Electric Utilities) 5,526,802
33,000 LG Semiconductor Company+ (Semiconductor) 1,285,811
31,840 Pohang Iron & Steel Company, Ltd. (Steel) 3,304,803
14,540 Samsung Electronics, Ltd. (F) (Electronics) 1,631,454
18 Samsung Electronics Ltd., GDR***+ (Electronics) 1,046
1,134 Samsung Electronics, Ltd., New, GDR*** (Electronics) 65,914
128,276 Shinhan Bank (Banks) 1,877,727
99,998 Yukong, Ltd. (Oil) 2,421,123
------------
21,607,784
------------
MALAYSIA--7.4%
791,000 Arab Malaysian Corporation (Diversified Financial Services) 2,945,879
336,000 Guinness Anchor Berhad (Food and Beverage). 745,483
457,000 Hong Leong Bank Berhad (Banks) 1,149,742
1,066,000 IJM Corporation Berhad (Heavy Construction) 2,238,431
3,715,000 IOI Corporation Oxygen, Inc. (Agricultural Commodities) 4,238,986
524,000 Leader Universal Holdings Berhad (Telecommunications Equipment) 942,536
151,000 Malakoff Berhad (Electric Utilities) 658,082
399,000 New Straits Times (Newspapers/Publishing) 2,339,620
</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, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--(continued) VALUE
SHARES (NOTE 1)
<C> <S> <C>
MALAYSIA--(continued)
192,000 Oriental Holdings Berhad (Auto/Auto Parts) $ 1,445,325
138,000 Powertek Berhad+ (Electric Utilities) 211,046
100,000 Public Bank Berhad (Banks) 142,631
1,135,000 Public Bank Berhad (F) (Banks) 1,771,751
1,200,000 Tan Chong Motor Holdings Berhad (Auto/Auto Parts) 2,263,074
243,000 Tanjong PLC (Leisure Time) 837,599
72,500 Telekom Malaysia Berhad (Telecommunications/Other) 338,946
343,000 United Engineers Berhad (Heavy Construction) 2,473,296
------------
24,742,427
------------
MEXICO--6.7%
203,000 Acer Computer Latino America S.A. de C.V.+
(Computers and Office Equipment) 704,976
1,205,686 Alfa S.A. de C.V. (Conglomerates) 8,207,312
650,000 Cifra S.A. de C.V., ADR (Retail Trade) 1,173,250
131,000 Empresas La Moderna S.A. de C.V., Class A+ (Tobacco) 696,414
92,100 Grupo Radio Central S.A. de C.V., ADR (Broadcasting/Advertising) 1,082,175
257,306 Industrias Penoles CPO (Metals and Mining) 1,227,040
300,000 Kimberly Clark de Mexico, Class A (Pulp and Paper) 1,200,377
300,000 San Luis Corporacion S.A. de C.V. (Metals and Mining) 2,219,566
121,000 Telefonos de Mexico S.A., ADR (Telephone/Long Distance) 5,777,750
------------
22,288,860
------------
MOROCCO--0.2%
9,371 Banque Marocaine du Commerce Exterieur (Banks) 589,232
2 Banque Marocaine du Commerce Exterieur, GDR*** (Banks) 39
------------
589,271
------------
PAKISTAN--0.3%
2,287 Adamjee Insurance Company** (Insurance) 5,149
459,900 Fauji Fertilizer Company Ltd. (Agricultural Commodities) 904,565
6,255 Nishat Textile Mills (Apparel and Textiles) 3,095
761 Pakistan International Airways (Airlines) 144
22,304 Pakistan State Oil** (Oil) 179,891
------------
1,092,844
------------
PERU--1.0%
38,698 Credicorp, Ltd. (Banks) 851,356
419,685 Ferreyros Enrique S.A. (Holding) 482,578
15,000 Ferreyros Enrique S.A. ADS*** (Metals and Mining ) 361,875
207,182 Telefonica del Peru S.A., Class B (Telephone/Networks) 544,414
41,700 Telefonica del Peru S.A., Series B, ADR (Telephone/Networks) 1,092,019
------------
3,332,242
------------
</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, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--(continued) VALUE
SHARES (NOTE 1)
<C> <S> <C>
PHILIPPINES--2.7%
5,776,000 Belle Corporation+ (Real Estate) $ 1,686,199
4,158,000 DMCI Holdings+ (Heavy Construction) 1,371,497
1,624,000 International Container Terminal Services, Inc.+ (Shipping) 831,210
250,000 La Tondena Distillers Inc. (Food and Beverage) 601,873
369,730,911 Manila Mining, Class B+ (Metals and Mining) 182,230
1,789,350 Metro Pacific Inc., Class B (Conglomerates) 386,688
1,209,000 Music Semiconductors Corporation+ (Semiconductor) 630,260
2,108,000 PCI Leasing and Finance, Inc.+ (Diversified Financial Services) 399,606
6,156,000 Petron Corporation (Oil) 1,563,740
4,133 Philippine Long Distance Telephone, ADR (Telephone/Long Distance) 265,545
4,260 Philippine Long Distance Telephone, GDR (Telephone/Long Distance) 247,080
2,045,000 Republic Glass (Glass) 186,078
3,813,000 Uniwide Holdings, Inc.+ (Retail Trade) 751,729
------------
9,103,735
------------
PORTUGAL--2.6%
9,380 Capital Portugal Fund+ (Mutual Funds) 1,422,003
104,000 Cimpor-Cimentos de Portugal (Building Materials) 2,424,047
27,000 Electricidad de Portugal+ (Electric Utilities) 495,540
106,880 Sonae Investimentos (Retail Trade) 4,469,174
------------
8,810,764
------------
ROMANIA--0.1%
34,653 Romania Growth Fund PLC+ (Mutual Funds) 346,530
------------
RUSSIA--7.4%
9,152 Global Telesystems Group, Inc.**+ (Telephone/Networks) 171,310
86 Irkutskenegro, RDC***+ (Electric Utilities) 5,839,400
18,200 LukOil Company, ADR (Oil) 1,416,188
25 LukOil Company, RDC*** (Oil) 2,438,750
156 Russian Telecom Basket GEC 144A*** (Telephone/Regional -Local) 2,075,188
74,400 Surgutneftegaz, ADR (Oil) 3,985,050
10,100 Tatneft, ADR+ (Oil) 1,083,225
71,200 Tatneft, Sponsored ADR+ (Oil) 7,636,200
------------
24,645,311
------------
SINGAPORE--0.7%
88,000 Advanced Systems Automation Ltd.+ (Electronics). 166,189
220,000 Keppel Corporation, ORD (Heavy Construction) 744,772
285,000 Sunright Ltd.+ (Electronics) 518,290
650,000 Thakral Corporation Ltd. (Home Appliance) 663,000
150,000 Wong's Circuits Holdings Ltd.+ (Semiconductor) 252,000
------------
2,344,251
------------
</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, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--(continued) VALUE
SHARES (NOTE 1)
<C> <S> <C>
SLOVENIA--0.0%#
10,000 BTC, GDR 144A***+ (Electric Utilities) $ 98,000
------------
SOUTH AFRICA--3.8%
67,000 Anglovaal, Ltd. (Conglomerates) 1,786,864
81,830 Barlow, Ltd. (Building Materials) 890,084
1,700,000 Highstone Property Fund (Real Estate) 487,106
196,000 JCI Ltd. (Diversified Financial Services). 1,507,692
1,242,578 Lonrho (Conglomerates) 2,662,080
9,000 Pepsi International Bottlers**##+ (Food and Beverage) 783,000
336,711 Sasol, Ltd. (Oil) 4,415,760
------------
12,532,586
------------
SRI LANKA--0.0%#
38,900 Aitken Spence and Company (Conglomerates) 123,038
21,600 Development Finance Corporation of Ceylon+ (Banks) 105,249
------------
228,287
------------
TAIWAN--8.8%
524,400 ASE+ (Semiconductor) 1,990,079
1,000,000 China Development Corporation+ (Diversified Financial Services) 5,161,870
1,444,250 China Steel Corporation (Steel) 1,527,372
650,000 Compal Electronics+ (Computers and Office Equipment) 2,571,942
492,000 Delta Electronic Industrial (Electrical Equipment) 3,044,029
1,060,000 Formosa Chemicals and Fiber Corporation (Apparel and Textiles) 1,540,432
960,000 Hung Sheng Construction Ltd. (Real Estate) 1,640,288
2,070,001 Pacific Construction+ (Heavy Construction) 2,211,476
600,000 Primax Electronics Ltd. (Computers and Office Equipment) 1,780,576
655,740 Taiwan Semiconductor Company+ (Semiconductor) 2,913,090
560,000 United World Chinese Commercial Bank (Banks) 1,339,568
382,200 Yageo Corporation+ (Electronics) 1,608,540
74,461 Yageo Corporation, GDR (Electronics) 1,303,068
41,665 Yageo Corporation, GDR***+ (Electronics) 729,137
------------
29,361,467
------------
THAILAND--2.1%
53,800 Bangkok Bank Public Company Entitlement Certificates (Banks) 278,684
174,100 Central Pattana Public Company, Ltd. (F) (Real Estate) 251,711
104,900 CH Karnchang Public Company (F) (Heavy Construction) 286,474
742,200 Electricity Generation Power Company (F) (Electric Utilities) 1,892,759
112,400 Pizza Public Company Ltd. (Food and Beverage) 600,369
154,200 PTT Exploration and Production Public Company, Ltd. (F) (Oil) 2,328,482
62,900 Regional Container Lines (F) (Shipping) 389,020
19,600 Siam Cement Public Company, Ltd. (F) (Building Materials) 352,642
37,800 Siam Cement Public Company, Ltd., Local, Series 2 (Building Materials) 585,900
------------
6,966,041
------------
</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, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--(continued) VALUE
SHARES (NOTE 1)
<C> <S> <C>
TURKEY--2.3%
5,203,000 Akcansa Cimento A.S. (Cement) $ 718,138
2,075,863 Efes Sinai Yatrium ve Ticaret**## (Food and Beverage) 148,696
110,700 Erciyas Biracilik ve Malt, ADR (Food and Beverage) 207,563
4,463,499 Koc Holdings (Holding) 1,051,826
1,988,000 Migros Turk T.A.S. (Retail Trade) 1,405,420
500,000 Otosan Otomobil Sanayii A.S. (Auto/Auto Parts) 265,948
3,163,957 Tat Konserve (Food and Beverage) 234,328
21,520,000 Turk Sise ve Cam+ (Glass) 1,361,979
42,626,500 Yapi ve Kredi Bankasi A.S. (Banks) 975,796
56,693,245 Yapi ve Kredi Bankasi A.S. Non-Tradeable Certificates (Banks) 1,297,809
------------
7,667,503
------------
UKRAINE--0.1%
232,000 Ukraine Enterprise Corporation+ (Mutual Funds) 411,601
------------
VENEZUELA--1.6%
68,900 Compania Anonima Nacional Telefonos de Venezuela, ADR
(Telephone/Networks) 2,971,312
1,460,507 Electricidad de Caracas (Electric Utilities) 2,339,997
------------
5,311,309
------------
VIETNAM--0.0%#
10,800 Southeast Asia Frontier Fund (Mutual Funds) 29,700
7,000 The Vietnam Frontier Fund+ (Mutual Funds) 59,500
------------
89,200
------------
TOTAL COMMON STOCKS (COST $231,694,174) 271,217,780
------------
PREFERRED STOCKS--16.8%
BRAZIL--16.7%
623,599,110 Banco Bradesco (Banks) 6,284,938
82,200,000 Cia Energetica de Minas Gerais (Electric Utilities) 4,237,704
167,702,000 Cia Paranaense de Energi (Electric Utilities) 3,115,545
2,500,000 Copene-Petroquimica do Nordests S.A. (Chemicals) 926,571
12,012,000 Electrobras, "B" (Electric Utilities) 7,163,350
2,300,000 Itausa Investimentos Itau (Holding) 2,115,090
9,400 Kepler Weber S.A. + (Machinery and Tool.s) 48,460
18,300,000 Lojas Americanas+ (Retail Trade) 248,182
21,340,000 Lojas Renner S.A. (Retail Trade) 1,094,206
1,160,000 Metalurgica E Shultz S.A. (Steel) 17,456
90,307,000 Odebrecht S.A. (Heavy Construction) 767,553
33,260,286 Petroleo Brasileiro (Oil) 9,237,990
59,533,872 Telebras (Telephone/Networks) 9,033,623
10,731,474 Telec de Minas Gerais S.A. (Telephone/Regional - Local) 1,898,979
4,171,326 Telec de Sao Paulo S.A. (Telephone/Regi.onal - Local) 1,361,963
11,145,221 Telec do Rio Janeiro S.A. (Telephone/Networks) 1,718,552
</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, 1997
<TABLE>
<CAPTION>
PREFERRED STOCKS--(continued) VALUE
SHARES (NOTE 1)
<C> <S> <C>
BRAZIL--(continued)
43,442,000 Uniao de Bancos Brasileiros (Banks) $ 1,593,539
142,300 Usiminas (Steel) 1,584,856
64,956 Vale do Rio Doce (Metals and Mining) 1,436,628
142,956 Vale do Rio Doce, "B"## (Metals and Mining) 0
2,628,000 Weg S.A. (Furniture) 1,806,437
------------
55,691,622
------------
KOREA--0.0%#
4,734 Samsung Electronics, Ltd. (F) (Electronics) 226,811
------------
PHILIPPINES--0.1%
8,800 Philippine Long Distance Telephone, Convertible Preferred
5.750% 12/31/49 (Telephone/Long Distance) 322,872
------------
TOTAL PREFERRED STOCKS (COST $31,440,001) 56,241,305
------------
CONVERTIBLE BONDS--0.5%
PRINCIPAL AMOUNT
MALAYSIA--0.0%#
$ 112,765 AMLN Loan Stock, 7.500% due 12/31/02 (Diversified Financial Services) 36,635
------------
SOUTH AFRICA--0.3%
840,000 Barlow, Ltd., 7.000% due 09/20/04 (Building Materials) 1,066,800
------------
THAILAND--0.2%
740,000 Central Pattana Public Company, Ltd., 2.750% due 04/10/01
*** (Real Estate) 678,950
------------
TOTAL CONVERTIBLE BONDS (COST $1,728,915) 1,782,385
------------
RIGHTS--0.0%#
SHARES
KOREA--0.0%#
241 Samsung Electronics Ltd., Expires 01/01/98+ (Electronics) 26,230
------------
Malaysia--0.0%#
61,375 Hong Leong Bank Berhad, Expires 07/21/97+ (Banks) 9,727
------------
TOTAL RIGHTS (COST $12,620) 35,957
------------
WARRANTS--0.0%#
(COST $44,214)
CZECH REPUBLIC--0.0%#
21,000 The Czech Value Fund, Expires 09/13/98+ (Mutual Funds) 7,980
------------
TOTAL SECURITIES (COST $264,919,924) 329,285,407
------------
</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, 1997
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--1.7% VALUE
PRINCIPAL AMOUNT (NOTE 1)
<C> <S> <C>
$2,812,000 Agreement with Bear Stearns, Tri-Party, 6.200%
dated 06/30/97, to be repurchased at $2,812,484,
on 07/01/97, collateralized by $2,868,240 market
value of U.S. Government securities, having
various maturities and various interest rates $ 2,812,000
2,812,000 Agreement with HSBC Securities Inc., Tri-Party,
6.200% dated 06/30/97, to be repurchased at
$2,812,484, on 07/01/97, collateralized by
$2,868,245 market value of U.S. Government
securities, having various maturities and
various interest rates 2,812,000
-------------
TOTAL REPURCHASE AGREEMENTS (COST $5,624,000) 5,624,000
-------------
TOTAL INVESTMENTS (COST $270,543,924*) 100.2% 334,909,407
OTHER ASSETS AND LIABILITIES (NET) (0.2) (728,710)
------- -------------
NET ASSETS 100.0% $ 334,180,697
======= =============
</TABLE>
- -------------------
* Aggregate cost for Federal tax purposes was $272,528,689.
** 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%.
## Security valued as determined in good faith by or under the direction of
the Board of Trustees.
+ 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.
11
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Statement of Assets and Liabilities
June 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Identified cost $270,543,924) (Note 1)............ $ 334,909,407
Cash..................................................................... 23,780
Foreign currency (Cost $3,076,088)....................................... 2,987,282
Receivable for forward foreign currency exchange contracts
to sell (Note 3)...................................................... 1,600,385
Forward foreign currency exchange contracts to buy, at value
(Contract cost $800,879) (Note 3)..................................... 797,673
Receivables:
Investment securities sold............................................ 3,156,207
Dividends............................................................. 1,294,500
Interest.............................................................. 51,989
Other Assets:
Organization costs (Note 1)........................................... 11,731
----------------
Total Assets..................................................... 344,832,954
LIABILITIES:
Forward foreign currency exchange contracts to sell, at value
(Contract cost $1,600,385) (Note 3)................................... $ 1,600,938
Payable for forward foreign currency exchange contracts to buy (Note 3).. 800,879
Payables:
Investment securities purchased....................................... 8,008,384
Custodian fees........................................................ 102,051
Management fee (Note 2)............................................... 69,332
Legal and audit fees.................................................. 42,350
Interest expense on equity swap agreements (Note 1)................... 5,043
Administration fee (Note 2)........................................... 3,714
Transfer agency and servicing fees.................................... 2,256
Trustees' fees and expenses (Note 2).................................. 1,500
Accrued liabilities and expenses...................................... 15,810
------------
Total Liabilities..................................................... 10,652,257
----------------
NET ASSETS............................................................... $ 334,180,697
================
NET ASSETS consist of:
Undistributed net investment income...................................... $ 1,620,507
Accumulated net realized gain on securities sold, forward foreign
currency exchange contracts and foreign currency transactions......... 756,771
Net unrealized appreciation of investments, forward foreign currency
exchange contracts, foreign currency transactions and net other assets 64,279,844
Shares of beneficial interest............................................ 57,107
Additional paid-in capital............................................... 267,466,468
----------------
NET ASSETS............................................................... $ 334,180,697
================
Net Asset Value, per share outstanding*.................................. $ 58.52
================
Maximum offering price per share (Note 4) ($58.52 / .9925) (based on
maximum investment expense reimbursement fee of 0.75% of the
offering price)....................................................... $ 58.96
================
Number of Fund shares outstanding........................................ 5,710,734
================
</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.
12
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Statement of Operations
For the Year Ended June 30, 1997
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $320,914).............................. $ 5,470,648
Interest.............................................................................. 573,606
-------------
Total Income.......................................................................... 6,044,254
EXPENSES:
Management fee (Note 2)............................................................... $ 3,614,992
Custodian fees........................................................................ 609,434
Administration fee (Note 2)........................................................... 128,078
Legal and audit fees.................................................................. 61,941
Interest expense on equity swap agreements (Note 1)................................... 15,296
Transfer agency and servicing fees.................................................... 9,765
Trustees' fees and expenses (Note 2).................................................. 8,201
Amortization of organization costs (Note 1)........................................... 4,403
Other ................................................................................ 130,903
-------------
Total Expenses........................................................................ 4,583,013
Fees deferred by Manager and/or Administrator (Note 2)................................ (995,074)
-------------
NET EXPENSES.......................................................................... 3,587,939
-------------
NET INVESTMENT INCOME................................................................. $ 2,456,315
-------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) from:
Securities transactions (Net of capital gains tax expense of $18)................. 15,558,378
Forward foreign currency exchange contracts (Net of CPMF tax
expense of $38,356)............................................................ (539,283)
Foreign currency transactions..................................................... (92,776)
-------------
Net realized gain on investments during the year...................................... 14,926,319
-------------
Net change in unrealized appreciation/(depreciation) of:
Securities........................................................................ 39,531,834
Forward foreign currency exchange contracts....................................... 4,814
Foreign currency and net other assets............................................. (57,571)
-------------
Net unrealized appreciation of investments during the year............................ 39,479,077
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS....................................... 54,405,396
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................. $ 56,861,711
=============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
13
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
06/30/97 06/30/96
---------- ----------
<S> <C> <C>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income........................................................... $ 2,456,315 $ 2,593,039
Net realized gain on securities transactions, forward foreign currency
exchange contracts and foreign currency transactions during the year........ 14,926,319 524,339
Net unrealized appreciation of securities, forward foreign currency exchange
contracts, foreign currency and net other assets during the year............ 39,479,077 23,202,979
------------------ -----------------
Net increase in net assets resulting from operations............................ 56,861,711 26,320,357
Distributions to shareholders from net investment income........................ (2,730,875) (169,409)
Net increase from beneficial interest transactions (Note 4)..................... 9,171,901 58,061,496
------------------ -----------------
Net increase in net assets...................................................... 63,302,737 84,212,444
NET ASSETS:
Beginning of year............................................................... 270,877,960 186,665,516
------------------ -----------------
End of year (including undistributed net investment income
of $1,620,507 and $1,194,794, respectively)............................. $ 334,180,697 $ 270,877,960
================== =================
</TABLE>
Financial Highlights
Selected Per Share Data for the Year or Period Ended:
<TABLE>
<CAPTION>
06/30/97 06/30/96 06/30/95++ 06/30/94*
<S> <C> <C> <C> <C>
Net asset value - beginning of year $ 49.09 $ 44.61 $ 43.71 $ 50.00
------------- ------------- ------------- -------------
Net investment income 0.43 0.50 0.13 0.09
Net realized and unrealized gain/(loss) on investments 9.46 3.93 0.67 (6.67)
------------- ------------- ------------- -------------
Net increase/(decrease) in net assets resulting from
investment operations 9.89 4.43 0.80 (6.58)
------------- ------------- ------------- -------------
Effect of redemption expense reimbursement fee 0.02 0.09 0.11 0.29
Distributions from net investment income (0.48) (0.04) (0.01) --
------------- ------------- ------------- -------------
Net asset value - end of year $ 58.52 $ 49.09 $ 44.61 $ 43.71
============= ============= ============ =============
Total return ** 20.45% 10.14% 2.09% (12.58)%
============= ============= ============ =============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) $ 334,181 $ 270,878 $ 186,666 $ 127,085
Ratio of net investment income to average net assets 0.86% 1.16% 0.29% 0.47%+
Ratio of net expenses to average net assets 1.26% 1.29% 1.40% 1.40%+
Portfolio turnover rate 85% 88% 101% 33%
Average commission rate paid (a) $ 0.0009 $ 0.0007 N/A N/A
Net investment income/(loss) before deferral of fees
by Manager $ 0.26 $ 0.33 $ (0.05) $ 0.01
Ratio of expenses before deferral of fees by Manager 1.61% 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.
14
<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, 1997, the Trust had two
publicly offered series, the Montgomery Asset Allocation Fund 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.
Portfolio securities which are traded primarily on foreign securities
exchanges or for which market quotations are readily available are
generally valued at the last reported sales price on the respective
exchanges or markets, except that when an occurrence subsequent to the
time that a value was so established is likely to have changed said value,
the fair value of those securities will be determined by consideration of
other factors by or under the direction of the Board of Trustees or its
delegates. Securities traded on the over-the-counter market are valued at
the mean between the last available bid and ask price prior to the time of
valuation. The value of equity swap agreements will be the value of the
underlying security. Short-term securities with maturities of 60 days or
less are valued at amortized cost which approximates 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 and
affiliated series of another registered investment company 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, 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 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
invest-
15
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
ments 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
The Fund may engage in forward foreign currency exchange contracts with
off balance sheet risk in the normal course of investing activities in
order to manage exposure to market risks. Forward foreign currency
exchange contracts are valued at the forward rate and are marked-to-market
daily. The change in market value is recorded by the Fund as an unrealized
gain or loss.
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. EQUITY SWAPS
The Fund has entered 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, equal to a fixed percentage
based on a notional amount equal to the Fund's acquisition cost for the
underlying security. Additionally, the Fund will make semi-annual floating
rate payments equal to the six month LIBOR and any capital depreciation on
the underlying security to the swap counterparty. The swap counterparty
will make semi-annual 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. The Fund is exposed to credit
loss in the event of non-performance by the swap counterparty. However,
the Fund does not anticipate non-performance by the counterparty. The Fund
has segregated cash as a reserve for the payment of liabilities under the
equity swap agreements.
f. 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, 1997,
resulting from differences in book and tax accounting have been
reclassified at year end to reflect an increase in undistributed net
investment income by $700,273 and a decrease in accumulated net capital
gain by $700,273.
g. 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.
h. FEDERAL INCOME TAX
The Fund has elected and qualified and it is the intention of the Fund to
continue to qualify to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), 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.
16
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
i. 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.
j. 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 based upon relative net assets.
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"). Its
general partner is Montgomery Asset Management, Inc. and its sole limited
partner is an affiliate of Montgomery Securities, the Funds' 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 0.98% of
average daily net assets before any deferral of fees for the year ending
June 30,1997. (the effective rate including the effect of current period
fee deferral was 0.95% for the year ending June 30, 1997.) 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, 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. 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, 1997, the Manager recouped fees
of $828,433, which were deferred during 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, 1997, the Manager has deferred fees of
$906,841.
As of June 30, 1997, the deferred management fee subject to recoupment is
$906,841.
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, 1997, the
Administrator has voluntarily waived fees of $88,233. 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 $35,000 per annum, as well as reimbursement for
expenses, for service as a Trustee of all Trusts advised by the Manager
($5,000 of which was allocated to the Montgomery Funds II).
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, 1997, the Fund's securities transactions
generated commissions of $2,250,280, 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, 1997, were
$251,380,456 and $233,549,447, respectively.
b. At June 30, 1997, 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
$81,076,027 and $18,695,309, respectively.
17
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
c. The schedules of forward foreign currency exchange contracts at June
30,1997 were as follows:
<TABLE>
<CAPTION>
CONTRACT VALUE DATE VALUE (NOTE 1)
<C> <S> <C> <C>
Forward Foreign Currency Exchange Contracts to Buy:
4,567,725 Indonesian Rupee 07/01/97 $ 127,590
4,836,838 Philippine Peso 07/01/97 183,380
1,917,388 South African Commercial Rand 07/01/97 422,611
1,690,480 Philippine Peso 07/02/97 64,092
-------------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO BUY
(CONTRACT COST $800,879) $ 797,673
------------
Forward Foreign Currency Exchange Contracts to Sell:
194,560 Indonesian Rupee 07/01/97 $ 5,435
3,251,509 Malaysian Ringgit 07/01/97 1,288,236
98,851 Singapore Dollar 07/01/97 69,141
8,905,659 Portuguese Escudo 07/02/97 50,603
659,518 Hong Kong Dollar 07/07/97 85,126
146,397 Singapore Dollar 07/07/97 102,397
-------------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO SELL
(CONTRACT COST $1,600,385) $ 1,600,938
-------------
</TABLE>
d. Under an unsecured Revolving Credit Agreement with DeutscheBank (New
York), the Fund, along with other funds of Montgomery Funds I, Montgomery
Funds II and Montgomery Funds III, may for one year starting August 6,
1996, borrow (consistent with applicable law and its investment policies)
up to 10% of its net asset value, provided that the aggregate principal
amount of outstanding loans under the agreement to all Funds does not
exceed $300,000,000. For the year ended June 30, 1997, there were no
borrowings under this agreement.
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 JUNE 30, 1997 YEAR ENDED JUNE 30, 1996
------------------------ ------------------------
Shares Amount Shares Amount
------------------------ ------------------------
<S> <C> <C> <C> <C>
Shares Sold 258,831 $13,097,700 1,525,175 $66,963,824
Issued as reinvestment of dividends 44,511 2,074,201 3,176 129,186
Shares redeemed (110,640) (6,000,000) (194,803) (9,031,514)
-------- ----------- --------- -----------
NET INCREASE 192,702 $ 9,171,901 1,333,548 $58,061,496
-------- ----------- ---------- -----------
</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 amounts 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.
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,
1997:
<TABLE>
<CAPTION>
ACQUISITION 6/30/97 VALUE % OF TOTAL
SECURITY DATE SHARES MARKET VALUE PER SHARE COST NET ASSETS
------------------------------ ----------- ------ ------------ --------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Efes Sinai Yatrium ve Ticaret 07/12/94 2,075,863 $ 148,696 $ 0.07 $123,129 0.05%
Global Telesystems Group, Inc. 06/17/94 9,152 171,310 18.72 98,177 0.05
Pepsi International Bottlers 12/27/95 9,000 783,000 87.00 900,000 0.23
------------ ----
$ 1,103,006 0.33%
============ ====
</TABLE>
In addition, certain of the foreign currency at June 30, 1997, may be
illiquid because conversion to U.S. dollars could take more than seven days.
18
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
The securities shown in the table below were held by the Fund on June 30,
1997 and 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, 1997. The Fund bears the cost of re-registering these
securities.
<TABLE>
<CAPTION>
ACQUISITION 6/30/97 VALUE % OF TOTAL
SECURITY DATE SHARES MARKET VALUE PER SHARE COST NET ASSETS
------------------------------ ----------- ------ ------------ --------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Adamjee Insurance Company 07/26/95 2,238 $ 5,036 $ 2.25 $ 6,043 0.00%#
Bajaj Auto, Ltd. 06/12/97 29,100 748,743 25.73 698,279 0.22
Castrol (India) Ltd. 06/17/97 49,800 724,047 14.54 719,663 0.22
HDFC Bank, Ltd. 07/16/96 600 1,035 1.73 648 0.00#
Hindustan Lever Ltd. 06/02/97 3,000 120,628 40.21 97,060 0.04
Hindustan Petroleum
Corporation Ltd. 06/11/97 125,000 1,585,195 12.68 1,588,440 0.47
Housing Development and Finance
Corporation 02/05/96 34 3,877 114.04 2,416 0.00#
Industrial Credit and Investment
Corporation 05/08/96 246 536 2.18 758 0.00#
Lippo Securities 06/24/97 560,000 397,600 0.71 410,883 0.12
Madras Cement Ltd. 06/11/97 1,520 342,851 225.56 299,685 0.10
Mahanagar Telephone Nigam, Ltd. 06/10/97 76,900 652,112 8.48 610,037 0.20
Mulia Industrindo (F) 05/23/97 195,500 101,660 0.52 99,215 0.03
Oil and Natural Gas
Corporation Ltd. 05/28/97 35,000 362,954 10.37 248,620 0.11
Pakistan State Oil 09/14/95 4,902 39,559 8.07 35,638 0.01
Putrya Surya Multidana (F) 06/05/97 281,500 448,525 1.59 341,548 0.14
Semen Gresik (F) 06/12/97 45,000 99,450 2.24 103,416 0.03
State Bank of India 03/26/96 850 8,075 9.50 5,712 0.00#
Tata Engineering & Locomotive
Company, Ltd. 05/06/96 460 5,810 12.63 6,403 0.00#
Tora Cement 07/10/96 500 12,650 25.30 6,985 0.00#
Videsh Sanchar Nigam Ltd. 06/20/97 8,200 265,680 32.40 231,308 0.08
------------ ----
$ 5,926,023 1.77%
============ ====
</TABLE>
---------------------
# Amount represents less than 0.01%.
6. FOREIGN SECURITIES
The Fund purchases securities on foreign securities exchanges. Securities of
foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies and
the U.S. government. These risks include 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 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. EQUITY SWAP AGREEMENTS
The Fund has entered into equity swap agreements with Robert Flemings & Co.
Limited, London ("Flemings"), with respect to the holdings of foreign equity
securities. Pursuant to these agreements, the Fund pays Flemings a swap fee
in cash, equal to a fixed percentage based on a notional amount equal to the
Fund's acquisition cost for the underlying security. Additionally, the Fund
will make semi-annual floating rate payments to Flemings equal to the six-
month LIBOR and any capital depreciation on the underlying security. Flemings
will make semi-annual payments to the Fund equal to any capital appreciation
and any dividends received on the underlying security. There were no equity
swap agreements open at June 30, 1997.
19
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
8. SUBSEQUENT EVENT
On March 25, 1997, Montgomery Securities, the Manager and CAM Acquisition LLC
("CAM"), a newly organized subsidiary of Commerzbank Aktiengesellschaft,
entered into an agreement providing for the transfer of substantially all the
assets composing the Manager's business to CAM. On June 23, 1997, the
shareholders of the Fund approved a new Investment Management Agreement with
CAM (renamed Montgomery Asset Management, LLC) that became effective upon the
closing of the Manager's transaction with CAM. Such transaction closed on
July 31, 1997.
20
<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 of investments, of the Montgomery Institutional Series:
Emerging Markets Portfolio (a portfolio of The Montgomery Funds II) as of June
30, 1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for the years ended June 30, 1997 and 1996,
and financial highlights for each of the periods ended June 30, 1997, 1996,
1995, and 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 including 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, 1997 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, 1997, 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
August 8, 1997
San Francisco, California
21
<PAGE>
Montgomery Funds II
Tax Information (unaudited)
Fiscal Year Ended June 30, 1997
For the fiscal year ended June 30, 1997, 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 INCOME FOREIGN TAXES
Montgomery Institutional Series:
Emerging Markets Portfolios $1.1146 $0.0864
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.
22
