<PAGE>
Montgomery Institutional Series:
Emerging Markets Portfolio
Annual Report
June 30, 1998
[LOGO]
Invest Wisely.(R)
The Montgomery Funds
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Highlights
June 30, 1998
- -------------------------------------------------------------------------------
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE YEAR?
A: The year ended June 30, 1998, was the most difficult 12-month period
since the Fund's inception in 1993. The Fund returned -38.06 %,
compared with-38.58% for the IFC Global Composite Index. Of the 33
emerging markets included in the index, only eight showed positive
results for the year. Most markets suffered double-digit losses with
Russia, Indonesia, and Thailand each declining by more than 50%.
Q: WHAT WERE SOME OF THE CONTRIBUTING FACTORS?
A: The global rout can be traced largely to events in Southeast Asia,
where a series of currency devaluations dampened investor sentiment
considerably in 1997. The markets rebounded sharply in the first
quarter after the announcement of several IMF-sponsored bailout
packages, but sentiment again turned sour when a declining Yen and a
confirmed recession in Japan renewed worries that Southeast Asian
economies would suffer additional devaluations. The financial turmoil
was aggravated by non-economic events including riots in Indonesia and
nuclear testing in India and Pakistan.
The IFC Global Latin America Index declined 25% for the year. Latin
American markets were hurt by the general decline in investor sentiment
for emerging markets as well as concerns about lower commodities
prices. Latin America is an important supplier of agricultural products
and metals. A drop in the price of oil added to already negative
investor sentiment in Venezuela, given that economy's reliance on oil-
related exports. Brazil was hit hard by profit taking despite the
implementation of major privatization programs. The Argentinean market
dropped, too, on concerns about its ability to maintain its
convertibility plan when other emerging market currencies have become
more competitive. Chile, which fared relatively well following the
devaluation of the Mexican Peso in 1994, also suffered in recent months
due to lower copper prices, (its main export item) and because roughly
a third of its exports go to Asia.
Among the emerging markets, the developing economies of Europe
displayed the best performance. Investors sought safety from Asia in
countries such as Poland and Hungary, which stand to benefit from next
year's EMU and are candidates for accession to the European Union. The
standout performers, however, were Greece and Portugal, returning 46.3%
and 56.6%, respectively, due to significant declines in interest rates.
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Josephine S. Jimenez, CFA
..................Senior Portfolio Manager
Bryan L. Sudweeks, Ph.D., CFA
..................Senior Portfolio Manager
Frank Chiang......Portfolio Manager
Jesus Duarte......Portfolio Manager
Jose Fiuza........Regional Portfolio Manager
Stuart Quint, CFA
..................Regional Portfolio Manager
Rajesh Varma......Regional Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns for the period
ended 6/30/98
- --------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
Since inception (12/17/93)........ -6.62%
1 year............................ -38.06%
3 years........................... -6.34%
MSCI EMERGING MARKETS FREE INDEX/1/
Since 12/31/93.................... -8.56%
1 year............................ -39.08%
3 years........................... -9.33%
IFC GLOBAL COMPOSITE INDEX/2/
Since 12/31/93.................... -8.31%
1 year............................ -38.58%
3 years........................... -9.47%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
/1/ The Morgan Stanley Capital International Emerging Markets Free Index is an
unmanaged, capitalization-weighted composite index that covers individual
securities within the equity markets of emerging markets countries.
/2/ The IFC Global Composite Index is comprised of more than 1,900 individual
stocks from developing countries in Asia, Latin America, Middle East,
Africa and Europe.
<TABLE>
<CAPTION>
Montgomery Institutional Series: MSCI Emerging Markets IFC GlobaL
Emerging Markets Portfolio Free Index\+1 Composite Index\+2
12/20/93 10000
<S> <C> <C> <C>
12/93 10154 10000 10000
1/94 10036 10182 10298
2/94 9632 10000 9947
3/94 9010 9095 9120
4/94 8994 8913 9172
5/94 9284 9218 9413
6/94 8742 8964 9240
7/94 9272 9521 9827
8/94 10282 10703 10896
9/94 10416 10825 11238
10/94 10384 10630 11000
11/94 9798 10077 10529
12/94 9215 9268 9947
1/95 8200 8282 8817
2/95 8226 8070 8706
3/95 8172 8121 8671
4/95 8320 8486 8807
5/95 8874 8938 9141
6/95 8924 8964 9123
7/95 9179 9165 9296
8/95 8822 8949 8935
9/95 8752 8907 8989
10/95 8466 8566 8724
11/95 8240 8413 8476
12/95 8558 8787 8721
1/96 9155 9412 9171
2/96 8964 9262 9113
3/96 9105 9334 9257
4/96 9593 9708 9947
5/96 9753 9664 9755
6/96 9830 9724 9898
7/96 9229 9060 9281
8/96 9503 9292 9487
9/96 9583 9372 9572
10/96 9383 9122 9358
11/96 9581 9275 9493
12/96 9675 9317 9409
1/97 10460 9953 10042
2/97 10818 10379 10499
3/97 10567 10106 10312
4/97 10575 10124 10314
5/97 10972 10413 10484
6/97 11838 10971 11020
7/97 12238 11134 11193
8/97 10980 9718 9981
9/97 11386 9987 10029
10/97 9428 8348 8502
11/97 9114 8043 8012
12/97 9485 8237 8041
1/98 8437 7591 7579
2/98 9009 8384 8360
3/98 9256 8748 8630
4/98 9388 8652 8563
5/98 8192 7467 7543
6/98 7333 6684 6768
</TABLE>
1
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Highlights (continued)
June 30, 1998
Q: WHAT WAS THE FUND'S STRATEGY IN ASIA?
A: Throughout the year, we maintained an underweight position in Asian
markets, given the region's negative economic outlook. At the end of
June, the combined holdings in Korea, Malaysia, the Philippines, and
Thailand amounted to less than 7% of assets. The Portfolio has no
exposure to Indonesia, the most troubled market in our estimation.
Having such light positions helped us in 1997, but hindered our
relative performance in the first quarter of 1998, when several Asian
markets rebounded sharply.
Our 3% weighting in China/Hong Kong reflects our relatively positive
outlook for that economy. China's currency is not freely convertible
and thus has not come under the same speculative pressures as other
Asian currencies in recent months. China also enjoys the insulation of
a large domestic economy not heavily reliant on exports. In the absence
of strong Japanese economic policy, China has emerged as a leader in
Asia, pledging to keep its currency stable despite competitive
pressures.
Q: WHAT IS THE FUND'S STRATEGY IN OTHER REGIONS OF THE WORLD?
A: We continue to favor the developing markets of Europe. Our combined 17%
exposure to Greece, Turkey, and Portugal helped boost performance
during the year. We have also maintained overweight positions in Brazil
and South Africa. These economies are in various stages of reform, with
ongoing privatizations and corporate restructurings, as well as stocks
selling at attractive valuations. Although we believe in their long-
term potential, our weightings in Brazil and South Africa were a drag
on performance during the year. As a capital-dependent country, Brazil
requires investment inflows to finance short-term debt and is
invariably hurt by negative investor sentiment. Likewise, rising risk
premiums across the emerging markets, as well as nearly US $3 billion
of foreign debt scheduled to come due this year put pressure on South
Africa's currency prompting the central bank to raise short-term
interest rates.
Q: AFTER SUCH A DIFFICULT YEAR, WHAT CAN WE EXPECT FROM THE EMERGING
MARKETS IN THE COMING MONTHS?
A: Emerging markets around the world will likely remain volatile until the
Asian currency crisis subsides. However, we believe the negative
environment is creating a catalyst for positive change by building the
foundation for stronger and more competitive markets for the long term.
In markets from Brazil to Turkey, we are seeing an increased emphasis
on privatization and structural reforms, greater transparency in
financial reporting, and advances in capital market development. Just
as the market crash of 1987 affected global markets and now looks like
a blip on a long-term price chart, we believe the emerging markets will
recover and share in the powerful trends toward long-term global
prosperity.
There are risks of investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions,
economic and political instability, and fluctuations in currency
exchange rates.
2
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Highlights
June 30, 1998
<TABLE>
<CAPTION>
TOP FIVE COUNTRIES
(as a percentage of total net assets):
<S> <C>
Brazil...................................... 19.4%
South Africa................................ 14.9
Turkey...................................... 7.4
Portugal.................................... 5.5
India....................................... 5.4
TOP TEN INDUSTRIES
(as a percentage of total net assets):
Telephone Networks.......................... 11.4%
Banks....................................... 10.2
Electric Utilities.......................... 8.2
Oil......................................... 6.5
Holdings.................................... 5.3
Retail Trade................................ 4.0
Metals and Mining........................... 3.8
Conglomerates............................... 3.5
Food & Beverage............................. 3.1
Diversified Financial Services.............. 2.9
TOP TEN HOLDINGS
(as a percentage of total net assets):
Telec Brasileiras-Telebras ON............... 4.5%
De Beers Centenary.......................... 3.2
Liberty Life Association of Africa Ltd...... 2.0
Cia Energetica de Minas Gerais.............. 2.0
Barlow Ltd.................................. 1.9
Yapi ve Kredi Bankasi A.S................... 1.8
Haci Omer Sabanci Holdings A.S.............. 1.7
Sasol Ltd................................... 1.6
Telebras (preferred)........................ 1.5
Sonae Investimentos......................... 1.4
</TABLE>
3
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Highlights
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS--85.4% VALUE
SHARES (NOTE 1)
<S> <C>
ARGENTINA--3.4
48,600 Banco de Galicia, ADR (Banks) $ 883,913
377,160 Cresud S.A.+ (Real Estate) 603,544
313,437 Inversiones y Representaciones (Real Estate) 921,638
6,590 Inversiones y Representaciones, GDR (Euro) (Real Estate) 191,934
313,590 Siderar S.A. (Steel) 1,191,815
61,600 Telefonica de Argentina, Sponsored ADR (Telephone/Networks) 1,998,150
32,200 Y.P.F. Sociedad Anonima, ADS (Oil) 968,013
--------------
6,759,007
--------------
BANGLADESH--0.1%
17,400 Apex Tannery (Apparel and Textiles) 108,989
--------------
BRAZIL--9.1%
67,700,000 Centrais Geradoras do Sul do Brasil S.A. - Gerasul+ (Electric Utilities) 92,487
6,154,000 Cia Saneamento Basico Estado (Water Utilities) 739,619
19,700,000 Electrobras (Electric Utilities) 592,763
67,700,000 Eletrobras (Electric Utilities) 1,990,230
22,600 Electrobras, GDS*** (Electric Utilities) 1,695,000
136,000 Souza Cruz S.A. (Tobacco) 1,011,284
15,670 Telebras, ADR (Telephone/Networks) 1,710,968
111,520,000 Telec Brasileiras-Telebras ON (Telephone/Networks) 8,871,082
1,291,545 Telecomunicacacoes de Ceara (Telephone/Regional-Local) 245,679
4,350,833 Telemunicacoes de Sao Paulo S.A. (Telephone/Regional-Local) 1,023,239
170,996 Telesp Cellular S.A.+ (Telephone/Regional-Local) 7,252
--------------
17,979,603
--------------
CHILE--1.2%
30,000 Cia de Telecommunicacoes de Chile S.A., ADR (Telephone/Integrated) 609,375
63,600 Linea Aerea Nacional Chile S.A.+ (Airlines) 516,750
19,034 Sociedad Quimica y Minera de Chile (Chemicals) 637,639
85,500 Supermercados Unimarc S.A.+ (Retail Trade) 662,625
--------------
2,426,389
--------------
CHINA/HONG KONG--3.1%
38,000 China Telecom Ltd., Sponsored ADR+ (Telephone/Wireless) 1,313,375
360,000 CLP Holdings Ltd. (Electric Utilities) 1,640,165
49,217 HSBC Holdings (Banks) 1,203,746
620,000 Shanghai Industrial Holdings Ltd. (Conglomerates) 1,460,377
--------------
47,000 Yanzhou Coal Mining Company Ltd., ADR (Coal) 458,250
6,075,913
--------------
The accompanying notes are in integral part of these financial statements
</TABLE>
4
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments (continued)
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED VALUE
SHARES (NOTE 1)
<S> <C> <C>
COLOMBIA--1.1%
246,000 Almacenes Exito S.A. (Retail Trade) $ 485,172
225,400 Bavaria (Food and Beverage) 1,317,166
225,400 Valores Bavaria S.A. (Holdings) 386,917
--------------
2,189,255
--------------
CZECH REPUBLIC--1.3%
48,750 Ceska Radiokomuknikace GDR**+ (Broadcasting/Advertising) 1,044,469
126,700 The Czech Value Fund+ (Mutual Funds) 839,388
150,059 Vseobecny I.F.+ (Mutual Funds) 292,221
65,525 Vynosovy I.F.+ (Mutual Funds) 457,960
--------------
2,634,038
--------------
EGYPT--3.3%
71,400 Al-Ahram Beverages Company, GDR (Food & Beverage) 2,266,950
2,500 Al-Ahram Beverages Company, GDR*** (Food & Beverage) 79,375
5,775 Al-Ahram Pyramid Beverages Company (Food & Beverage) 369,058
101,028 Amreya Cement (Cement) 1,747,351
115,000 Paints and Chemical Industries Company*** (Paint) 1,075,250
57,200 Tora Cement (Cement) 985,123
--------------
6,523,107
--------------
GREECE--3.6%
19,400 Alpha Credit Bank (Banks) 1,572,818
42,500 Hellenic Petroleum (Oil) 347,158
43,333 Hellenic Telecommunication Organization S.A. (Telephone/Networks) 1,111,030
51,000 Heracles General Cement S.A. (Cement) 1,188,581
14,340 National Bank of Greece (Banks) 1,837,869
23,000 STET Hellas Telecommunications S.A., ADR (Telecommunications/Wireless) 953,063
--------------
7,010,519
--------------
HUNGARY--1.6%
47,000 Borsodchem Rt.+ (Chemicals) 1,375,206
15,000 EGIS Rt.+ (Pharmacy/Drugs) 528,459
25,000 Mol Magyar Olaj-es Gazipari Rt. (Oil) 674,872
74,500 Zalakeramia Rt., GDR***+ (Building Materials) 517,775
--------------
3,096,312
--------------
INDIA--5.4%
23,425 Bajaj Auto, Ltd. (Auto/Auto Parts) 316,017
65,100 Bajaj Auto Ltd., GDS*** (Auto/Auto Parts) 869,085
150,000 Bharat Petroleum Corporation Ltd. (Oil) 1,240,861
50,000 Bombay Suburban Electric Company, GDR (Electric Utilities) 516,250
140,000 BSES Ltd.*** (Electric Utilities) 515,094
100 Carrier Aircon, Ltd. (Home Appliance) 441
The accompanying notes are in integral part of these financial statements
</TABLE>
5
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments (continued)
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED VALUE
SHARES (NOTE 1)
<S> <C> <C>
INDIA--CONTINUED
35,000 Castrol (India) Ltd.** (Chemicals) $ 492,394
50 Hindustan Lever Ltd.** (Cosmetics and Personal Care) 1,780
90,000 Hindustan Petroleum Corporation Ltd.** (Oil) 828,892
17,000 Housing Development and Finance Corporation** (Banks) 1,200,024
69,206 Indian Hotels Company, Ltd.** (Lodging) 701,445
21,600 Indian Hotels, GDS*** (Lodging) 167,400
1,950 ITC Ltd. (Tobacco) 29,986
53,000 ITC Ltd., GDR** (Tobacco) 934,125
50,000 Kirloskar Cummins India Ltd.+ (Machinery & Tools) 415,979
300,000 Mahanagar Telephone Nigam, Ltd.+ (Telephone/Regional-Local) 1,262,264
100 Oil and Natural Gas Corporation Ltd.** (Oil) 424
150 State Bank of India (Banks) 748
40,000 Videsh Sanchar Nigam Ltd., GDR (Telephone/Long Distance) 414,000
70,000 Videsh Sanchar Nigam Ltd., GDR (Telephone/Long Distance) 724,500
--------------
10,631,709
--------------
ISRAEL--4.1%
885,000 Bank Leumi Le-Israel (Banks) 1,765,610
120,000 Dor Energy Ltd., GDR+ (Oil) 864,000
51,600 ECI Telecom Ltd., ADR (Telecommunications Equipment) 1,954,350
18,000 Formula Systems Ltd., ADR+ (Computer Software) 627,188
351,124 Machteshim-Agan Industries Ltd. (Chemicals) 1,117,748
534,410 Supersol Ltd. (Retail Trade) 1,760,927
--------------
8,089,823
--------------
JORDAN--0.3%
2,000 Arab Bank Group (Banks) 548,523
--------------
KAZAKHSTAN--0.4%
54,859 Central Asia Growth Fund** (Mutual Funds) 411,443
12,600 Kazomerts Bank+ (Banks) 270,900
--------------
682,343
--------------
KOREA--2.6%
126,300 LG Semiconductor Company+ (Semiconductor) 984,275
158,610 Lucky-Goldstar Chemical Ltd. (Chemicals) 877,958
43,000 Pusan City Gas Company Ltd. (Gas Utilities) 566,861
31 Samsung Electronics, Ltd., New, GDS***+ (Semiconductor) 496
28,000 Seoul City Gas Company Ltd. (Gas Utilities) 418,063
195,020 Shinan Bank (Banks) 647,699
37,590 Sindoh Rioch Company (Computers and Office Equipment) 1,023,937
26,000 Youngone Corporation (Apparel & Textiles) 509,395
--------------
5,028,684
--------------
The accompanying notes are in integral part of these financial statements
</TABLE>
6
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments (continued)
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED VALUE
SHARES (NOTE 1)
<S> <C> <C>
MALAYSIA--1.1%
404,000 Berjaya Sports Toto Berhad (Leisure Time) $ 598,663
611,000 Powertek Berhad (Electric Utilities) 647,768
2,466,000 Tan Chong International Ltd. Berhad** (Auto/Auto Parts) 344,625
822,000 Tan Chong Motor Holdings Berhad (Auto/Auto Parts) 149,536
907,000 YTL Power International Berhad (Electric Utilities) 493,903
--------------
2,234,495
--------------
MEXICO--4.0%
189,000 Acer Computer Latino America S.A. de C.V.+
(Computers and Office Equipment) 111,480
236,200 Corporacion GEO, S.A. de C.V., Series B+ (Building Materials) 1,311,711
404,140 Corporacion Interamericana Entertainment S.A., Series B+
(Entertainment) 1,137,916
131,000 Empresas La Moderna S.A. de C.V., Class A+ (Agricultural Commodities) 761,026
1,454,000 Grupo Financiero Banorte S.A. de C.V. (Banks) 1,618,163
86,100 Grupo Radio Central S.A. de C.V., ADR (Broadcasting/Advertising) 957,863
53,885 Interamericana Entramineto Corporation, Series L (Entertainment) 125,935
18,000 Panamerican Beverages Inc., Class A (Food & Beverages) 565,875
280,000 San Luis Corporacion S.A. de C.V. (Auto/Auto Parts) 1,090,646
5,000 Telefono de Mexico S.A., ADR (Telephone/Networks) 240,313
--------------
7,920,928
--------------
MOROCCO--0.0%#
2 Banque Marocaine du Commerce Exterieur, GDR*** (Banks) 48
--------------
PAKISTAN--0.6%
898,200 Fauji Fertilizer Company Ltd.** (Agriculture Commodities) 974,081
6,255 Nishat Textile Mills+ (Apparel and Textiles) 1,085
141,964 Pakistan State Oil** (Oil) 227,703
--------------
1,202,869
--------------
PERU--0.4%
412,760 Ferreyros Enrique S.A. (Holding) 556,436
9,732 Ferreyros Enrique S.A. ADS*** (Machinery & Tools) 261,243
--------------
817,679
--------------
PHILIPPINES--1.1%
87,500 Benpress GDR*** (Broadcasting/Advertising) 240,625
296,000 Manila Electric Company, Series B (Electrical Utilities) 780,815
41,240 Music Semiconductors Corporation+ (Semiconductor) 3,659
39,243 Philippine Long Distance Telephone, ADR (Telephone/Long Distance) 887,873
3,487,000 Philippino Telephone Corporation (Telephone/Wireless) 275,950
--------------
2,188,922
--------------
The accompanying notes are in integral part of these financial statements
</TABLE>
7
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments (continued)
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED VALUE
SHARES (NOTE 1)
<S> <C> <C>
POLAND--0.8%
45,000 Bank Handloway W. Warszawie, GDR*** (Banks) $ 856,125
47,500 Prokom Software, GDR*** (Business Services) 815,813
--------------
1,671,938
--------------
PORTUGAL--4.9%
63,200 Brisa-Auto Estradas+ (Auto/Auto Parts) 2,704,659
48,000 Cia de Segros Tranquilidade (Insurance) 1,300,108
44,900 Cimpor-Cimentos de Portugal (Building Materials) 1,578,554
23,000 Portugal Telecom SA+ (Telephone/Networks) 1,219,772
52,180 Sonae Investimentos (Retail Trade) 2,851,819
--------------
9,654,912
--------------
ROMANIA--0.1%
46,653 Romania Growth Fund PLC**+ (Mutual Funds) 209,939
--------------
RUSSIA--2.8%
1,350,000 Bashkirenergo+ (Electric Utilities) 108,000
5,548 Chelyabinskvyazinform, ADR (Telephone/Networks) 183,084
13,728 Global Telesystems Group, Inc.**+ (Telephone/Networks) 654,174
320,000 Irkutskenegro, ADR (Electric Utilities) 1,659,200
22,046 Kransnoyarskelectrosvyaz, ADR (Telephone/Networks) 66,138
26,500 Krasny Oktyabr+ (Food and Beverage) 86,125
5,000 Luk Oil Company, ADR (Oil) 167,500
84,242 Murmansk Electrosvyaz, ADR (Telecommunications/Other) 69,500
29,054 Nizhnovsvyazinform, Sponsored, ADR (Telephone/Regional-Local) 51,135
120,450 Orenburg Region Electrosvyez, ADR (Telecommunications/Other) 15,659
10,574 Samarasvyazinform+ (Telephone/Regional-Local) 449,395
182,300 Tatneft, ADR+ (Oil) 1,412,825
6,278 Uraltelecom, ADR** (Telecommunications/Networks) 62,780
78,300 Uralmash Zavody, ADR*** (Machinery & Tools) 508,950
--------------
5,494,465
--------------
SOUTH AFRICA--14.9%
712,703 Barlow, Ltd. (Conglomerates) 3,755,813
5,199,500 Consolidated African Mining Company+ (Metals & Mining) 1,131,089
359,000 De Beers Centenary, AG (Metals & Mining) 6,308,239
245,000 Engen Ltd. (Gas) 677,572
1,700,000 Highstone Property Fund** (Real Estate) 451,518
363,816 JCI Ltd. (Diversified Financial Services) 1,892,702
11,800 Liberty Holdings Ltd. (Holdings) 618,853
207,649 Liberty Life Association of Africa Ltd. (Insurance) 4,047,940
289,700 Molope Foods (Holdings) 346,858
510,300 Molope Foods Ltd., N Shares (Holdings) 516,324
165,300 Nasionale Pers Beperk (Holdings) 1,087,133
845,000 NBS Boland Group Ltd. (Diversified Financial Services) 1,097,218
1,001,400 Orion Selections Ltd. (Diversified Financial Services) 1,241,196
The accompanying notes are in integral part of these financial statements
</TABLE>
8
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments (continued)
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED VALUE
SHARES (NOTE 1)
<S> <C> <C>
SOUTH AFRICA--CONTINUED
9,000 Pepsi International Bottlers**+ (Food & Beverage) $ 783,000
545,811 Sasol, Ltd. (Oil) 3,161,654
610,000 Smith (C.G.) Ltd., Ord+ (Conglomerates) 1,676,729
320,000 Wooltru Ltd. (Retail Trade) 415,514
200,000 Wooltru Ltd., N Shares (Retail Trade) 256,324
--------------
29,465,676
--------------
TAIWAN--4.5%
680,000 China Development Corporation+ (Diversified Financial Services) 1,573,318
578,000 Compal Electronics Inc.+ (Computers & Office Equipment) 1,556,002
300,000 Hon Hai Precision Industry (Electronics) 1,519,186
1,040,000 Kindom Construction (Real Estate) 1,589,034
330,000 Synnex Technology International Corporation (Computers & Office Equipment) 1,426,202
626,023 Taiwan Semiconductor Company+ (Semiconductor) 1,293,568
--------------
8,957,310
--------------
THAILAND--1.6%
261,000 BEC World Public Company Ltd. (Entertainment) 1,008,128
146,000 BEC World Public Company Ltd. (F) (Entertainment) 563,934
385,000 Cogeneration Public Company (Electric Utilities) 155,095
416,100 Cogeneration Public Company (F) (Electric Utilities) 167,623
2,100,000 Industrial Finance of Thailand (F) (Securities Brokerage) 432,938
122,600 PTT Exploration (F) (Oil) 929,668
--------------
3,257,386
--------------
TURKEY--7.4%
19,500,000 Akbank (Banks) 629,741
33,900,000 Dogan Sirketler Grubu Holdings A.S.+ (Holdings) 2,068,626
5,200,000 Eregli Demir Ve Celik Fabrikalari T.A.S.+ (Retail Trade) 810,364
54,500,000 Haci Omer Sabanci Holding A.S.+ (Holdings) 3,376,831
77,066,562 Turk Sise ve Cam+ (Glass) 2,546,698
41,750,000 Turkiye Halk Bankasi A.S.+ (Banks) 1,685,364
140,183,394 Yapi ve Kredi Bankasi A.S. (Banks) 3,579,598
--------------
14,697,222
--------------
UKRAINE--0.1%
232,000 Ukraine Enterprise Corporation (Mutual Funds) 134,008
--------------
VENEZUELA--0.5%
711,354 Electricidad Caracas (Electric Utilities) 321,122
26,900 Cia Anonima de Telefonos de Venezuela, ADR (Telephone/Networks) 672,500
--------------
993,622
--------------
Total Common Stocks (Cost $199,779,985) 168,685,633
--------------
The accompanying notes are in integral part of these financial statements
</TABLE>
9
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments (continued)
June 30, 1998
<TABLE>
<CAPTION>
PREFERRED STOCKS--11.2% VALUE
SHARES (NOTE 1)
<S> <C> <C>
BRAZIL--10.3%
39,200,000 Banco do Estado de Sao Paulo S.A. - Banespa (Banks) $ 1,813,663
124,461,114 Cia Energetica de Minas Gerais (Electric Utilities) 3,874,118
88,402,000 Cia Paranaense de Energi (Electric Utilities) 825,508
1,399,400 Cia Rio Grandense de Telecomunicacoes+ (Telephone/Networks) 1,525,782
19,700,000 Centrais Geradoras do Sul do Brasil S.A. - Gerasul+ (Electric Utilities) 28,446
2,497,000 Itausa Investimentos Itau (Holdings) 1,576,075
9,400 Kepler Weber S.A.+ (Machinery and Tools) 23,164
19,940,000 Lojas Renner S.A. (Retail Trade) 586,192
84,287,000 Odebrecht S.A. (Heavy Construction) 269,648
10,560,286 Petroleo Brasileiro (Oil) 1,963,133
26,553,872 Telebras, ADR (Telephone/Networks) 2,888,312
13,792,475 Telec de Minas Gerais S.A. (Telephone/Regional-Local) 960,005
18,075,401 Telec do Rio Janeiro S.A. (Telephone/Networks) 1,359,699
1,536 Teleceara Celular S.A., Series B (Telephone/Wireless) 150
1,291,545 Teleceara Celular S.A., Series D** (Telephone/Wireless) 67,003
1,536 Telecomunicacoes Ceara (Telecommunications Equipment) 279
170,996 Telecomunicacoes de Sao Paulo S.A. (Telephone/Regional-Local) 25,859
19,675,401 Telej Celular S.A., Series B (Telecommunications/Other) 1,170,266
13,792,475 Telemig Cellular S.A., Series C (Telephone/Wireless) 417,394
12,147,860 Telesp Celular S.A., Series B+ (Telephone/Regional-Local) 1,008,339
142,956 Vale do Rio Doce B (Metals & Mining) 0
--------------
20,383,035
--------------
GREECE--0.2%
26,500 Delta Dairy S.A.+ (Food & Beverage) 305,749
--------------
PORTUGAL--0.6%
95,000 Lusomundo-SGPS, S.A.+ (Entertainment) 1,253,629
--------------
RUSSIA--0.1%
16,000 Luk Oil Company, ADR (Oil) 128,000
6,000 Samarasvyazinform+ (Telephone/Regional-Local) 90,000
--------------
218,000
--------------
Total Preferred Stocks (Cost $21,828,742) 22,160,413
--------------
The accompanying notes are in integral part of these financial statements
</TABLE>
10
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Portfolio Investments (continued)
June 30, 1998
<TABLE>
<CAPTION>
RIGHTS--0.0%# VALUE
SHARES (NOTE 1)
<S> <C> <C>
BRAZIL--0.0%#
8,482 Telec de Minas Gerais S.A., Rights, Expire 07/14/98+
(Telephone/Regional-Local) $ 0
163,022 Telec do Rio Janiero, Rights, Expire 06/12/98+
(Telephone/Networks) 0
--------------
GREECE--0.0%#
19,400 Alpha Credit Bank, Rights, Expire 07/22/98+ (Banks) 33,054
--------------
TOTAL RIGHTS (COST $0) 33,054
--------------
WARRANTS--0.2% (Cost $587,593)
PHILIPPINES--0.2%
1,200,000 Jollibee Foods Company, Warrants, Expire 02/24/03+ (Food & Beverage) 366,906
--------------
TOTAL SECURITIES (COST $222,196,320) 191,246,006
--------------
REPURCHASE AGREEMENTS--3.5%
PRINCIPAL AMOUNT
$ 3,473,000 Agreement with Greenwich Capital Markets, Tri-Party, 6.900% dated
06/30/98, to be repurchased at $3,473,666, on 07/01/98, collateralized
by $3,542,460 market value of U.S. government securities, having various
maturities and various interest rates 3,473,000
3,473,000 Agreement with UBS, Tri-Party, 6.300% dated 06/30/98, to be
repurchased at $3,473,608, on 07/01/98, collateralized by
$3,542,460 market value of U.S. government securities, having
various maturities and various interest rates 3,473,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST $6,946,000) 6,946,000
--------------
TOTAL INVESTMENTS (COST $229,142,320*) 100.3% 198,192,006
--------------
OTHER ASSETS AND LIABILITIES (NET) (0.3) (613,897)
--------------------------
NET ASSETS 100.0% $ 197,578,109
==========================
- ------------------------
* Aggregate cost for federal tax purposes was $230,743,370
** 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.
ABBREVIATIONS:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
GDS Global Depositary Share
The accompanying notes are in integral part of these financial statements
</TABLE>
11
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Statement of Assets and Liabilities
June 30, 1998 Assets:
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investment in securities, at value (Identified cost $229,142,320) (Note 1)
Securities $ 191,246,006
Repurchase agreements 6,946,000
--------------
Total investments 198,192,006
Cash 921,939
Foreign currency (Cost $470,398) 476,183
Receivables:
Investment securities sold 1,393,867
Dividends 716,851
Interest 1,216
Other Assets:
Deferred organization costs (Note 1) 3,848
---------------
Total Assets 201,705,910
LIABILITIES:
Forward foreign currency exchange contracts:
Net unrealized depreciation of forward foreign currency
contracts (Note 3) $ 925
Payables:
Investment securities purchased 3,819,795
Custodian fees 179,139
Management fee (Note 2) 73,751
Administration fee (Note 2) 2,847
Trustees' fees and expenses (Note 2) 1,885
Transfer agency and servicing fees 1,469
Accrued liabilities and expenses 47,990
---------------
Total Liabilities 4,127,801
---------------
NET ASSETS $ 197,578,109
===============
NET ASSETS consist of:
Undistributed net investment income $ (196,482)
Accumulated net realized loss on securities sold, forward foreign
currency exchange contracts and foreign currency transactions (31,432,938)
Net unrealized appreciation of investments, forward foreign currency
exchange contracts, foreign currency transactions and net other assets (30,954,060)
Shares of beneficial interest 55,491
Additional paid-in capital 260,106,098
---------------
NET ASSETS $ 197,578,109
===============
Net Asset Value, per share outstanding* $ 35.61
===============
Maximum offering price per share (Note 4) ($35.61/.9925) (based
on maximum investment expense reimbursement fee of
0.75% of the offering price) $ 35.88
===============
Number of Fund shares outstanding 5,549,105
===============
- ---------------------------
* Redemption price per share is equal to Net Asset Value less any applicable
investment expense reimbursement fee (Note 4)
The accompanying notes are in integral part of these financial statements
</TABLE>
12
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Statement of Operations
For the Year Ended June 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $306,725) $ 5,291,687
Interest 632,189
---------------
Total Income 5,923,876
===============
EXPENSES:
Management fee (Note 2) $ 3,536,299
Custodian fees 565,136
Administration fee (Note 2) 133,581
Legal and audit fees 76,820
Interest Expense 16,546
Amortization of organization costs (Note 1) 7,883
Trustees' fees and expenses (Note 2) 6,471
Transfer agency and servicing fees 4,581
Other 100,188
----------------
Total Expenses 4,447,505
Fees deferred by Manager and waived by Administrator (Note 2) (1,090,011)
---------------
NET EXPENSES 3,357,494
---------------
NET INVESTMENT INCOME $ 2,566,382
---------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from:
Securities transactions and equity swaps (26,410,489)
Forward foreign currency exchange contracts (1,119,965)
Foreign currency transactions (Net of CPMF tax expenses of $119,816) (1,905,985)
---------------
Net realized loss on investments during the period (29,436,439)
---------------
Net change in unrealized appreciation/(depreciation) of:
Securities (95,315,797)
Forward foreign currency exchange contracts 1,728
Foreign currency and net other assets 80,165
---------------
Net unrealized depreciation of investments during the period (95,233,904)
---------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (124,670,343)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (122,103,961)
---------------
The accompanying notes are in integral part of these financial statements
</TABLE>
13
<PAGE>
Montgomery Institutional Series: Emerging Markets Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
6/30/98 06/30/97
----------------- -----------------
<S> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income. $ 2,566,382 $ 2,456,315
Net realized gain/(loss) on securities transactions, forward foreign
currency exchange contracts and foreign currency
transactions during the period (29,436,439) 14,926,319
Net unrealized appreciation/(depreciation) of securities, forward
foreign currency exchange contracts, foreign currency and
net other assets during the period (95,233,904) 39,479,077
----------------- -----------------
Net increase/(decrease) in net assets resulting from operations (122,103,961) 56,861,711
Distributions to shareholders from net investment income (3,559,976) (2,730,875)
Distributions to shareholders from net realized gains on investments (854,895) --
Net increase/(decrease) from beneficial interest transactions (Note 4) (10,083,756) 9,171,901
----------------- -----------------
Net increase/(decrease) in net assets. (136,602,588) 63,302,737
NET ASSETS:
Beginning of period 334,180,697 270,877,960
----------------- -----------------
End of period (including (distributions in excess of net
investment income)/undistributed net investment income
of ($996,482) and $1,620,507, respectively) $ 197,578,109 $ 334,180,697
================= =================
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA FOR THE YEAR OR PERIOD ENDED:
6/30/98 6/30/97 6/30/96 6/30/95++ 6/30/94*
----------------------------------------------------------
Net asset value--beginning of year $ 58.52 $ 49.09 $ 44.61 $ 43.71 $ 50.00
----------------------------------------------------------
Net investment income 0.32 0.43 0.50 0.13 0.09
Net realized and unrealized gain/(loss) on investments (22.44) 9.46 3.93 0.67 (6.67)
----------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (22.12) 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 (0.64) (0.48) (0.04) (0.01) -
Distributions from net realized gains on investments (0.15) - - - -
----------------------------------------------------------
Net asset value--end of year $ 35.61 $ 58.52 $ 49.09 $44.61 $ 43.71
----------------------------------------------------------
Total return** (38.05)% 20.45% 10.14% 2.09% (12.58)%
==========================================================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $197,578 $ 334,181 $ 270,878 $ 186,666 $ 127,085
Ratio of net investment income to average net assets 0.96% 0.86% 1.16% 0.29% 0.47%+
Ratio of net expenses to average net assets 1.25% 1.26% 1.29% 1.40% 1.40%+
Portfolio turnover rate 104% 85% 88% 101% 33%
Net investment income/(loss) before deferral of fees by Manager $ 0.03 $ 0.26 $ 0.33 $ (0.05) $ 0.01
Ratio of expenses before deferral of fees by Manager 1.66% 1.61% 1.70% 1.79% 1.81%+
- -----------------------
* 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.
The accompanying notes are in integral part of these financial statements
</TABLE>
14
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
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 and was organized as a Delaware business trust on September
8, 1993 and commenced operations with the Montgomery Institutional Series:
Emerging Markets Portfolio. As of June 30, 1998, the Trust had four publicly
offered series, the Montgomery U.S. Asset Allocation Fund, the Montgomery Global
Long-Short Fund, the Montgomery Emerging Markets Focus Fund and the Montgomery
Institutional Series: Emerging Markets Portfolio. Information presented in these
financial statements pertains only to the Montgomery Institutional Emerging
Markets Portfolio (the "Fund"). The financial statements for the Montgomery U.S.
Asset Allocation Fund have been presented under separate cover.
1. SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates. 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. 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 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.
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, and the Fund to resell, 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 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
The Fund may engage in forward foreign currency exchange contracts
(forward contract) as a hedge in connection with portfolio purchases
and sales of securities denominated in foreign currencies. A forward
contract is a commitment to purchase or sell a foreign currency at the
settlement date at a negotiated rate.
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
Forward contracts are valued at the prevailing forward exchange rate of
the underlying currencies and unrealized gain/(loss) is recorded daily.
Realized and unrealized gains and losses which represent the difference
between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized
gain/(loss) from foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet terms of their contracts.
Additionally, when utilizing forward contracts to hedge, a Fund gives
up the opportunity to profit from favorable exchange rate movements
during the term of the contract.
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, which
is equal to a fixed percentage of the cost for the underlying security
(the "notional amount"). Additionally, the Fund will make semi-annual
payments to the swap counterparty, equal to any capital depreciation on
the underlying security Plus a floating-rate payment based on the
notional amount and the six month LIBOR rate. The swap counterparty
will make 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 value of the swaps
are recorded as unrealized gains or losses. Amounts received from
(paid to) the swap counterparty representing capital appreciation
(depreciation) are recorded as realized gain (loss), while dividends
on the underlying security are recorded when received. The Fund is
exposed to credit loss in the event of non-performance by the swap
counterparty. However, the Fund does not anticipate non-performance
by the counterparty. At June 30, 1998, there were no outstanding
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. During the year
ended June 30, 1998, the Fund recharacterized $476 from net investment
income to realized gains.
Permanent differences incurred during the year ended June 30, 1998,
resulting from differences in book and tax accounting that have been
reclassified at year end to undistributed net investment income,
accumulated net realized gain/(loss) and paid-in capital were as
follows:
PAID-IN UNDISTRIBUTED NET ACCUMULATED NET
CAPITAL INVESTMENT INCOME REALIZED GAIN/(LOSS)
------- ----------------- --------------------
$ 2,721,770 $ (823,395) $ (1,898,375)
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 except that certain dividends from foreign securities are recorded
as soon as the Fund is informed of the ex-dividend date.
h. FEDERAL INCOME TAXES
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.
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.
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
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, LLC is the Fund's Manager (the "Manager").
The Manager, a Delaware limited liability company, is an investment
adviser registered with the Securities and Exchange Commission under
the Investment Advisers Act of 1940, as amended (the "Advisers Act").
The Manager is a subsidiary of Commerzbank AG.
Pursuant to 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 annual rate of one and
twenty-five one-hundredths percent (1.25%) of the first $50 million in
average daily net assets, one percent (1.00%) of the next $50 million
of daily net assets, and nine-tenths of one percent (.90%) of amounts
over $100 million in average daily net assets. 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. 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,
1998, the Manager recouped fees of $906,841, 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, 1998, the Manager has deferred fees of
$993,833. As of June 30, 1998, the deferred management fee subject to
recoupment is $1,090,011.
b. Montgomery Asset Management, LLC 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, 1998, the Administrator has voluntarily waived fees of
$96,178. This waiver may not be recouped 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, Funds Distributor, Inc.
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, 1998,
were $262,002,741 and $276,183,996, respectively.
b. At June 30, 1998, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value for federal income tax
purposes were $4,804,071 and $37,355,435, respectively.
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
<TABLE>
<CAPTION>
c. The schedules of forward foreign currency exchange contracts at June 30, 1998 were as follows:
SETTLEMENT IN EXCHANGE NET UNREALIZED
DATE FOR (U.S.$) DEPRECIATION
---------- ----------- --------------
<S> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Receive:
1,351,786 Philippine Peso 07/01/98 $ 31,561 $ 855
75,597 Brazilian Real 07/02/98 65,293 70
---------- ----------- --------------
TOTAL FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS TO SELL
(CONTRACT COST $191,652) $ 96,854 $ 925
</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, 1997, 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 $250,000,000. For the year ended June 30,
1998, there were no borrowings by the Fund 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, 1998 YEAR ENDED JUNE 30, 1997
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares Sold 839,837 $ 46,214,845 258,831 $ 13,097,700
Issued as reinvestment of dividends 73,789 3,279,907 44,511 2,074,201
Shares redeemed (1,075,255) (59,578,508) (110,640) (6,000,000)
-----------------------------------------------------------------------
NET INCREASE/(DECREASE) (161,629) ($ 10,083,756) 192,702 $ 9,171,901
=======================================================================
</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 securities at June 30, 1998:
<TABLE>
<CAPTION>
ACQUISITION 6/30/98 VALUE % OF TOTAL
SECURITY DATE SHARES MARKET VALUE PER SHARE COST NET ASSETS
- -------- ----------- ------ ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Global Telesystems Group, Inc. 03/31/98 13,728 $ 654,174 $ 47.65 $ 507,358 0.33%
Pepsi International Bottlers 12/27/95 9,000 783,000 87.00 9,000 0.40%
------------ ----------
$1,437,174 0.73%
============ ==========
</TABLE>
In addition, certain of the foreign currency at June 30, 1998 may be illiquid
because conversion to U.S. dollars could take more than seven days.
The securities shown in the table below were held by the Fund on June 30, 1998
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
18
<PAGE>
The Montgomery Funds II
Notes to Financial Statements
(continued)
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, 1998. The Fund bears the cost of
re-registering these securities.
<TABLE>
<CAPTION>
ACQUISITION 6/30/98 VALUE % OF TOTAL
SECURITY DATE SHARES MARKET VALUE PER SHARE COST NET ASSETS
- -------- ----------- ------ ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BSES Ltd. 02/12/98 11,775 $ 43,322 $ 3.68 $ 193,007 0.02%
Castrol (India)Ltd. 06/17/97 57 801 14.05 824 0.00#
Central Asia GRowth Fund 11/03/97 54,859 411,443 7.500 565,000 0.21
Ceska Radiokamuknikace, GDR 05/25/98 48,750 1,044,469 21.43 909,846 0.53
Fauji Fertilizer Company, Ltd. 11/27/96 898,200 974,081 1.08 1,796,937 0.49
Highstone Property Fund 09/19/95 1,700,000 451,518 0.27 894,896 0.23
Hindustan Lever Ltd. 06/02/97 50 1,780 35.60 1,618 0.00#
Hindustan Petroleum Corporation Ltd 06/11/97 8,000 73,679 9.21 102,066 0.04
Housing Development and Finance
Corporation 02/05/96 17,000 1,200,024 70.59 1,262,911 0.61
India Hotel Company, Ltd. 07/15/97 50 507 10.14 882 0.00#
ITC Ltd. 06/02/98 2,655 40,827 15.38 43,815 0.02
Oil and Natural Gas Corporation Ltd. 05/28/97 100 424 4.24 1,007 0.00#
Pakistan State Oil 09/14/95 84,900 136,171 1.60 670,329 0.07
Romania Growth Fund 05/22/97 46,653 209,939 4.50 474,320 0.11
Tan Chong International Ltd. Berhad 02/06/98 2,466,000 344,625 0.14 227,928 0.17
Teleceara Celular SA, Series D 04/17/97 1,291,545 67,003 .0.5 348,492 0.03
Ural Telecom ADR 02/20/98 6,278 62,780 10.00 182,925 0.03
Uralmash Zavody, ADR 10/28/97 78,300 508,950 0.76 673,380 0.26
---------- ------
$5,572,343 2.82%
========== ======
- --------------------------
# Amount represents less than 0.01%.
</TABLE>
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.
19
<PAGE>
The Montgomery Funds II
Tax Information (Unaudited)
Fiscal Year Ended June 30, 1998
For the fiscal year ended June 30, 1998, foreign income and foreign taxes paid
relating to foreign sources and possessions in the United States, on a per share
basis were as follows:
<TABLE>
<CAPTION>
FOREIGN FOREIGN
INCOME TAXES
<S> <C> <C>
Montgomery Institutional Series: Emerging Markets Portfolio $ 0.8759 $ 0.0793
</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.
20
<PAGE>
The Montgomery Funds II
Report of Independent Accountants
TO THE BOARD OF TRUSTEES OF THE MONTGOMERY FUNDS II AND SHAREHOLDERS OF
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
In our opinion, the accompanying statements of assets and liabilities, including
the portfolio investments, and the related statements of operations, of changes
in net assets, and the financial highlights present fairly, in all material
respects, the financial position of Montgomery Institutional Series: Emerging
Markets Portfolio (a portfolio of the Montgomery Funds II) (the "Fund") at June
30, 1998, the results of its operations, the changes in its net assets, and the
financial highlights for the year ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at June 30, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
The financial statements of the Fund for the year ended June 30, 1997 were
audited by other independent accountants whose report dated August 8, 1997
expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
San Francisco, CA
August 14, 1998
21
