<PAGE>
[PICTURE APPEARS HERE]
The Montgomery Funds(SM)
Institutional Series
- --------------------
Emerging Markets Portfolio
Annual Report
June 30, 1999
Invest wisely
<PAGE>
==========================
Montgomery
Institutional Series
--------------------------
Emerging Markets Portfolio
--------------------------
Portfolio Highlights
INVESTMENT REVIEW
Q: How did the Portfolio perform during the year ended June 30, 1999?
A: In an extremely challenging year for emerging markets, the Portfolio returned
9.8% versus a 28.7% return for the benchmark Morgan Stanley Capital
International (MSCI) Emerging Markets Free Index. Although this underperformance
is disappointing, the Portfolio lost most ground during the difficult market
conditions in the second half of 1998. We are pleased to report that by the end
of June, our relative performance against the benchmark improved considerably.
Q: What factors contributed to these results?
A: There were a couple of factors. First, the Portfolio's bias toward small- and
mid-cap stocks placed it in a much more vulnerable position than many of its
peers during the severe correction in global markets and the subsequent "flight
to quality." Smaller-cap companies felt the most severe impact of such capital
outflows, as investors who remained in the emerging markets sought the relative
safety of large-cap, highly liquid securities.
Second, our cautious approach to the rebounding markets of South Korea and
Indonesia meant that we did not fully participate in these markets'
fourth-quarter 1998 rally, detracting from relative returns. In our view,
because of the tentative nature of the Korean recovery and the political
upheaval in Indonesia, the inherent risks outweighed the potential rewards.
A much more benign investment environment for most of the latter half of the
financial year proved more favorable to the Portfolio's performance. Our
strategy maintains its slight bias toward small- and mid-cap companies. We
believe that by identifying smaller, well-managed, fundamentally sound and
attractively valued companies before the rest of the market recognizes their
potential we can add value to the Portfolio. Interest in such stocks is
beginning to improve, especially in Asia, where market liquidity has improved
considerably in recent months. In addition, the Portfolio's overweight position
in the outperforming Pacific Rim markets, specifically in South Korea and
Thailand in the three months ended June 30, 1999, contributed to strong returns
and a considerable improvement in the Portfolio's relative performance against
both its benchmark and its peers.
Q: You mentioned the recovery in Asian markets as a contributing factor to
improved performance. Were there any other trends that increased returns over
the period?
A: The recovery in commodity prices during the final three months of the
financial year proved beneficial to the emerging markets in general -- which
tend to be large exporters of primary products such as metals and oil -- and to
the Portfolio's performance. Recognizing the potential for a rebound in this
sector at the end of March, we increased the Portfolio's exposure to companies
that would profit from such a recovery. As a result, 57% of the Portfolio's
holdings were in countries likely to benefit from this trend by June 30, 1999.
================================================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Josephine Jimenez, CFA ................................... Sr. Portfolio Manager
Bryan Sudweeks, Ph.D., CFA ............................... Sr. Portfolio Manager
Frank Chiang ................................................. Portfolio Manager
================================================================================
F U N D P E R F O R M A N C E
- --------------------------------------------------------------------------------
Average annual total returns for the period ended 6/30/99
- --------------------------------------------------------------------------------
Montgomery Institutional Series:
Emerging Markets Portfolio
Since inception (12/17/93) ............................................ (3.85)%
One year .............................................................. 9.75%
Five years ............................................................ (1.64)%
- --------------------------------------------------------------------------------
MSCI Emerging Markets Free Index
Since 12/31/93 ........................................................ (2.70)%
One year .............................................................. 28.71%
Five years ............................................................ (0.83)%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
MSCI Emerging Markets MSCI Emerging Markets
Date Emerging Markets Portfolio Free Index/1/ Date Emerging Markets Portfolio Free Index/1/
---- -------------------------- ------------- ---- -------------------------- -------------
<S> <C> <C> <C> <C> <C>
12/93 $10,154 $10,000 1/97 $10,460 $ 9,953
1/94 10,036 10,182 2/97 10,818 10,379
2/94 9,632 10,000 3/97 10,567 10,106
3/94 9,010 9,095 4/97 10,575 10,124
4/94 8,994 8,913 5/97 10,972 10,413
5/94 9,284 9,218 6/97 11,838 10,971
6/94 8,742 8,964 7/97 12,238 11,134
7/94 9,272 9,521 8/97 10,980 9,718
8/94 10,282 10,703 9/97 11,386 9,987
9/94 10,416 10,825 10/97 9,428 8,348
10/94 10,384 10,630 11/97 9,114 8,043
11/94 9,798 10,077 12/97 9,485 8,237
12/94 9,215 9,268 1/98 8,437 7,591
1/95 8,200 8,282 2/98 9,009 8,384
2/95 8,226 8,070 3/98 9,256 8,748
3/95 8,172 8,121 4/98 9,388 8,652
4/95 8,320 8,486 5/98 8,192 7,467
5/95 8,874 8,938 6/98 7,333 6,684
6/95 8,924 8,964 7/98 7,683 6,894
7/95 9,179 9,165 8/98 5,385 4,901
8/95 8,822 8,949 9/98 5,597 5,212
9/95 8,752 8,907 10/98 5,955 5,761
10/95 8,466 8,566 11/98 6,468 6,240
11/95 8,240 8,413 12/98 6,166 6,149
12/95 8,558 8,787 1/99 5,989 6,050
1/96 9,155 9,412 2/99 5,840 6,109
2/96 8,964 9,262 3/99 6,638 6,914
3/96 9,105 9,334 4/99 7,394 7,769
4/96 9,593 9,708 5/99 7,233 7,724
5/96 9,753 9,664 6/99 8,049 8,601
6/96 9,830 9,724
7/96 9,229 9,060
8/96 9,503 9,292
9/96 9,583 9,372
10/96 9,383 9,122
11/96 9,581 9,275
12/96 9,675 9,317
</TABLE>
/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 approximately 25 emerging markets
countries.
1
<PAGE>
==========================
Montgomery
Institutional Series
- --------------------------
Emerging Markets Portfolio
- --------------------------
Portfolio Highlights
================================================================================
TOP TEN HOLDINGS
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Telefonos de Mexico S.A .................................................. 3.4%
Samsung Electronics Company .............................................. 3.2%
Pohang Iron & Steel Company Ltd. ......................................... 2.6%
Korea Telecom Corporation ................................................ 2.4%
Samsung Display Devices Company .......................................... 2.4%
Hon Hai Precision Industry ............................................... 2.4%
Synnex Technology International Corporation .............................. 2.0%
Korea Electric Power Corporation ......................................... 1.8%
Hellas Telecommunications S.A ............................................ 1.8%
Taiwan Semiconductor Company Ltd. ........................................ 1.7%
================================================================================
TOP FIVE COUNTRIES
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
Korea .................................................................... 16.1%
Brazil ................................................................... 11.2%
Mexico ................................................................... 10.2%
South Africa ............................................................. 8.2%
Taiwan ................................................................... 8.1%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities
There are risks associated with investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions, economic and
political instability, and fluctuations in currency exchange rates.
INVESTMENT REVIEW
There were a number of stocks across the emerging markets regions that boosted
performance. These included low-cost copper producer Grupo Mexico (0.6% of net
assets as of 6/30/99) and South Africa's Anglo American Platinum Corporation
(0.5% of net assets as of 6/30/99).
Q: Where do you believe that the best opportunities are likely to be in the
emerging markets in the coming year?
A: We are confident that the recovery we have seen in the emerging markets since
the beginning of 1999 is likely to continue. We are especially optimistic about
the prospects for Asia. The economic fundamentals of the region continue to
improve, and significant progress has been made in bank reform and corporate
restructuring. Although Asian markets appreciated rapidly during the second
quarter, we believe that there are still some attractively valued companies
whose potential has yet to be widely recognized. We particularly like the
prospects for India and China. We believe that the combination of strong
economic growth and a possible resolution of its conflict with Pakistan over
Kashmir may boost the Indian market. Selected Chinese stocks are likely to
benefit from that country's possible entry into the World Trade Organization
(WTO).
Elsewhere, in Latin America we are optimistic about the outlook for the
Brazilian market. Interest rates in Brazil have fallen, and inflation is running
at a rate lower than even the most optimistic analysts had predicted at the
beginning of the year. In view of such rapidly improving fundamentals, we
believe Brazil will outperform. We also like the prospects for selected stocks
in Egypt and South Africa.
Q: How is the Portfolio currently positioned to take advantage of any
opportunities?
A: The Portfolio remains overweighted in Asia, specifically in South Korea and
Thai-land, but we are also researching opportunities in India and have begun to
build positions in Chinese stocks that we believe may benefit from WTO
membership.
In Latin America the Portfolio has an overweight position in Brazil, and we are
looking for interesting opportunities in Chile. In the Middle East and Africa,
we continue to like the prospects for the Portfolio's existing holdings in
commodities stocks and Egyptian cellular phone services. We are optimistic that
if we maintain our strong focus on asset allocation and good stock selection, we
should continue to improve our relative performance against the benchmark.
2
<PAGE>
==========================
Montgomery
Institutional Series
--------------------------
Emerging Markets Portfolio
--------------------------
Investments
PORTFOLIO INVESTMENTS
June 30, 1999
Shares Value (Note 1)
COMMON STOCKS -- 85.3%
Argentina -- 0.9%
1 Cresud S.A. (Farming/Seeds/Milling) .............. $ 1
30,800 Telefonica de Argentina, ADR
(Other Telephone/Communication) .................. 966,350
------------
966,351
Brazil -- 2.8%
64,400 Cia Cervejaria Brahma, ADR
(Non-U.S. Utilities) ............................. 728,525
69,800 Embratel Participacoes, ADR
(Other Telephone/Communication) .................. 968,475
46,900 Pao de Acucar, ADR (Food Chains) ................. 876,444
43,856,900 Telecomunicacoes Brasileiras S.A.+
(Other Telephone/Communication) .................. 348,950
------------
2,922,394
Chile -- 0.7%
30,000 Cia de Telecom Chile de S.A., ADR
(Other Telephone/Communication) .................. 742,500
China/Hong Kong -- 1.8%
48,000 Cheung Kong (Holdings) Ltd.
(Real Estate) .................................... 426,898
5,000 China Telecom Ltd. ADR+
(Other Telephone/Communication) .................. 285,000
926,000 Cosco Pacific Ltd.
(Marine Transportation) .......................... 769,847
10,800 HSBC Holdings PLC
(Non-U.S. Banks) ................................. 393,952
------------
1,875,697
Czech Republic -- 0.8%
23,050 Ceske Radiokomunikace, GDR+
(Other Telephone/Communication) ...................... 795,225
Egypt -- 2.6%
41,900 Al-Ahram Beverages Company, GDR+
(Alcoholic Beverages) ................................ 1,191,008
65,398 Egyptian Mobile Phone Network
(Cellular Telephone) ................................. 1,473,787
400 Tourah Portland Cement Company
(Building Materials) ................................. 7,031
------------
2,671,826
Greece -- 3.2%
23,455 Alpha Credit Bank (Non-U.S. Banks) ............... 1,513,899
81,800 Hellas Telecommunications S.A., ADR+
(Other Telephone/Communication) .................. 1,830,275
------------
3,344,174
Hungary -- 1.7%
10,700 Borsodchem Rt. (Paints/Coatings) ................. 261,186
14,900 EGIS Rt. (Other Pharmaceuticals) ................. 356,927
10,800 Mol Magyar Olaj-es Gazipari Rt.
(Integrated Oil Companies) ....................... 260,499
21,600 Mol Magyar Olaj-es Gazipari Rt., GDR
(Integrated Oil Companies) ....................... 517,320
8,180 OTP Bank Rt. (Non-U.S. Banks) .................... 341,475
------------
1,737,407
India -- 8.1%
96,110 Bajaj Auto Ltd. (Motor Vehicles) ................... 1,197,915
200 BSES Ltd. (Non-U.S. Utilities) ..................... 687
414 Castrol (India) Ltd.
(Oil Refining/Marketing) ........................... 3,961
43,200 Dr. Reddy's Laboratories Ltd.
(Generic Drugs) .................................... 829,165
50 Hindustan Lever Ltd.
(Packaged Goods/Cosmetics) ......................... 2,742
115,700 Hindustan Petroleum Corporation Ltd.
(Oil Refining/Marketing) ........................... 662,399
29,200 Housing Development and Finance
Corporation (Finance Companies) .................... 1,494,814
56 Indian Hotels Company Ltd. (Lodging) ............... 449
68,950 ITC Ltd. (Tobacco) ................................. 1,740,231
186,800 Mahanagar Telephone Nigam Ltd.
(Other Telephone/Communication) .................... 800,479
100 Oil & Natural Gas Corporation Ltd.
(Integrated Oil Companies) ......................... 352
28,800 Satyam Computer
(Computer Software) ................................ 841,308
150 State Bank of India
(Non-U.S. Banks) ................................... 819
60,800 Videsh Sanchar Nigam Ltd., GDR
(Other Telephone/Communication) .................... 779,000
------------
8,354,321
Indonesia -- 2.9%
37,400 Asia Pulp & Paper Company Ltd. ADR+
(Paper) ............................................ 359,975
49,700 Gulf Indonesia Resources Ltd.+
(Oil & Gas Production) ............................. 571,550
1,534,400 PT Indah Kiat Pulp & Paper Corporation
(Paper) ............................................ 709,037
550,000 PT Indofood Sukses Makmur Tbk+
(Food Distributors) ................................ 746,570
990,360 PT Telekomunikasi Indonesia
(Other Telephone/Communication) .................... 572,049
------------
2,959,181
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
==========================
Montgomery
Institutional Series
- --------------------------
Emerging Markets Portfolio
- --------------------------
Investments
Shares Value (Note 1)
COMMON STOCKS -- continued
Israel -- 3.3%
641,100 Bank Leumi Le-Israel
(Non-U.S. Banks) ............................. $ 1,212,111
127,820 Bezeq Israeli Telecommunication
Corporation Ltd.+
(Other Telephone/Communication) .............. 514,949
10,300 Koor Industries Ltd.
(Multi-Sector Companies) ..................... 1,188,113
13 Makhteshim-Agan Industries Ltd.+
(Specialty Chemicals) ........................ 29
172,910 Supersol Ltd. (Food Chains) .................. 508,160
------------
3,423,362
Korea -- 16.1%
60,300 Hyundai Motor Company
(Automotive Aftermarket) ..................... 1,430,009
37,000 Kookmin Bank (Non-U.S. Banks) ................ 751,188
93,400 Korea Electric Power Corporation ADR
(Non-U.S. Utilities) ......................... 1,914,700
37,300 Korea Telecom Corporation
(Other Telephone/Communication) .............. 2,474,851
1,000 Korea Telecom Corporation ADR+
(Other Telephone/Communication) .............. 40,000
26,400 LG Chemical Ltd. (Major Chemicals) ........... 718,445
22,660 Pohang Iron & Steel Company Ltd.
(Steel/Iron Ore) ............................. 2,728,939
45,000 Samsung Display Devices Company
(Industrial Specialties) ..................... 2,449,244
30,226 Samsung Electronics Company
(Diversified Electronic Products) ............ 3,316,373
31 Samsung Electronics Ltd., GDR
(Diversified Electronic Products) ............ 1,660
17,041 Sindo Ricoh Company
(Office Equipment/Supplies) .................. 912,779
------------
16,738,188
Malaysia -- 3.8%
2,461,000 Public Bank Berhad (Non-U.S. Banks) ............. 1,590,903
818,000 Tenaga Nasional Berhad
(Non-U.S. Utilities) ............................ 1,601,016
197,000 YTL Corporation Berhad
(Engineering and Construction) .................. 352,525
443,000 YTL Power International Berhad
(Non-U.S. Utilities) ............................ 360,694
------------
3,905,138
Mexico -- 10.2%
353,140 Corporacion Interamericana Entertainment
S.A., Series B+ (Movies/Entertainment) .......... 1,148,651
41,400 Fomento Economico Mexicano S.A. de
C.V., ADR Series B (Soft Drinks) ................ 1,650,825
297,000 Grupo Carso S.A., Series A+ (Textiles) .......... 1,377,364
636,000 Grupo Financiero Banamex Accival S.A
de C.V.+ (Non-U.S. Banks) ....................... 1,606,368
255,000 Grupo Industrial Bimbo S.A. de C.V.
(Specialty Foods/Candy) ......................... 565,584
134,000 Grupo Mexico S.A., Series B
(Other Metals/Minerals) ......................... 570,243
41,100 Grupo Radio Central S.A. de C.V., ADR
(Broadcasting) .................................. 215,775
43,200 Telefonos de Mexico S.A., ADR
(Other Telephone/Communication) ................. 3,491,100
------------
10,625,910
Morocco -- 0.0%#
2 Banque Marocaine do Commerce Exterieur
Series B+ (Non-U.S. Banks) ...................... 43
Peru -- 0.9%
28,300 Compania de Minas Buenaventura ADR
Series B (Precious Metals) ...................... 433,344
18,700 Credicorp Ltd. (Non-U.S. Banks) ................. 205,700
22,800 Telefonica del Peru S.A., ADR
(Other Telephone/Communication) ................. 344,850
------------
983,894
Philippines -- 1.8%
824,000 Ayala Corporation
(Multi-Sector Companies) ...................... 271,231
74,800 Bank of the Philippine Islands
(Non-U.S. Banks) .............................. 267,882
210,100 Manila Electric Company, Series B
(Non-U.S. Utilities) .......................... 757,964
17,843 Philippine Long Distance Telephone
Company ADR, Series B
(Other Telephone/Communication) ............... 537,520
------------
1,834,597
Poland -- 1.2%
4,900 Agora S.A., GDR, Series B+
(Broadcasting) ................................ 57,085
28,600 Elektrim Spolka Akcyjna S.A.
(Wholesale Distributors) ...................... 403,893
24,300 Prokom Software, GDR, Series B
(EDP Services) ................................ 398,520
53,500 Telekomunikacja Polska, GDR+
(Other Telephone/Communication) ............... 377,175
------------
1,236,673
Singapore -- 0.6%
6,700 Pacific Internet Ltd. Series B+
(Internet Services) ............................ 319,716
16,200 Singapore Press Holdings Ltd.
(Newspapers) ................................... 275,971
------------
595,687
South Africa -- 8.2%
46,800 ABSA Group Ltd. (Finance Companies) ............ 264,847
23,500 Anglo American Platinum Corporation
Ltd., Series B (Precious Metals) ............... 548,314
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
==========================
Montgomery
Institutional Series
--------------------------
Emerging Markets Portfolio
--------------------------
Investments
Shares Value (Note 1)
COMMON STOCKS -- continued
South Africa -- continued
5,134 Anglo American PLC+ (FinanceCompanies) .......... $ 239,918
17,000 AngloGold Ltd. (Precious Metals) ................ 732,455
1,161,916 B.O.E. Corporation Ltd., "N" Shares, Series
B (Investment Managers) ......................... 924,219
194,025 Barlow Ltd. (Multi-Sector Companies) ............ 1,118,911
52,000 De Beers Centenary AG
(Other Metals/Minerals) ......................... 1,246,035
33,242 Liberty International PLC
(Life Insurance) ................................ 220,071
71,298 Liberty Life Association of Africa Ltd.
(Life Insurance) ................................ 913,304
1,041,000 Molope Group Ltd., "N" Shares+
(Diversified Commercial Services) ............... 586,527
11,000 Nedcor Bank Ltd., Series B
(Non-U.S. Banks) ................................ 249,002
5,337 Pepsi International Bottlers (a)(S)
(Soft Drinks) ................................... 44,991
137,711 Sasol Ltd. (Coal Mining) ........................ 982,428
267,792 Wooltru, Ltd. "N" Shares, Series B
(Food Chains) ................................... 434,893
-----------
8,505,915
Taiwan -- 8.1%
1,498,500 China Steel Corporation, Series B
(Steel/Iron Ore) ................................ 1,131,994
718,000 Far East Textile Ltd., Series B+ (Textiles) ..... 1,066,997
270,000 Hon Hai Precision Industry+
(Electronic Data Processing) .................... 2,440,867
389,636 Synnex Technology International Corporation
(Diversified Electronic Products) ............... 2,026,590
459,988 Taiwan Semiconductor Company Ltd.+
(Electronic Production Equipment) ............... 1,758,777
-----------
8,425,225
Thailand -- 3.0%
1,243,000 Industrial Finance of Thailand, Series B
(Finance Companies) ............................. 791,935
400 Krung Thai Bank Public Company Ltd.
(Non-U.S. Banks) ................................ 266
144,000 PTT Exploration and Production Public
Company Ltd. (F) (Oil & Gas Production) ......... 1,100,935
387,100 Thai Farmers Bank Public Company Ltd.
(Non-U.S. Banks) ................................ 1,196,405
-----------
3,089,541
Turkey -- 2.6%
461,500 Migros Turk T.A.S. (Food Chains) ................ 574,604
19,450,000 Haci Omer Sabanci Holding A.S.
(Real Estate) ................................... 433,596
5,246,000 Tupras-Turkie Petrol Rafinerileri Ltd. (F)
(Oil Refining/Marketing) ........................ 348,357
24,312,600 Turkiye Is Bankasi, Class C
(Non-U.S. Banks) ................................ 432,444
61,985,332 Yapi Ve Kredi Bankasi A.S.
(Non-U.S. Banks) ................................ 896,719
-----------
2,685,720
TOTAL COMMON STOCKS
(Cost $71,208,110)............................................... 88,418,969
-----------
PREFERRED STOCKS -- 9.6%
Brazil -- 8.4%
105,200,000 Banco do Brasil S.A. Ltd. (F)
(Non-U.S. Banks) ................................ 551,713
10,300,000 Banco do Estado de Sao Paulo S.A. Banespa
Ltd. (F) (Non-U.S. Banks) ....................... 438,310
38,361,114 Cia Energetica de Minas Gerais
(Non-U.S. Utilities) ............................ 806,462
122,002,000 Cia Paranaense de Energi
(Non-U.S. Utilities) ............................ 992,839
880,000 Itausa Investimentos Itau
(Multi-Sector Companies) ........................ 462,504
10,975,000 Petroleo Brasileiro S.A. Ltd. (F)
(Integrated Oil Companies) ...................... 1,699,435
138,714 Telec de Minas Gerais Ltd. (F)
(Other Telephone/Communication) ................. 3,442
9,350,836 Telec de Sao Paulo S.A.--Telesp
(Other Telephone/Communication) ................. 1,104,450
1 Telec do Rio Janeiro S.A.+
(Other Telephone/Communication) ................. -
1,291,545 Telecel-Comunicacoes Pessoais S.A.
(Cellular Telephone) ............................ 72,989
12,437,860 Telesp Celular S.A., Series B
(Cellular Telephone) ............................ 646,670
262,000 Uninas Sider Minas Gerais
(Steel/Iron Ore) ................................ 882,464
86,200 Usinas Sider Minas Gerais, GDR Ltd. (F)
(Steel/Iron Ore) ................................ 290,337
41,800 Vale do Rio Doce Series "A" Ltd. (F)
(Other Metals/Minerals) ......................... 826,787
142,956 Vale do Rio Doce Series "B" Ltd. (F)
(Other Metals/Minerals) ......................... 1
-----------
8,778,403
Russia -- 0.9%
126,000 LukOil Company, ADR
(Integrated Oil Companies) ...................... 913,500
Thailand -- 0.3%
194,000 Siam Commercial Bank+
(Non-U.S. Banks) ................................ 276,128
TOTAL PREFERRED STOCKS
(Cost $9,842,427) ............................................... 9,968,031
-----------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
==========================
Montgomery
Institutional Series
- --------------------------
Emerging Markets Portfolio
- --------------------------
Investments
Shares Value (Note 1)
WARRANTS -- 0.3%
Philippines -- 0.3%
658,000 Jollibee Food Company, Warrants,
Expire 02/24/03+ (Restaurants)
(Cost $322,197) .................................$ 337,880
-----------
TOTAL INVESTMENTS -- 95.2%
(Cost $81,372,734*) ............................................. 98,724,880
OTHER ASSETS AND LIABILITIES -- 4.8%
(Net) ........................................................... 4,936,015
-----------
NET ASSETS -- 100.0% ............................................$ 103,660,895
===========
* Aggregate cost for federal tax purposes was $83,639,606.
(S) Valued in good faith using procedures approved by the Board of Trustees.
+ Non-income-producing security.
# Amount represents less then 0.1% of net assets.
Abbreviations
ADR American Depositary Receipt
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
(a) Restricted security: At June 30, 1999, the Portfolio owned the following
restricted security, constituting less than .05% of net assets, which may
not be publicly sold without registration under the Securities Act of 1933
(note 1). Additional information on the securities is as follows:
Security Acquisition Date Shares Cost Value per Share
- --------------------------------------------------------------------------------
Pepsi International Bottlers 12/27/95 5,337 $160,110 $8.43
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
=======================
Montgomery
Institutional Series
-----------------------
Statement of
Assets and Liabilities
-----------------------
June 30, 1999
Assets: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Investment in securities, at value (note 1) ............... $ 98,724,880
Foreign currency, at value (Cost $3,798,760) .............. 3,794,617
Receivables:
Investment securities sold ........................... 4,398,646
Dividends ............................................ 532,145
Expenses absorbed by Manager (note 2) ................ 120,167
Other ................................................ 34,000
------------
Total Assets 107,604,455
------------
Liabilities:
- --------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward
foreign-currency exchange contracts (note 3) ........ 7,368
Payables:
Cash overdrafts payable to custodian ................. 2,880,072
Investment securities purchased ...................... 519,620
Custodian fees ....................................... 200,240
Loans payable ........................................ 200,000
Accounting fees ...................................... 12,433
Administration fees (note 2) ......................... 50,044
Trustees' fees and expenses (note 2) ................. 2,850
Transfer agency and servicing fees ................... 655
Other accrued liabilities and expenses................ 70,278
------------
Total Liabilities 3,943,560
------------
Net Assets $103,660,895
Investments at identified cost ............................ $ 81,372,734
Net Assets Consist of:
- --------------------------------------------------------------------------------
Accumulated net investment loss ........................... $ (991,799)
Accumulated net realized gain/(loss) on securities sold,
forward foreign-currency exchange contracts and
foreign-currency transactions ........................ (72,630,882)
Net unrealized appreciation of investments, forward
foreign-currency exchange contracts, foreign-currency
transactions, and other assets ....................... 17,274,903
Shares of beneficial interest ............................. 26,547
Additional paid-in capital ................................ 159,982,126
------------
Net Assets $103,660,895
Net Assets:
- --------------------------------------------------------------------------------
Net Assets ................................................ $103,660,895
Number of Portfolio shares outstanding .................... 2,654,716
Net asset value, offering and redemption
price per share outstanding .......................... $ 39.05
------------
Maximum offering price per share (note 4) ($39.05/.9925)
(based on maximum investment expense reimbursement
fee of 0.75% of the offering price) .................. $ 39.35
------------
7
The accompanying notes are an integral part of these financial statements.
<PAGE>
========================
Montgomery
Institutional Series
- ------------------------
Statement of Operations
- ------------------------
Year Ended June 30, 1999
Net Investment Income: Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Investment Income:
Interest ................................................. $ --
Dividends (net of foreign withholding taxes of $204,202).. 3,298,231
-----------
Total Income 3,298,231
-----------
Expenses:
Management fee (note 2) .................................. 2,664,737
Custodian fee ............................................ 395,192
Interest expense ......................................... 111,698
Administration fee (note 2) .............................. 75,002
Accounting expenses ...................................... 74,449
Legal and audit fees ..................................... 37,540
Registration fees ........................................ 17,111
Trustees' fees (note 2) .................................. 9,909
Transfer agency and servicing fees ....................... 4,245
Printing fees ............................................ 3,592
Taxes expense ............................................ 186,925
Amortization of organization expenses (note 1) ........... 3,848
Other .................................................... 41,207
-----------
Total Expenses 3,625,455
Fees deferred and/or expenses absorbed by Manager (note 2) (1,449,058)
-----------
Net Expenses 2,176,397
-----------
Net Investment Income 1,121,834
-----------
Net Realized and Unrealized Gain/(Loss) on Investments:
- --------------------------------------------------------------------------------
Net realized loss from:
Securities transactions ............................... (40,803,907)
Foreign-currency transactions and other assets ........ (2,298,235)
-----------
Net Realized Loss on Investments (43,102,142)
Net change in unrealized appreciation/(depreciation) of:
Securities ............................................ 48,302,460
Forward foreign currency exchange contracts ........... (8,293)
Foreign-currency transactions and other assets ........ (65,204)
-----------
Net Unrealized Appreciation of Investments 48,228,963
-----------
Net Realized and Unrealized Gain on Investments 5,126,821
-----------
Net Increase in Net Assets Resulting from Operations $ 6,248,655
-----------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
==========================
Montgomery
Institutional Series
--------------------------
Statement of
Changes in Net Assets
--------------------------
Emerging Markets Portfolio
- --------------------------------------------------------------------------------
Year Ended Year Ended
Increase/(Decrease) in Net Assets from Operations: 6/30/99 6/30/98
- --------------------------------------------------------------------------------
Net investment income ........................... $ 1,121,834 $ 2,566,382
Net realized loss on securities, forward foreign-
currency exchange contracts, futures contracts,
foreign currency transactions and other assets
during the period ............................ (43,102,142) (29,436,439)
Net unrealized appreciation/(depreciation) of
securities, forward foreign-currency exchange
contracts, foreign currency transactions and
other assets during the period ............... 48,228,963 (95,233,904)
------------ -------------
Net Increase/(Decrease) in Net Assets Resulting
from Operations .............................. 6,248,655 (122,103,961)
Distributions to Shareholders:
- --------------------------------------------------------------------------------
Distributions to shareholders from net investment
income ....................................... -- (3,559,976)
Distributions to shareholders in excess of net
investment income ............................ (12,952) --
Distributions to shareholders from net realized
gains on investments ......................... -- (854,895)
- --------------------------------------------------------------------------------
Total Distributions to Shareholders ............. (12,952) (4,414,871)
Beneficial Interest Transactions:
- --------------------------------------------------------------------------------
Net decrease from beneficial interest transactions
(note 4) ..................................... (100,152,917) (10,083,756)
------------ -------------
Net Increase/(Decrease) in Net Assets ........... (93,917,214) (136,602,588)
Net Assets:
- --------------------------------------------------------------------------------
Beginning of Period ............................. 197,578,109 334,180,697
End of Period .................................. $103,660,895 $ 197,578,109
Accumulated Net Investment Loss/(Distributions In
Excess of Net Investment Income) ............. $ (991,799) $ (196,482)
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
=======================
Montgomery
Institutional Series
- -----------------------
Financial Highlights
- -----------------------
<TABLE>
<CAPTION>
Emerging Markets Portfolio
Selected Per-Share Data for the Year Ended: Fiscal Year Ended June 30,
----------------------------------------------------------
1999 1998 1997 1996 1995++
<S> <C> <C> <C> <C> <C>
Net Asset Value--Beginning of Period ........................... $ 35.61 $ 58.52 $ 49.09 $ 44.61 $ 43.71
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) .................................... 0.38 0.32 0.43 0.50 0.13
Net realized and unrealized gain/(loss) on investments .......... 3.06 (22.44) 9.46 3.93 0.67
- -----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting
from investment operations .................................. 3.44 (22.12) 9.89 4.43 0.80
- -----------------------------------------------------------------------------------------------------------------------------
Effect of redemption expense reimbursement fee ............... -- -- 0.02 0.09 0.11
- -----------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ............................ -- (0.64) (0.48) (0.04) (0.01)
Dividends in excess of net investment income .................... 0.00(S) -- -- -- --
Distributions from net realized capital gains ................... -- (0.15) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions ............................................. -- (0.79) (0.48) (0.04) (0.01)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value--End of Period $ 39.05 $ 35.61 $ 58.52 $ 49.09 $ 44.61
- -----------------------------------------------------------------------------------------------------------------------------
Total Return* ................................................... 9.75% (38.05)% 20.45% 10.14% 2.09%
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) ...............................$ 103,661 $ 197,578 $ 334,181 $ 270,878 $ 186,666
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets ..... 0.79% 0.96% 0.86% 1.16% 0.29%
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.11) $ 0.03 $ 0.26 $ 0.33 $ (0.05)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate ........................................ 115% 104% 85% 88% 101%
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense ................ 1.45% 1.25% 1.26% 1.29% 1.40%
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest and tax expense .............................. 2.42% 1.66% 1.61% 1.70% 1.79%
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense ................ 1.25% 1.25% 1.26% 1.29% 1.40%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return represents aggregate total return for the periods indicated.
++ Per-share numbers have been calculated using the average share method, which
more appropriately represents the per-share data for the period, since the
use of the undistributed income method did not accord with results of
operations.
(S) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial statements.
10
<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. The Trust 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, 1999, the Trust had seven
publicly offered series: Montgomery U.S. Asset Allocation Fund, Montgomery
Global Long-Short Fund, Montgomery Institutional Series: Emerging Markets Focus
Portfolio, Montgomery Institutional Series: Small Cap Systematic Value
Portfolio, Montgomery Institutional Series: Macro Cap Systematic Value
Portfolio, Montgomery Institutional Series: Emerging Markets Portfolio, and
Montgomery Institutional Series: International Growth Portfolio. Prior to the
public offerings of shares of each fund, a limited number of shares were sold 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). Information presented in these financial statements
pertains only to the Montgomery Institutional Series: Emerging Markets Portfolio
(the "Fund"). The financial statements for the other Funds in the Trust have
been presented under separate covers.
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
Portfolio securities are valued using current market valuations: either the last
reported sale 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 ask prices.
Portfolio securities that are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sale price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market or on the NASDAQ national market are valued at the mean between the last
available bid and ask prices prior to the time of valuation.
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision of
the Trust's officers in accordance with methods authorized by the Trust's Board
of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market 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 takes possession of
a government debt obligation as collateral. The Fund also agrees with the
counterparty to allow the counterparty to repurchase, and the Fund to resell,
the obligation at a specified date and price, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at least equal at all times to the total
amount of the repurchase obligations, including interest. In the event of
counterparty default, the Fund has the right to use the collateral to offset
losses incurred. There could be 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 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 that involve a counterparty and a
custodian bank.
c. Foreign Currency
The accounting records of the Fund are maintained in U.S. Dollars. Investment
securities and all other assets and liabilities of the Fund denominated in a
foreign currency are translated into U.S. Dollars at the exchange rate each day.
Purchases and sales of securities, income receipts and expense payments are
translated into U.S. Dollars at the exchange rate in effect on the date of the
respective transactions.
The Fund does not isolate the portion of the fluctuations on investments
resulting from changes in foreign-currency exchange rates from the fluctuations
in market prices of investments held. Such fluctuations are included with the
net realized gain (loss) and unrealized appreciation (depreciation) from
investments.
d. Forward Foreign Currency-Exchange Contracts
The Fund may engage in forward foreign-currency exchange contracts ("forward
contracts") as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. A forward contract is a commitment
to purchase or sell a foreign currency at the settlement date at a negotiated
rate.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies, and unrealized gain (loss) is recorded daily. Realized
and unrealized gains and losses that represent the difference between the value
of the forward contract to buy and the forward contract to sell are included in
net realized and unrealized gain (loss) from foreign-currency-related
transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their
11
<PAGE>
=======================
The Montgomery
Funds II
- -----------------------
Notes
- -----------------------
to Financial Statements
contracts. Additionally, when utilizing forward contracts to hedge, the Fund
gives up the opportunity to profit from favorable exchange rate movements during
the term of the contract.
e. Dividends and Distributions
Dividends from net investment income of the Fund are declared and paid annually.
Distributions of any short-term capital gains earned by the Fund are distributed
at least 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 book and tax differences incurred during the year ended June 30, 1999,
resulting in reclassification of $1,904,199 to decrease undistributed net
investment income, $1,904,198 to increase accumulated net realized gain (loss)
and $1 to increase paid-in capital.
f. Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis (date the order to
buy or sell is executed). Interest income is accrued daily and includes
amortization of premium and accretion of discount on investments. Realized gain
and loss from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date, except that certain
dividends from foreign securities are recorded as soon as the Fund is informed
of the ex-dividend date.
g. 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 of all or substantially
all federal income taxes. Therefore no federal income-tax or excise-tax
provision has been provided.
The Fund may be subject to foreign taxes on income, gains on investments or
currency repatriation, a portion of which may be recoverable. The Fund will
accrue such taxes and recoveries as applicable, based on their current
interpretation of tax rules and regulations that exist in the markets in which
it invests.
h. Organization Costs
Expenses incurred in connection with the organization of the Fund were amortized
on a straight-line basis over a period of five years from the commencement of
operations.
i. Expenses
General expenses of the Trust are allocated to the Fund, and other series of the
Trust based on relative net assets. Operating expenses directly attributable to
the Fund are charged to the Fund's operations.
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 Manager is a subsidiary of Commerzbank AG.
Pursuant to Investment Management Agreement (the "Agreement") between the
Manager and the Trust with respect to the Fund, 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 the Agreement. Under an Operating Expense Agreement with the Trust, 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
Rule 12b-1 fees, dividend expense, interest, extraordinary expenses and taxes,
at or below 1.25% of the Fund's average net assets. Any reductions or
absorptions made to the Fund by the Manager are subject to recovery within the
following three years, provided the Fund is able to effect such reimbursement
and remain in compliance with applicable expense limitations. The Operating
Expense Agreement has a rolling 10-year term, extendable for one year at the end
of each fiscal year.
As compensation the Fund has accrued a monthly management fee (accrued daily)
based on the average daily net assets of the Fund. The contractual management
fee annual rate was 1.05%. The effective management fee annual rate including
current year accrued fees and recoupment of prior year deferral, but not
including the effect of current year fee deferral or expense absorption; and
management fee annual rate including the effects of fees reduced were 1.78% and
0.81% respectively.
The Manager recouped previously deferred fees and/or absorbed expenses during
the year ended June 30, 1999 of $1,090,011. This amount has been included with
current annual management fees in the Statement of Operations and are part of
the effective management fee shown.
For the year ended June 30, 1999, the Manager has deferred fees and/or absorbed
expenses and has deferred management fees and absorbed expenses subject to
recoupment totaling $1,449,058.
b. Montgomery Asset Management, LLC, serves as the Fund's administrator (the
"Administrator"). The Administrator performs
12
<PAGE>
=======================
The Montgomery
Funds II
-----------------------
Notes
-----------------------
to Financial Statements
services with regard to various aspects of the Fund's administrative operations.
As compensation, the Fund pays the Administrator a monthly fee (accrued daily)
at an annual rate of 0.05% of average daily net assets.
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 who is not an affiliated person will receive an annual
retainer and quarterly meeting fee totaling $55,000 per annum, as well as
reimbursement for expenses, for services as a Trustee of all Trusts advised by
the Manager ($15,000 of which will be allocated to The Montgomery Funds II).
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, 1999, were $164,825,374
and $262,741,042, respectively.
b. At June 30, 1999, cost for federal income tax purposes was $83,639,606,
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 $18,678,814 and $3,593,540, respectively.
c. The schedule of forward foreign-currency exchange contracts at June 30, 1999
was as follows:
Foreign-Currency Net Unrealized
Amount Settlement Date In Exchange for (US$) Depreciation
- --------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Deliver
6,892,382 Mexican Pesos 07/01/99 $ 731,442 $(3,207)
2,383,160 Mexican Pesos 07/02/99 252,909 (1,135)
4,706,669 South African Rand 07/01/99 779,960 (3,026)
---------- -------
Net Unrealized Depreciation $1,764,311 $(7,368)
========== =======
d. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New York,
the Fund, along with other Funds of The Montgomery Funds, The Montgomery Funds
II and The Montgomery Funds III, may for one year starting August 13, 1998,
borrow (consistent with applicable law and its investment policies) up to 10% of
its net asset value, provided that the aggregate funds borrowed do not exceed
$175,000,000. The Fund pays its pro-rata share of the quarterly commitment fee
of 0.08% per annum of the unutilized credit line balance. For the year ended
June 30, 1999, borrowings under this agreement were as follows:
<TABLE>
<CAPTION>
Amount
Outstanding at Average Amount Maximum Average Average Debt
Fund 6/30/99 Outstanding Debt Outstanding Interest Rate Average Shares per Share
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Portfolio $ 200,000 $7,752,941 $ 29,400,000 5.40% 4,101,911 $1.89
</TABLE>
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Transactions in shares of beneficial interest
for the periods indicated below were:
<TABLE>
<CAPTION>
Year Ended 6/30/99 Year Ended 6/30/98
Shares Dollars Shares Dollars
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 111,839 $ 3,452,857 839,837 $ 46,214,845
Issued as reinvestment of dividends 300 8,857 73,789 3,279,907
Redeemed (3,006,528) (103,614,631) (1,075,255) (59,578,508)
- ---------------------------------------------------------------------------------------
Net increase/(decrease) (2,894,389) $(100,152,917) (161,629) $(10,083,756)
- ---------------------------------------------------------------------------------------
</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.
13
<PAGE>
========================
The Montgomery
Funds II
- -----------------------
Notes
- -----------------------
to Financial Statements
5. FOREIGN SECURITIES:
The Fund purchases securities on foreign securities exchanges. Securities of
foreign companies and foreign governments involve risks and considerations not
typically associated with investing in U.S. companies and the U.S. government.
These risks include revaluation of currencies, less-reliable information about
issuers, different securities transactions clearance and settlement practices,
and potential future adverse political and economic developments.
These risks are heightened for investments in emerging markets countries.
Moreover, securities of many foreign companies and foreign governments and their
markets may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies and the U.S. government.
6. CAPITAL LOSS CARRYFORWARDS:
At June 30, 1999, the Fund had available for federal tax purposes unused capital
losses as follows:
Expiring in 2006 Expiring in 2007
--------------------------------------------
$17,750,209 $41,909,046
Under current tax law, net capital and currency losses realized after October
31, 1998, may be deferred and treated as occurring on the first day of the
following fiscal year ended June 30, 1999. The Fund elected to defer losses
totaling $12,920,359 occurring between November 1, 1998, and June 30, 1999. No
losses deferred in prior years were utilized during the current fiscal year.
14
<PAGE>
====================
Montgomery
Institutional Series
--------------------
Independent
Auditors' Report
--------------------
To the Board of Trustees and the Shareholders of The Montgomery Funds II:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio investments, and the related statements of operations and 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, 1999, the results of its operations for the year then ended, the
changes in its net assets and financial highlig hts for each of the two years in
the period then ended, 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 audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perfor m 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 audits, which included
confirmation of securities at June 30, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
The financial highlights of the Fund for the periods preceding July 1, 1997 were
audited by other independent accountants whose report dated August 8, 1997
expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
San Francisco, CA
August 18, 1999
15
<PAGE>
====================
Montgomery
Institutional Series
- --------------------
Tax Information
- --------------------
(Unaudited)
For the fiscal year ended June 30, 1999, foreign income and foreign taxes paid
relating to foreign sources and possessions in the United States on a per share
basis, were as follows:
Foreign Foreign
Income Taxes
- --------------------------------------------------------------------------------
Emerging Markets Portfolio ..................... $1.3369 $0.0769
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.
16
<PAGE>
[GRAPHIC APPEARS HERE]
Invest wisely(SM)
The Montgomery Funds(SM)
101 California Street
San Francisco, CA 94111-9361
- -----------------------
800.232.2197 x6032
- -----------------------
www.montgomeryasset.com
- -----------------------
