<PAGE>
Montgomery Variable Series:
Growth Fund
Annual Report
December 31, 1996
[LOGO OF MONTGOMERY FUNDS APPEARS HERE]
THE MONTGOMERY FUNDS
Invest wisely.
<PAGE>
Montgomery Variable Series: Growth Fund
Portfolio Highlights
December 31, 1996
- --------------------------------------------------------------------------------
Investment Review
Q. How did the Montgomery Variable Series: Growth Fund perform since its
inception on February 9, 1996?
A. The Montgomery Variable Series: Growth Fund kept pace with the market
during the year and continues to lead the index by a wide margin.
Q. Where was the Fund overweight during this period? Do you still have a
favorable outlook for these areas?
A. The Montgomery Variable Series: Growth Fund was overweight in three
sectors in the second half of 1996: basic materials, such as paper and
forest products; consumer cyclicals like retail, lodging and building
materials; and technology. Each of these sectors is sensitive to the
economic cycle. Although the economy is entering its sixth year of
expansion, we are optimistic about continued growth in the U.S. economy
and about the relative values offered by the stocks we own in these
sectors.
A recent survey of U.S. paper and forest products companies, for
instance, revealed that over the next three years they plan to increase
capacity only marginally; many observers, in fact, expect the rate of
expansion to near an all-time low. Industry investors have also declined
significantly in all product areas over the past six months. At the same
time, demand has risen considerably, resulting in significantly higher
industry operating rates. We believe these conditions should lead to an
upturn in prices for paper and forest products fairly soon. On top of
these improving fundamentals, relative stock prices in the group
recently hit a 3-year low.
These trends represent the sort of important fundamental change that we
look for and we believe they should help drive these stocks up in the
near future.
Q. Isn't it unusual to find sectors such as basic industries and building
materials in a growth fund?
A. True, but we believe "growth is where you find it." A key element of
our process and our discipline is that we're willing to look at
companies and industries other portfolios might overlook because these
areas are not considered traditional growth. This can create a
meaningful advantage for our shareholders. Remember, we are trying to
find companies combining the best future growth prospects at the most
reasonable prices .
Q. At the end of 1996, four stocks in the Montgomery Variable Series:
Growth Fund each made up more that 3% of assets. Two of them are Dayton
Hudson and L.M. Ericsson. How did they perform during the second half of
1996?
A. Both companies' stocks outperformed the overall market and our outlook
for them remains favorable. Dayton Hudson rose about 14% in the last
half of 1996, after it reported earnings that surpassed analyst
expectations and
Portfolio Manager
- -------------------------------------------------
<TABLE>
<S> <C>
Roger W. Honour....... Senior Portfolio Manager
Andrew Pratt.......... Portfolio Manager
Kathryn M. Peters..... Portfolio Manager
- -------------------------------------------------
</TABLE>
Fund Performance
- -------------------------------------------------
Aggregate total returns for the period
ended 12/31/96
- -------------------------------------------------
Montgomery Variable Series:
Growth Fund
<TABLE>
<S> <C>
Since inception (2/9/96)............... 27.22%
S&P 500 Index
Since (1/31/96)........................ 18.91%
- -------------------------------------------------
</TABLE>
Past performance is not guaranteed 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 orginal cost.
- -------------------------------------------------
Growth of a $10,000 Investment
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Montgomery Variable Series: Growth Fund S&P 500 index
--------------------------------------- -------------
<S> <C> <C>
1 1/96 10000
2 2/9/96 10000
3 2/96 10040 10093
4 3/96 10437 10190
5 4/96 11081 10340
6 5/96 11766 10607
7 6/96 11508 10647
8 7/96 11002 10177
9 8/96 11448 10392
10 9/96 11954 10976
11 10/96 12272 11278
12 11/96 12817 12131
13 12/96 12722 11890
</TABLE>
1
<PAGE>
Montgomery Variable Series: Growth Fund
Portfolio Highlights
December 31, 1996
its earnings estimates were revised upward. Ericsson's performance was
even more exceptional, registering 40% gain in the last half of the
year.
It's important to note that both stocks became large positions in the
Montgomery Variable Series: Growth Fund through capital appreciation.
Q. How will you manage the Montgomery Variable Series: Growth Fund going
forward?
A. As in the past, we will follow our multidisciplined methodology and seek
to creatively provide shareholders with the best available returns,
while at the same time taking the least number of necessary risks. Our
investment decisions are guided by companies' business fundamentals, not
by trying to guess the next hot trend or sector of the market. We invest
as we find opportunities that meet our disciplines, and we believe this
approach will serve our shareholders over the long term.
<TABLE>
<CAPTION>
Top Five Industries
(as a percentage of net assets)
<S> <C>
Software Systems.............................................. 10.1%
Telecommunications Equipment.................................. 9.1
Retail Trade.................................................. 7.9
Pulp and Paper................................................ 7.8
Banks/Savings and Loan........................................ 5.7
<CAPTION>
Top Ten Holdings
(as a percentage of net assets)
<S> <C>
Simulation Sciences, Inc...................................... 7.0%
Canadian National Railway Company............................. 3.6
Dayton Hudson Corporation..................................... 3.3
Ericsson (L.M.) Telephone Company, Class B, ADR............... 3.2
International Paper Company................................... 3.0
Octel Communications Corporation.............................. 3.0
Golden West Financial Corporation............................. 3.0
Willamette Industries, Inc.................................... 3.0
Masco Corporation............................................. 2.3
Sybase, Inc................................................... 2.3
</TABLE>
2
<PAGE>
Montgomery Variable Series: Growth Fund
- --------------------------------------------------------------------------------
Portfolio Investments
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks--83.2%
Shares Value (Note 1)
<S> <C>
Aerospace/Defense--1.0%
900 Gulfstream Aerospace Corporation+ $ 21,825
--------
Airlines--2.1%
1,000 Federal Express Corporation+ 44,500
--------
Apparel and Textiles--1.2%
375 VF Corporation 25,312
--------
Auto/Auto Parts--1.6%
600 General Motors Corporation 33,450
--------
Banks/Savings and Loan--5.7%
400 BankAmerica Corporation 39,900
175 Citicorp 18,025
1,000 Golden West Financial Corporation 63,125
--------
121,050
Building Materials--2.3%
1,375 Masco Corporation 49,500
--------
Business Services--5.4%
1,575 AccuStaff Inc.+ 33,272
250 Computer Sciences Corporation + 20,531
700 Forrester Research, Inc.+ 18,112
750 Netscape Communications Corporation+ 42,656
--------
114,571
--------
Conglomerates--1.1%
450 Tyco International Ltd. 23,794
--------
Diversified Financial Services--0.4%
200 Norwest Corporation 8,700
--------
Electronics--1.1%
300 Raychem Corporation 24,038
--------
Food and Beverage--2.7%
1,300 Fleming Companies, Inc. 22,425
200 Unilever N.V., ADR 35,050
--------
57,475
--------
Health Care--0.6%
200 Oxford Health Plans, Inc.+ 11,713
--------
Leisure Time--1.4%
900 GTECH Holdings Corporation+ 28,800
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Montomgery Variable Series: Growth Fund
Portfolio Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks--(continued)
Shares Value (Note 1)
<S> <C>
Lodging--2.6%
325 HFS Inc.+ $ 19,419
1,300 Interstate Hotels Company+ 36,725
---------
56,144
---------
Machinery and Tools--1.1%
1,000 Measurex Corporation 24,000
---------
Metals and Mining--1.5%
1,050 Freeport-McMoRan Copper and Gold, Inc., Series B 31,369
---------
Newspapers/Publishing--0.9%
1,000 World Color Press, Inc.+ 19,250
---------
Oil--3.7%
600 Amerada Hess Corporation 34,725
525 Belco Oil & Gas Corporation+ 14,372
1,000 Union Pacific Resources Group, Inc. 29,250
---------
78,347
---------
Oilfield Equipment--3.2%
350 Schlumberger Ltd. 34,956
725 Tidewater Inc. 32,806
---------
67,762
---------
Pipelines--0.6%
300 Enron Corporation 12,937
---------
Pulp and Paper--7.8%
1,200 Boise Cascade Corporation 38,100
1,600 International Paper Company 64,600
900 Willamette Industries, Inc. 62,888
---------
165,588
---------
Railroad--3.6%
2,000 Canadian National Railway Company 76,000
---------
Real Estate--0.5%
200 Starwood Lodging Trust 11,025
---------
Retail Trade--7.9%
1,800 Dayton Hudson Corporation 70,650
300 Gucci Group 19,163
1,050 Nordstrom, Inc. 37,209
400 Saks Holdings, Inc.+ 10,800
600 Staples, Inc.+ 10,837
400 TJX Companies, Inc. 18,950
---------
167,609
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Montomgery Variable Series: Growth Fund
Portfolio Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Common Stocks--(continued)
Shares Value (Note 1)
<S> <C>
Semiconductors--2.2%
650 Analog Devices Inc.+ $ 22,019
400 Texas Instruments, Inc. 25,500
----------
47,519
----------
Software Systems - 10.1%
1,000 Macromedia Inc.+ 18,125
10,000 Simulation Sciences, Inc.+ 148,125
2,875 Sybase, Inc.+ 47,977
----------
214,227
----------
Technology--Miscellaneous - 1.8%
3,700 Avid Technology Inc.+ 38,619
----------
Telecommunications Equipment--9.1%
2,250 Ericsson (L.M.) Telephone Company, Class B, ADR 67,922
250 General Instrument Corporation New+ 5,406
550 Northern Telecom Ltd. 34,031
3,700 Octel Communications Corporation+ 64,288
850 PictureTel Corporation+ 21,994
----------
193,641
----------
Total Common Stocks (Cost $1,629,615) 1,768,765
----------
<CAPTION>
Repurchase Agreements--34.9%
Principal Amount
<S> <C>
$371,500 Agreement with Bear Stearns Companies Inc. Tri-Party 7.500% dated
12/31/96, to be repurchased at $371,655, on 01/02/97, collateralized
by $381,812 market value of U.S. Government securities, having
various maturities and various interest rates 371,500
----------
371,500 Agreement with Chase Manhattan Corporation Tri-Party, 7.500% dated
12/31/96, to be repurchased at $371,655, on 01/02/97, collateralized by
$378,941 market value of U.S. Government securities, having various
maturities and various interest rates 371,500
----------
Total Repurchase Agreements (Cost $743,000) 743,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
Total Investments (Cost $2,372,615*) 118.1 % 2,511,765
Other Assets and Liabilities (Net) ( 18.1) (385,070)
-------- ----------
Net Assets 100.0 % $2,126,695
======== ==========
</TABLE>
- ----------------------
* Aggregate cost for Federal tax purposes is $2,379,803.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviation:
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Montgomery Variable Series: Growth Fund
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
Assets:
<S> <C> <C>
Investments in securities, at value (Identified cost $2,372,615)(Note 1)
Securities.............................................. $1,768,765
Repurchase agreements................................... 743,000
-----------
Total investments....................................... 2,511,765
Cash............................................................ 194
Receivables:
Investment securities sold.............................. 11,748
Expenses absorbed by Manager (Note 2)................... 4,067
Shares of beneficial interest sold...................... 2,915
Dividends............................................... 875
Interest................................................ 154
Other Assets:
Organization costs (Note 1)............................. 50,870
----------
Total Assets.................................................... 2,582,588
Liabilities:
Payables:
Investment securities purchased......................... $345,816
Organization cost....................................... 60,235
Shares of beneficial interest redeemed.................. 36,949
Trustees' fees and expenses............................. 1,500
Custody fees............................................ 772
Other accrued liabilities and expenses.................. 10,621
--------
Total Liabilities............................................... 455,893
----------
Net Assets...................................................... $2,126,695
==========
Net Assets consist of:
Accumulated net realized gain on securities sold................ $ 13,765
Net unrealized appreciation of investments...................... 139,150
Shares of beneficial interest................................... 1,725
Additional paid-in capital...................................... 1,972,055
----------
Net Assets...................................................... $2,126,695
==========
Net Asset Value, offering and redemption price per share
($2,126,695 divided by 172,459 shares of beneficial interest
outstanding).................................................... $ 12.33
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Montgomery Variable Series: Growth Fund
Statement of Operations
For the Period Ended December 31, 1996*
<TABLE>
<CAPTION>
Net Investment Income:
<S> <C> <C>
Interest........................................................ $ 20,333
Dividends (Net of foreign withholding taxes of $75)............. 6,327
----------
Total Investment Income......................................... 26,660
Expenses:
Legal and audit fees............................................ $29,179
Amortization of organization expenses (Note 1).................. 11,197
Management fee (Note 2)......................................... 10,449
Trustees' fees and expenses (Note 2)............................ 9,795
Custodian fees.................................................. 3,758
Transfer agency fees............................................ 1,021
Other........................................................... 7,481
-------
Total Expenses.................................................. 72,880
Fees deferred and expenses absorbed by Manager (Note 2)......... (72,827)
----------
Net Expenses.................................................... 53
----------
Net Investment Income........................................... 26,607
----------
Net Realized and Unrealized Gain on Investments (Notes 1 and 3):
Net realized gain on investments during the period.............. 74,537
Net unrealized appreciation of investments during the period.... 139,150
----------
Net Realized and Unrealized Gain on Investments................. 213,687
----------
Net Increase in Net Assets Resulting from Operations............ $ 240,294
==========
Statement of Changes in Net Assets
For the Period Ended December 31, 1996*
Net Increase in Net Assets Resulting from Operations:
Net investment income........................................... $ 26,607
Net realized gain on investments during the period.............. 74,537
Net unrealized appreciation of investments during the period.... 139,150
----------
Net increase in net assets resulting from operations............ 240,294
Distributions to Shareholders:
Distributions from net investment income........................ (26,562)
Distributions from net realized gains on investments............ (60,772)
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (Note 4)..... 1,854,346
----------
Net increase in net assets...................................... 2,007,306
Net Assets:
Beginning of period............................................. 119,389
----------
End of period................................................... $2,126,695
----------
</TABLE>
- --------------------
* Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Montgomery Variable Series: Growth Fund
Financial Highlights
Selected Per Share Data for the Period Ended:
<TABLE>
<CAPTION>
12/31/96*
<S> <C>
Net asset value--beginning of period........................................... $ 10.08
-------
Net investment income.......................................................... 0.15
Net realized and unrealized gain on investments................................ 2.59
-------
Net increase in net assets resulting from investment operations................ 2.74
Distributions to Shareholders:
Distributions from net investment income............................... (0.15)
Distributions from net realized gains on investments................... (0.34)
-------
Total Distributions.................................................... (0.49)
-------
Net asset value - end of period................................................ $ 12.33
=======
Total return **................................................................ 27.22 %
=======
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000's)........................................... $ 2,127
Ratio of net investment income to average net assets........................... 2.55 %+
Ratio of operating expenses to average net assets.............................. 0.01 %+
Portfolio turnover rate........................................................ 78 %
Average commission rate paid (a)............................................... $0.0520
Net investment loss before deferral of fees and absorption
of expenses by Manager................................................. $ (0.27)
Operating expense ratio before deferral of fees and absorption
of expenses by Manager................................................. 6.98 %+
</TABLE>
* Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a)Average commission rate paid per share of securities purchased and sold
by the Fund.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
1. Significant Accounting Policies:
The Montgomery Funds III (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-
end management investment company. As of December 31, 1996, the Trust had
three series, the Montgomery Variable Series: Growth Fund, the Montgomery
Variable Series: Emerging Markets Fund and the Montgomery Variable Series:
International Small Cap Fund.
The Trust was organized as a Delaware business trust on August 24, 1994.
Prior to the public offerings of shares of the Funds, a limited number of
shares were sold to Montgomery Asset Management, L.P. and/or affiliated
persons of Montgomery Asset Management in private placement offerings.
Otherwise, the Funds had no significant operations prior to February 2,
1996, the date on which the Montgomery Variable Series: Emerging Markets
Fund commenced operations (i.e., commenced selling shares to the public).
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Information presented in these financial statements pertains to the
Montgomery Variable Series: Growth Fund (the "Fund"). The Montgomery
Variable Series: Emerging Markets Fund and the Montgomery Variable Series:
International Small Cap Fund are presented under separate covers.
The following is a summary of significant accounting policies.
a. Portfolio Valuations
The Fund's securities are valued using current market valuations:
either the last reported sales price or, lacking any reported sales,
and in the case of fixed income securities, the mean between the
closing bid and asked prices. Securities for which market quotations
are not readily available (including restricted securities which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith by or under the supervision of the Trust in
accordance with methods which are authorized by the Trust's Board of
Trustees.
Short term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-
term securities with maturities of 60 days or less are carried at
amortized cost, which approximates market value.
b. Dividends and Distributions
Dividends, if any, from net investment income of the Fund are declared
and paid at least 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
characterizations of distributions made by the Fund.
Permanent differences incurred during the year ended December 31,
1996, resulting from differences in book and tax accounting have been
reclassified at year end to reflect a decrease to undistributed net
investment income of $773 and an increase to paid-in capital of $773.
c. Repurchase Agreements
The Fund may engage in repurchase agreement transactions individually
or jointly through a joint repurchase account with other series of the
Trust pursuant to a joint repurchase agreement. Under the terms of a
typical repurchase agreement, the Fund writes a financial contract
with a counterparty and takes possession of a government debt
obligation as collateral. The Fund also agrees with the counterparty
to allow the counterparty to repurchase the financial contract at a
specified date and price, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's
holding period. The value of the collateral is at least equal at all
times to the total amount of the repurchase obligations, including
interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There 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 while 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.
9
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
d. Securities Transactions and Investment Income
Securities transactions are recorded on a trade-date basis. Realized
gain and loss from securities transactions are recorded on the
specific identified cost basis. Dividend income is recognized on the
ex-dividend date and interest income, including, where applicable,
amortization of discount on short-term investments, is recognized on
an accrual basis.
e. Federal Income Taxes
It is the intention of the Fund to qualify and elect treatment as a
regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), by complying with the
provisions available to certain investment companies, as defined in
applicable sections of the Code, and to make distributions of taxable
income to shareholders sufficient to relieve the Fund from all or
substantially all Federal income taxes.
f. 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
commencement of operations.
2. Management Fees and Other Transactions with Affiliates:
a. Montgomery Asset Management, L.P. is the Fund's Manager
(the "Manager"). The Manager, a California limited partnership, is an
investment adviser registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"). The general partner of the Manager is Montgomery
Asset Management, Inc. Montgomery Securities and certain of its
principals are affiliates of the Manager. Under the Advisers Act, both
Montgomery Asset Management, Inc. and Montgomery Securities may be
deemed controlling persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery
Securities, it is expected that the Manager may draw upon the research
and administrative resources of Montgomery Securities at its
discretion in a manner consistent with applicable regulations.
Pursuant to the 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) at the following annual rates based upon the average
daily net assets of the Fund:
<TABLE>
<CAPTION>
First $500 Million Next $500 Million Over $1 Billion
------------------ ----------------- ---------------
<S> <C> <C>
1.00% 0.90% 0.80%
</TABLE>
The Manager has agreed to reduce some or all of its management fee or
absorb the Fund expenses if necessary to keep the Fund's annual
operating expenses, exclusive of interest or taxes, at or below 1.25%
of the average daily net assets of the Fund or the maximum allowed by
applicable state expense limitations for the Fund.
Any reductions or absorptions made for the Fund by the Manager of 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 period ended December 31, 1996, the Manager has deferred fees
of $10,449 and absorbed expenses of $62,378.
As of December 31, 1996, the deferred management fees and absorbed
expenses subject to recoupment are $72,827.
b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or Montgomery Securities, "affiliated persons" as
defined in the 1940 Act. Each Trustee 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 services as a Trustee of all three Trusts advised by the Manager
($5,000 of which will be allocated to the Montgomery Funds III).
c. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees.
d. For the period ended December 31, 1996, the Fund incurred total
brokerage commissions of $2,368 of which $9 was paid to its
affiliates.
10
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
3. Securities Transactions:
a. The aggregate amounts of purchases and sales of investment securities,
other than short-term securities, for the period ended December 31,
1996, were $2,142,641 and $593,575, respectively.
b. At December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value for federal income tax
purposes were $201,050 and $69,088, respectively.
c, Under an unsecured Revolving Credit Agreement with Deutsche Bank (New
York), the Montgomery Variable Series: Growth Fund, along with other
funds of the Montgomery Funds I, Montgomery Funds II and Montgomery
Funds III, may for one year starting August 6, 1996, borrow
(consistent with applicable law and its investment policies) up to 10%
of its net asset value, provided that the aggregate principal amount
of outstanding loans under the agreement to all Funds does not exceed
$300,000,000. For the period ended December 31, 1996, there were no
borrowings under this agreement.
4. Transactions in Shares of Beneficial Interest:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the period indicated below were:
<TABLE>
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C>
Shares Sold 333,351 $3,946,116
Issued as Reinvestment
of Dividends 7,141 87,335
Shares Redeemed (179,876) (2,179,105)
--------- -----------
Net Increase 160,616 $1,854,346
========= ===========
</TABLE>
- --------------------
* Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.
11
<PAGE>
To the Board of Trustees and the Shareholders of The Montgomery Funds III:
We have audited the accompanying statement of assets and liabilities,
including the portfolio investments, of the Montgomery Variable Series:
Growth Fund (the "Fund") as of December 31, 1996, and the related statement
of operations, statement of changes in net assets and the financial
highlights for the period February 9, 1996 (commencement of operations) to
December 31, 1996. These financial statements and financial highlights are
the responsibility of the Fund's management, Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards, Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement, An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at December 31, 1996, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund as of
December 31, 1996, the results of its operations, the changes in its net
assets and its financial highlights for the period February 9, 1996
(commencement of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche, LLP.
San Francisco, California
January 31, 1997
12
<PAGE>
The Montgomer Funds III
Tax Information (Unaudited)
Fiscal Year Ended December 31, 1996
Of the distributions made by the Fund, the corresponding percentage
represents the amount of the distribution which will qualify for the
dividends received deduction available to corporate shareholders:
Montgomery Variable Series: Growth Fund................................... 5.66%
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