<PAGE>
Montgomery Variable Series:
Emerging Markets Fund
Semi-Annual Report
June 30, 1997
[LOGO OF THE MONTGOMERY FUNDS]
Invest wisely.(TM)
The Montgomery Funds
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights
June 30, 1997 (unaudited)
Investment Review
- --------------------------------------------------------------------------------
Q: How did the Fund perform from July 1, 1996, through June 30, 1997?
A: The Fund gained 22.31% over that period, outpacing its benchmark, the IFC
Global Index, by a considerable margin. It also continues to outperform the
index since inception.
Q: What were some of the most positive factors behind that performance?
A: We made some very profitable decisions in terms of both country and stock
selection over the past year.
Our decision in early 1996 to increase the Fund's weighting in Brazil paid
off handsomely throughout the second half of that year and the first half
of this one. Excitement has been growing in the Brazilian stock market over
that country's progress on privatization. The Fund also benefited from
several of our stock choices there. For example, Telebras (the country's
monopoly telephone operator) has had a tremendous performance. There is
huge pent-up demand for telecommunications in Brazil, and we believe
Telebras will benefit from it. The Brazilian market became more volatile in
July 1997, due to concerns about the stability of its currency. We think
the downturn will be short-lived, however, because the strong economic
fundamentals that have been driving Brazil over the past two years are
still in place.
The Fund also profited from its overweighting in Russia relative to its
benchmark index (and to many of our competitors). This market has grown by
leaps and bounds, especially as international investors have begun to
discover it. Both the political and economic situation there appear to be
stabilizing, though of course considerable risk remains. The Russian market
also offers what we believe are phenomenal asset values.
Q: Were there any disappointments?
A: Although we have gradually reduced the Fund's exposure to the Southeast
Asian markets over the past year, its weighting there, though light,
continued to work against us. One of the main factors weighing on these
markets has been the high level of real interest rates in a number of these
countries, such as Malaysia. They've also experienced some growing pains.
Construction companies in Thailand, for example, were a little overzealous
in 1996, and the country is now facing the consequences of the resulting
property glut. That has depressed the Thai stock market, but we strongly
believe that the problem will work itself out in the coming year.
Q: What's your outlook for the emerging markets over the coming year?
A: In Latin America we think Brazil (the region's largest economy) will
continue to drive performance. Mexico, the other major Latin American
economy, appears to be in good shape, too. We are encouraged by the results
of the recent election there, which signal a move toward a democratic
political system.
We have a mixed outlook for Asian markets, but believe that China/Hong Kong
is poised to grow rapidly, with inflation under control. Investors will
undoubtedly watch it carefully in the coming year to see whether China
lives up to its promise of maintaining "one country, two systems" with
respect to Hong Kong.
Emerging Europe should benefit from economic recovery in Germany, a major
trading partner of many countries in the region. As always, politics will
continue to dictate the mood of Middle Eastern stock markets. We see some
dynamic opportunities in North Africa (such as the cement industry in
Egypt), but remain cautious on South Africa, where the economy suffers from
a dangerously low level of foreign reserves, and corporate profits are
being hurt by lower gold prices.
On that note, it's important for investors in the emerging markets to be
prepared at all times for short-term shocks and downturns. These markets
are prone to greater economic and political risks than the United States
and other developed markets, though we believe that they are gradually
becoming more stable on both fronts. And their potential for higher risk
goes hand-in-hand with the potential for greater returns over time.
Q: Why should an investor consider the Montgomery Variable Series: Emerging
Markets Fund right now?
A: We're continually impressed with the strides that developing economies are
making and we expect to see more progress in the future. These countries
are restructuring their economies and laying the foundations for future
growth. What's especially remarkable is that most investors still don't
seem to have discovered them. That creates opportunities for investors who
already recognize both the risks and exceptional long-term potential they
present.
Portfolio Management
Josephine S. Jimenez, CFA
Senior Portfolio Manager
Bryan L. Sudweeks, Ph.D., CFA
Senior Portfolio Manager
Angeline Ee Portfolio Manager
Frank Chiang Portfolio Manager
Fund Performance
Average annual total returns for the periods
ended 6/30/97
Montgomery Variable Series: Emerging Markets Fund
Since inception (2/2/96) 19.88%
One year 22.31%
IFC Global Composite Index
Since (1/31/96) 20.15%
One year 13.83%
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
GROWTH OF A $10,000 INVESTMENT
AMONG MONTGOMERY VARIABLE SERIES: EMERGING MARKET FUND
AND IFC GLOBAL COMPOSITE INDEX
S&P 500 INDEX AND S&P FINANCIAL INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
MONTGOMERY
VARIABLE
SERIES: IFC GLOBAL
Measurement Period EMERGING COMPOSITE
(Fiscal Year Covered) MARKETS FUND INDEX
- --------------------- --------------- ---------
<S> <C> <C>
Measurement Pt-01/01/1996 $100.00 $100.00
FYE 02/01/1996 $ 97.20 $ 99.37
FYE 03/01/1996 $101.00 $100.95
FYE 04/01/1996 $103.30 $108.46
FYE 05/01/1996 $105.80 $106.38
FYE 06/01/1996 $105.60 $107.93
FYE 07/01/1996 $100.50 $101.20
FYE 08/01/1996 $105.00 $103.45
FYE 09/01/1996 $105.10 $104.37
FYE 10/01/1996 $103.10 $102.05
FYE 11/01/1996 $104.70 $103.51
FYE 12/01/1996 $106.79 $102.60
FYE 01/01/1997 $115.32 $109.50
FYE 02/01/1997 $117.82 $114.48
FYE 03/01/1997 $115.92 $112.45
FYE 04/01/1997 $115.42 $112.46
FYE 05/01/1997 $120.23 $113.33
FYE 06/01/1997 $129.15 $120.15
</TABLE>
* The IFC Global Composite Index is comprised of more than 1,200 individual
stocks from 25 developing countries in Asia, Latin America, Middle East,
Africa and Europe.
2
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights (continued)
June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Top Five Countries
(as a percentage of total net assets)
<TABLE>
<S> <C>
Brazil.........................................16.7%
Taiwan......................................... 7.6
Russia......................................... 7.2
Korea.......................................... 7.1
Malaysia....................................... 6.9
Top Ten Holdings
(as a percentage of total net assets)
<S> <C>
Tatneft, Sponsored ADS......................... 2.7%
Electrobras, "B"............................... 2.4
Telebras, ADR.................................. 2.2
Bharat Petroleum Corporation Ltd............... 2.2
Alfa S.A. de C.V............................... 2.1
Hyundai Engineering and Construction Company... 1.9
Banco Bradesco................................. 1.8
Telefonos de Mexico S.A., ADR.................. 1.7
Sonae InvestImentos............................ 1.7
Tan Chong Motor Holdings Berhad................ 1.7
</TABLE>
3
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS-77.1% VALUE
SHARES (NOTE 1)
<C> <S> <C>
ARGENTINA-2.0%
17,724 Banco Frances del Rio de La Plata, ADR (Banks) $ 576,030
48,000 Cresud S.A.+ (Real Estate) 106,577
72,600 Inversiones y Representaciones (Real Estate) 315,859
114,000 Siderar S.A. (Steel) 468,613
18,500 Telefonica de Argentina, Sponsored ADR (Telephone/Networks) 640,562
----------
2,107,641
----------
BRAZIL-5.4%
11,900 Cemig, ADS (Electric Utilities) 609,131
945,000 Cia Saneamento Basico Estado (Water Utilities) 287,920
1,091,000 Electrobas (Electric Utilities) 610,080
29,000 Electrobas, ADR (Electric Utilities) 899,072
580 Electrobas, GDS*** + (Electric Utilities) 81,454
22,000 Souza Cruz S.A. (Tobacco) 231,945
15,600 Telebras, ADR(Telephone/Networks) 2,367,300
3,670,000 Telec Brasileiras-Telebras ON (Telephone/Networks) 497,720
12,000 Usiminas, ADR*** (Steel) 132,750
----------
5,717,372
----------
CHILE-1.2%
8,230 Compania de Telefonos de Chile, ADR (Telecommunications/Wireless) 271,590
22,200 Empresa Nacional Electricidad S.A. (Electric Utilities) 500,888
2,800 Sociedad Quimica y Minera de Chile (Chemicals) 185,150
15,100 Supermercados Unimarc S.A.+(Retail Trade) .283,125
----------
1,240,753
----------
CHINA/HONG KONG - 5.6%
126,000 Beijing Enterprises Holdings Ltd.+ (Holding) 793,670
1,290,000 Beijing Yanhua Petrochemical Company Ltd.+ (Chemicals) 279,736
30,000 Cheung Kong Holdings (Real Estate) 296,232
67,000 China Light and Power Company (Electric Utilities) 379,655
102,000 China Resources Enterprises Ltd. (Holding) 500,303
58,000 Citic Pacific Ltd. (Holding) 362,346
700,000 Guangzhou Investment Company Ltd. (Real Estate). 386,264
550,000 Heilongjiang Electric Power Company Ltd., Class B (Electric Utilities) 440,000
11,400 HSBC Holdings (Banks) 342,855
35,000 Hutchison Whampoa Ltd. (Conglomerates) 302,686
71,000 New World Development Company Ltd. (Holding) 423,399
160,000 New World Infrastructure Ltd+ (Heavy Construction) 452,287
75,000 Shanghai Industrial Holdings Ltd. (Conglomerates) 466,614
20,000 Sun Hung Kai Properties Ltd. (Real Estate) 240,729
45,000 Union Bank of Hong Kong Ltd. (Banks) 130,110
480,000 Zhejiang Expressway Company Ltd.+ (Heavy Construction) 116,479
----------
5,913,365
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS-(CONTINUED) VALUE
SHARES (NOTE 1)
<C> <S> <C>
COLOMBIA-0.4%
38,900 Almacenes Exito S.A. (Retail Trade) $ 132,103
42,000 Bavaria (Food and Beverage) 301,430
----------
433,533
----------
CZECH REPUBLIC-1.7%
8,100 AGB Obevreny Podilovy Fund+ (Mutual Funds) 177,385
11,000 Alpha-Effect+ (Mutual Funds) 239,875
1,800 Komercni Banka, GDR+ (Banks) 37,485
13,000 Komercni Banka, GDR***+ (Banks) 270,725
27,800 Komercni Banka I.F.+ (Mutual Funds) 413,300
33,800 The Czech Value Fund+ (Mutual Funds) 215,644
83,000 Vynosovy I.F.+(Mutual Funds) 419,851
----------
1,774,265
----------
EGYPT-0.8%
30,800 Al-Ahram Beverages Company, GDR***+ (Food and Beverage) 630,630
4,000 Amreya Cement (Cement) 97,447
4,000 Tora Cement (Cement) 101,214
----------
829,291
----------
HUNGARY-0.1%
16,900 Zalakeramia Rt., GDR*** (Building Materials) 132,243
----------
INDIA-5.9%
13,300 Bajaj Auto, Ltd., GDR*** (Auto/Auto Parts) 464,503
21,600 Bajaj Auto, Ltd., GDS (Auto/Auto Parts) 754,380
187,000 Bharat Petroleum Corporation Ltd. (Oil) 2,350,558
19,900 Indian Hotels, GDS (Euro) (Lodging) 472,625
25,000 Indian Hotels, GDS*** (Lodging) 593,750
110,000 Mahangar Telephone Nigam, Ltd. (Telephone/Regional - Local) 933,310
16,700 Tata Engineering & Locomotive Company, Ltd. (Auto/Auto Parts) 256,762
17,600 Videsh Sanchar Nigam Ltd., GDR***+ (Telephone/Long Distance) 366,520
----------
6,192,408
----------
INDONESIA-2.7%
237,000 Bimantara (F) (Conglomerates) 414,165
90,000 Hanjaya Mandala Sampoerna(F)(Tobacco) 343,236
268,000 Lippo Bank(F) (Banks) 275,493
350,000 Lippo Securities** (Diversified Financial Services) 248,252
68,000 London Sumatra Indonesia (Agricultural Commodities) 215,296
280,000 Matahari Putra Prima (F) (Retail Trade) 564,145
510,000 Mulia Industrindo (F) (Glass) 267,373
90,000 Semen Gresik (F) (Building Materials) 201,686
9,100 Telekomunikas Indonesia, ADR (Telephone/Regional - Local) 295,750
----------
2,825,396
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS-(CONTINUED) VALUE
SHARES (NOTE 1)
<C> <S> <C>
ISRAEL-0.8%
12,850 Teva Pharmaceuticals, ADR (Pharmacy/Drugs) $ 832,841
----------
KOREA-7.1%
44,000 Daewoo Corporation (Conglomerates) 357,748
50,000 Dongwon Securities (Securities Brokerage) 658,784
80,000 Hyundai Engineering and Construction Company (Heavy Construction) 2,054,054
28,000 Hyundai Merchant Marine+ (Shipping) 526,577
269 Kookmin Bank (Banks) 5,030
18,700 Korea Electric Power Corporation, ADR (Electric Utilities) 349,456
53,201 Korea Special Opportunities Fund (Mutual Funds) 784,715
9,000 LG Semiconductor Company +(Semiconductor) 350,676
2,580 Pohang Iron & Steel Company, Ltd. (Steel) 267,789
14,000 Pohang Iron & Steel Company, Ltd., ADR (Steel). 448,000
3,640 Samsung Electronics Ltd.(F) (Electronics) 408,425
2,134 Samsung Electronics Ltd. GDS*** (Electronics) 57,479
26 Samsung Electronics Ltd., New, GDS***+ (Electronics) 1,511
1,600 Samsung Electronics Ltd., GDS*** Non-voting (Electronics) 43,096
200,000 SeoulBank+ (Banks) 826,577
16,000 Yukong, Ltd. (Oil) 387,387
----------
7,527,304
----------
MALAYSIA-6.9%
172,000 Arab Malaysian Corporation (Diversified Financial Services) 640,570
67,000 Guinness Anchor Berhad (Food and Beverage) 148,653
44,000 Hong Leong Bank Berhad (Banks) 110,697
128,000 IJM Corporation Berhad (Heavy Construction) 268,780
791,000 IOI Corporation Oxygen, Inc. (Agricultural Commodities) 902,567
173,000 Leader Universal Holdings Berhad (Telecommunications Equipment) 311,181
53,000 Malakoff Berhad (Electric Utilities) 230,983
95,000 New Straits Times (Newspapers/Publishing) 557,052
36,000 Oriental Holdings Berhad (Auto/Auto Parts) 270,998
560,000 Public Bank Berhad(F) (Banks) 874,168
936,000 Tan Chong Motor Holdings Berhad (Auto/Auto Parts) 1,765,198
28,000 Tanjong PLC (Leisure Time) 96,513
48,000 Telekom Malaysia Berhad (Telecommunications/Other) 224,406
128,000 United Engineers Berhad (Heavy Construction) 922,979
----------
7,324,745
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS-(CONTINUED) VALUE
SHARES (NOTE 1)
<C> <S> <C>
MEXICO-6.0%
278,000 Accel, S.A., Series B (Conglomerates) $ 74,856
60,000 Acer Computer Latino America S.A. de C.V.+ (Computers and Office Equipment) 208,367
321,000 Alfa S.A. de C.V. (Conglomerates) 2,185,102
14,400 Bufete Industrial S.A.+ (Heavy Construction) 307,800
185,000 Cifra S.A. de C.V., ADR (Retail Trade) 333,925
6,000 Grupo Modelo S.A. de C.V., Series C (Food and Beverage) 41,522
53,000 Hylsamex S.A., Series B (Steel Products) 272,752
49,000 Industrias Penoles CPO (Metals and Mining). 233,671
66,000 San Luis Corporacion S.A. de C.V. (Metals and Mining) 488,305
38,000 Telefonos de Mexico S.A., ADR (Telephone/Long Distance) 1,814,500
31,500 Vitro S.A., ADR+ (Glass) 354,375
----------
6,315,175
----------
MOROCCO-0.2%
3,836 Banque Marocaine du Commerce Exterieur (Banks) 241,201
2 Banque Marocaine du Commerce Exterieur, GDR*** (Banks) 39
----------
241,240
----------
PERU-0.9%
7,910 Credicorp, Ltd. (Banks) 174,020
10,500 Ferreyros Enrique S.A., ADS*** (Metals and Mining) 253,313
21,000 Telefonica del Peru S.A., Series B, ADR (Telephone/Networks) 549,938
----------
977,271
----------
PHILIPPINES-2.7%
1,796,000 Belle Corporation+ (Real Estate) 524,310
1,288,000 DMCI Holdings+ (Heavy Construction) 424,841
636,000 International Container Terminal Services, Inc.+ (Shipping) 325,523
50,000 La Tondena Distillers, Inc. (Food and Beverage) 120,375
706,000 Metro Pacific Inc., Class B (Conglomerates) 152,571
381,000 Music Semiconductors Corporation+ (Semiconductor) 198,618
851,000 PCI Leasing and Finance, Inc.+ (Diversified Financial Services) 161,321
1,957,200 Petron Corporation (Oil) 497,166
1,700 Philippine Long Distance Telephone, ADR (Telephone/Long Distance) 109,225
2,120 Philippine Long Distance Telephone, GDR (Telephone/Long Distance) 122,960
642,500 Republic Glass (Glass) 58,462
925,000 Uniwide Holdings, Inc.+ (Retail Trade) 182,363
----------
2,877,735
----------
PORTUGAL-2.8%
2,700 Capital Portugal Fund+ (Mutual Funds) 409,319
25,500 Cimpor - Cimentos de Portugal (Building Materials) 594,357
9,000 Electricidad de Portugal+ (Electric Utilities) 165,180
42,300 Sonae Investimentos (Retail Trade) 1,768,769
----------
2,937,625
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS-(CONTINUED) VALUE
SHARES (NOTE 1)
<C> <S> <C>
RUSSIA-6.8%
22,000 Irkutskenegro, ADR (Electric Utilities) $ 379,500
9 Irkutskenegro, RDC***+ (Electric Utilities) 611,100
14,600 LukOil Company, ADR (Oil) 1,136,062
93 Russian Telecom Basket GEC 144A*** (Telephone/Regional - Local) 1,237,131
15,700 Surgutneftegaz, ADR (Oil) 840,931
1,200 Tatneft, ADR+ (Oil) 128,700
26,350 Tatneft, Sponsored ADS***+ (Oil) 2,826,038
----------
7,159,462
----------
SINGAPORE-0.6%
57,000 Keppel Corporation, ORD (Heavy Construction) 192,964
130,000 Sunright Ltd.+ (Electronics) 236,413
210,000 Thakral Corporation Ltd. (Home Appliance) 214,200
----------
643,577
----------
SOUTH AFRICA-4.2%
18,000 Anglovaal, Ltd. (Conglomerates) 480,053
71,300 Barlow, Ltd. (Building Materials) 775,547
60,000 JCI Ltd. (Diversified Financial Services) 461,538
604,882 Lonrho (Conglomerates) 1,295,890
106,600 Sasol, Ltd. (Oil) 1,397,994
----------
4,411,022
----------
TAIWAN-7.6%
88,320 ASE+ (Semiconductor) 335,171
105,000 Bank Sinopac (Banks) 100,279
306,000 China Development Corporation+ (Diversified Financial Services) 1,579,532
324,825 China Steel Corporation (Steel) 343,520
260,000 Compal Electronics+ (Computers and Office Equipment) 1,028,777
127,000 Delta Electronic Industrial (Electrical Equipment) 785,755
235,000 Formosa Chemicals and Fiber Corporation (Apparel and Textiles) 341,511
213,600 Hung Sheng Construction Ltd. (Real Estate) 364,964
471,000 Pacific Construction+ (Heavy Construction) 503,191
150,000 Primax Electronics Ltd. (Computers and Office Equipment) 445,144
171,000 Taiwan Semiconductor Company+ (Semiconductor) 759,658
120,000 United World Chinese Commercial Bank (Banks) 287,050
131,000 Yageo Corporation+ (Electronics) 551,331
6,200 Yageo Corporation, GDR+ (Electronics) 108,500
6,000 Yageo Corporation, GDR***+ (Electronics) 105,000
70,000 Yuanta Securities Corporation (Securities Brokerage) 265,018
76,000 Yue Loong Motor Company (Auto/Auto Parts) 136,691
----------
8,041,092
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS-(CONTINUED) VALUE
SHARES (NOTE 1)
<C> <S> <C>
THAILAND-2.0%
239,800 Electricity Generation Power Company (F) (Electric Utilities) $ 611,538
31,600 Industrial Finance Corporation of Thailand (F) (Securities Brokerage) 41,880
58,400 Pizza Public Company Ltd. (Food and Beverage) 311,936
40,900 PTT Exploration and Production Public Company, Ltd. (F) (Oil) 617,606
7,600 Siam Cement Public Company, Ltd. (F) (Building Materials) 136,739
10,500 Siam Cement Public Company, Ltd. Local, Series 2 (Building Materials) 162,750
138,000 Thai Airways International Public Company, Ltd. (F) (Airlines) 210,602
-----------
2,093,051
-----------
TURKEY-1.6%
3,000,000 Akcansa Cimento A.S. (Cement) 414,072
450,000 Aygaz A.S. (Chemicals) 92,409
2,038,333 Koc Holdings (Holding) 480,334
5,816,000 Turk Sise ve Cam+ (Glass) 368,089
7,300,000 Yapi ve Kredi Bankasi A.S. (Banks) 167,110
9,709,000 Yapi ve Kredi Bankasi A.S. Non-Tradeable Certificates (Banks) 222,256
-----------
1,744,270
-----------
VENEZUELA-1.1%
18,100 Compania Anonima Nacional Telefonos de Venezuela, ADR (Telephone/Networks) 780,563
271,440 Electricidad de Caracas (Electric Utilities) 434,896
-----------
1,215,459
-----------
TOTAL COMMON STOCKS (COST $72,075,481) 81,508,136
-----------
PREFERRED STOCKS-11.7%
BRAZIL-11.3%
185,308,000 Banco Bradesco (Banks) 1,867,625
90,000,000 Banco de Credito Nacional S.A. (Banks) 1,003,205
5,200,000 CESP-Cia Ener Sao Paulo (Electric Utilities) 347,778
25,000,000 Cia Energetica de Minas Gerais (Electric Utilities) 1,288,839
40,583,000 Cia Paranaense de Energi (Electric Utilities) 753,945
400,000 Copene - Petroquimica do Nordests S.A. (Chemicals) 148,251
4,186,000 Electrobas, "B" (Electric Utilities) 2,496,319
396,000 Electropaulo, "B" (Electric Utilities) 115,866
550,000 Itausa Investimentos Itau (Holding) 505,782
15,500,000 Lojas Americanas+ (Retail Trade) 210,209
65,880,000 Odebrecht S.A. (Heavy Construction) 559,939
800,000 Petroleo Brasileiro(Oil) 222,199
44,020,000 Uniao de Bancos Brasileiros (Banks) 1,614,741
39,460 Usiminas (Steel) 439,483
15,700 Vale do Rio Doce (Metals and Mining) 347,236
20,000 Vale do Rio Doce, "B" (Metals and Mining) 0
-----------
11,921,417
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
9
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCKS-(CONTINUED) VALUE
SHARES (NOTE 1)
<S> <C>
KOREA-0.0%#
60 Samsung Electronics Ltd.(F) (Electronics) $ 6,530
-----------
RUSSIA-0.4%
18,900 LukOil Company, ADR (Oil) 482,895
-----------
TOTAL PREFERRED STOCKS (Cost $9,942,879) 12,410,842
-----------
Convertible Bonds-0.7%
Principal Amount
MEXICO-0.4%
$300,000 Alfa S.A. de C.V.,
8.000% due 09/15/00*** (Conglomerates) 428,250
-----------
SOUTH AFRICA-0.1%
100,000 Barlow Ltd.
7.000% due 09/20/04*** (Building Materials) 127,000
-----------
THAILAND-0.2%
150,000 Central Pattana Public Company, Ltd.
2.750% due 04/10/01*** (Real Estate) 137,625
-----------
TOTAL CONVERTIBLE BONDS (COST $597,676) 692,875
-----------
Rights-0.0%#
(Cost $1,223)
Shares
MALAYSIA-0.0%#
5,500 Hong Leong Bank Berhad, Expires 07/21/97+ (Banks) 872
-----------
TOTAL SECURITIES (COST $82,617,259) 94,612,725
-----------
Repurchase Agreements-15.0%
Principal Amount
$7,933,500 Agreement with Bear Stearns, Tri-Party, 6.200% dated 06/30/97,
to be repurchased at $7,934,866, on 07/01/97, collateralized by
$8,092,170 market value of U.S. Government securities, having
various maturities and various interest rates 7,933,500
7,933,500 Agreement with HSBC Securities Inc., Tri-Party, 6.200% dated
06/30/97, to be repurchased at $7,934,866, on 07/01/97,
collateralized by $8,092,183 market value of U.S. Government
securities, having various maturities and various interest rates. 7,933,500
-----------
TOTAL REPURCHASE AGREEMENTS (COST $15,867,000) 15,867,000
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
10
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
VALUE
(NOTE 1)
<S> <C> <C>
TOTAL INVESTMENTS (COST $98,484,259*) 104.5% $110,479,725
OTHER ASSETS AND LIABILITIES (NET) (4.5) (4,776,696)
------ ------------
NET ASSETS 100.0% $105,703,029
====== ============
</TABLE>
- ---------------------------------
* Aggregate cost for Federal tax purposes.
** Illiquid Security or Special Situation Security (See Note 6 to Financial
Statements).
*** Security exempt from registration under Rule 144A of the Securities Act of
1933.
These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
ABBREVIATIONS:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or alien share.
GDR Global Depositary Receipt
GDS Global Depositary Share
ORD Ordinary
RDC Russian Depository Certificate
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
11
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Assets and Liabilities
June 30, 1997 (unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Identified cost $98,484,259) (Note 1)
Securities............................................................ $ 94,612,725
Repurchase agreements................................................. 15,867,000
------------
Total investments.......................................................... 110,479,725
Foreign currency (Cost $521,621)........................................... 521,092
Forward foreign currency exchange contracts:
Forward foreign currency exchange contracts to buy, at value
(Contract cost $1,174,145) (Note 3)................................. 1,169,329
Forward foreign currency exchange contracts to sell (Note 3).......... 260,611
Receivables:
Investment securities sold............................................ 608,537
Shares of beneficial interest sold.................................... 325,232
Dividends............................................................. 291,648
Interest.............................................................. 16,190
Other Assets:
Organization costs (Note 1)........................................... 44,613
------------
Total Assets.......................................................... 113,716,977
LIABILITIES:
Forward foreign currency exchange contracts:
Payable for forward foreign currency exchange
contracts to buy (Note 3)........................................... $1,174,145
Payable for forward foreign currency exchange contracts to sell,
at value (Contract cost $260,611) (Note 3).......................... 260,780
Payables:
Investment securities purchased....................................... 5,794,234
Due to custodian...................................................... 530,882
Management fee........................................................ 108,603
Shares of beneficial interest redeemed................................ 72,475
Organization costs.................................................... 61,485
Trustees' fees and expenses........................................... 1,503
Other accrued liabilities and expenses................................ 9,841
----------
Total Liabilities.......................................................... 8,013,948
------------
NET ASSETS................................................................. $105,703,029
============
NET ASSETS consist of:
Accumulated net investment income.......................................... $ 320,926
Accumulated net realized gain on securities sold, forward foreign
currency exchange contracts and foreign currency transactions......... 337,325
Net unrealized appreciation of investments, forward foreign currency
exchange contracts, foreign currency transactions and other
net assets............................................................ 11,987,625
Shares of beneficial interest.............................................. 82,072
Additional paid-in capital................................................. 92,975,081
------------
NET ASSETS................................................................. $105,703,029
============
Net Asset Value, offering and redemption price per share
($105,703,029 divide by 8,207,205 shares of beneficial interest
outstanding).......................................................... $ 12.88
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
12
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Operations
For the Six Months Ended June 30, 1997 (unaudited)
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $37,535).............. $ 617,085
Interest............................................................. 286,655
-----------
Total Investment Income.............................................. 903,740
EXPENSES:
Management fee (Note 2).............................................. $491,113
Custodian fees....................................................... 80,970
Legal and audit fees................................................. 11,405
Amortization of organization expenses (Note 1)....................... 6,165
Trustees' fees and expenses (Note 2)................................. 3,818
Other................................................................ 32,888
--------
Total Expenses....................................................... 626,359
Fees deferred by Manager (Note 2).................................... (58,766)
-----------
NET EXPENSES......................................................... 567,593
-----------
NET INVESTMENT INCOME................................................ 336,147
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 and 3)
Net realized gain/(loss) on:
Security transactions........................................... 553,214
Forward foreign currency exchange contracts..................... (134,564)
Foreign currencies transactions (Net of foreign capital
gains tax of $16,764)......................................... 20,076
-----------
Net realized gain on investments during the period................... 438,726
-----------
Change in unrealized appreciation/(depreciation) of:
Securities...................................................... 11,368,630
Forward foreign currency exchange contracts..................... (6,755)
Foreign currency transactions and net other assets.............. (447)
Net unrealized appreciation of investments during the period......... 11,361,428
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS...................... 11,800,154
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................. $12,136,301
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
13
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six Months
Ended 06/30/97 For the Period
(unaudited) Ended 12/31/96*
<S> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income........................................................... $ 336,147 $ 68,556
Net realized gain/(loss) on securities, forward foreign currency exchange
contracts and foreign currency transactions during the period............... 438,726 (119,260)
Net unrealized appreciation of securities, forward foreign currency
exchange contracts, foreign currency transactions and net other
assets during the period.................................................... 11,361,428 626,197
------------ -----------
Net increase in net assets resulting from operations............................ 12,136,301 575,493
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income........................................ - (65,918)
BENEFICIAL INTEREST TRANSACTIONS:
Net increase from beneficial interest transactions (Note 4)..................... 66,600,985 25,956,168
------------ -----------
Net increase in net assets...................................................... 78,737,286 26,465,743
NET ASSETS:
Beginning of period............................................................. 26,965,743 500,000
------------ -----------
End of period................................................................... $105,703,029 $26,965,743
============ ===========
Accumulated net investment income/(Accumulated net investment loss)............. $ 320,926 $ (15,221)
============ ===========
</TABLE>
- -------------------------
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
14
<PAGE>
Financial Highlights
Selected Per Share Data for the Period Ended:
<TABLE>
<CAPTION>
06/30/97 12/31/96*
(unaudited)
<S> <C> <C>
Net asset value - beginning of period................................. $ 10.65 $ 10.00
-------- -------
Net investment income................................................. 0.05 0.03
Net realized and unrealized gain on investments....................... 2.18 0.65
-------- -------
Net increase in net assets resulting from investment operations....... 2.23 0.68
Distributions to shareholders:
Distributions from net investment income......................... - (0.03)
-------- -------
Net asset value - end of period....................................... $ 12.88 $10.65
======== =======
Total return**........................................................ 20.94% 6.79%
======== =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).................................. $105,703 $26,966
Ratio of net investment income to average net assets.................. 1.04%+ 0.81%+
Ratio of operating expenses to average net assets..................... 1.75%+ 1.45%+
Portfolio turnover rate............................................... 28% 43%
Average commission rate paid (a)...................................... $ 0.0008 $0.0002
Net investment income/(loss) before deferral of fees and absorption
of expenses by Manager........................................... $ 0.04 $ (0.01)
Operating expense ratio before deferral of fees and absorption of
expenses by Manager.............................................. 1.93%+ 2.47%+
</TABLE>
- -----------------------
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
** Total return represents aggregate total return for the periods 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.
15
<PAGE>
The Montgomery Funds III
Notes to Financial Statements (unaudited)
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 June 30, 1997, the Trust had four
series, the Montgomery Variable Series: Growth Fund, the Montgomery Variable
Series: Emerging Markets Fund, the Montgomery Variable Series: International
Small Cap Fund and the Montgomery Variable Series: Small Cap Opportunities
Fund. The Montgomery Variable Series: Small Cap Opportunities Fund had not
commenced operations as of June 30, 1997.
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: Emerging Markets Fund (the "Fund"). The
Montgomery Variable Series: Growth 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 VALUATION
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. The value of securities denominated in foreign currencies
and traded on foreign exchanges or in foreign markets will be translated
into U.S. dollars at the last price of their respective currency
denomination against U.S. dollars quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance
with policies established in good faith by the Board of Trustees.
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.
c. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may engage in forward foreign currency exchange contracts with
off balance sheet risk in the normal course of investing activities in
order to manage exposure to market risks. Forward foreign currency
exchange contracts are valued at the forward rate and are marked-to-
market daily. The change in market value is recorded by the Fund as an
unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. Forward foreign
currency exchange contracts have been used solely to establish a rate of
exchange for settlement of transactions. Although forward foreign
currency exchange contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In
addition, the Fund could be exposed to risks if the counterparties to
the contracts are unable to meet the terms of their contracts.
16
<PAGE>
The Montgomery Funds III
Notes to Financial Statements (unaudited)
(continued)
d. FOREIGN CURRENCY
Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the exchange rates prevailing at the end
of the period, and purchases and sales of investment securities and
income and expenses are translated on the respective dates of such
transactions. Unrealized gains and losses which result from changes in
foreign currency exchange rates on investments have been included in the
unrealized appreciation/(depreciation) of securities. Net realized
foreign currency gains and losses resulting from movement in exchange
rates include foreign currency gains and losses between trade date and
settlement date on investment securities, transactions, foreign currency
transactions and the difference between the amounts of interest and
dividends recorded on the books of the Fund and the amount actually
received and the portion of foreign currency gains and losses related to
fluctuations in exchange rates between the initial purchase trade date
and subsequent sale trade date.
e. REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions individually or
jointly through a joint repurchase account with other series of the
Trust and affiliated registered investment companies 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.
f. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on a trade-date basis. Realized
gain and loss from securities transactions are recorded on the specific
identified cost basis. Dividend income is recognized on the ex-dividend
date and interest income, including, where applicable, amortization of
discount on short-term investments, is recognized on an accrual basis.
Dividend income on foreign securities is recognized as soon as the Fund
is informed of the ex-dividend date.
g. FEDERAL INCOME TAXES
The Fund has elected and qualified, and it is the intention of the Fund
to continue to qualify, as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Code, and
to make distributions of taxable income to shareholders sufficient to
relieve the Fund from all or substantially all Federal income taxes.
h. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Fund are
amortized on a straight-line basis over a period of five years from
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., and
its sole limited partner is an affiliate of Montgomery Securities. 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.
17
<PAGE>
The Montgomery Funds III
Notes to Financial Statements (unaudited)
(continued)
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:
First $250 Million Over $250 Million
------------------ -----------------
1.25% 1.00%
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 1.75% of
the average daily net assets of 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 six months ended June
30, 1997, the Manager recouped fees of $86,264.
For the six months ended June 30, 1997, the Manager has deferred fees of
$58,766.
As of June 30, 1997, the deferred management fees subject to recoupment
are $58,766.
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
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.
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of investment securities,
other than short-term securities, for the six months ended June 30,
1997, were $74,369,340 and $15,810,946, respectively.
b. At June 30, 1997, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value for federal income tax
purposes were $15,574,948 and $3,579,482, respectively.
The schedule of forward foreign currency exchange contracts at June 30,
1997 was as follows:
<TABLE>
<CAPTION>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO BUY: CONTRACT VALUE DATE VALUE (NOTE 1)
<S> <C> <C>
2,237,752 Mexican Pesos 07/01/97 $ 281,567
1,876,392 South African Commercial Rand 07/01/97 413,576
10,600,216 Philippine Pesos 07/02/97 401,879
1,907,313 Philippine Pesos 07/03/97 72,307
----------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO BUY
(CONTRACT COST $1,174,145) $1,169,329
----------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO SELL:
102,079 Brazilian Real 07/01/97 $ 94,821
204,023 Malaysian Ringgit 07/01/97 80,833
659,518 Hong Kong Dollar 07/07/97 85,126
----------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO SELL
(CONTRACT COST $260,611) $ 260,780
----------
</TABLE>
c. Under an unsecured Revolving Credit Agreement with DeutscheBank (New
York), the Montgomery Variable Series: Emerging Markets Fund, along with
other funds of Montgomery Funds I, Montgomery Funds II and Montgomery
Funds III, may for one year starting August 6, 1996, borrow (consistent
with applicable law and its investment policies) up to 10% of its net
asset value, provided that the aggregate principal amount of outstanding
loans under the agreement to all Funds does not exceed $300,000,000. For
the six months ended June 30, 1997, there were no borrowings under this
agreement.
18
<PAGE>
The Montgomery Funds III
Notes to Financial Statements (unaudited)
(continued)
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>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1997 DECEMBER 31, 1996*
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares Sold 7,387,214 $86,655,259 2,724,011 $28,483,626
Issued as Reinvestment of Dividends - - 6,363 65,918
Shares Redeemed (1,712,001) (20,054,274) (248,382) (2,593,376)
---------------------------- ------------------------
Net Increase 5,675,213 $66,600,985 2,481,992 $25,956,168
============================ ========================
</TABLE>
- ---------------
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
5. FOREIGN SECURITIES
The Fund purchases securities in emerging market countries. Securities of
foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies and
the U.S. government. These risks include re-evaluation of currencies, less
reliable information about issuers, differences in the clearance and
settlement of securities transactions practices, and future adverse
political and economic developments. These risks are heightened for
investments in emerging market countries. Moreover, securities of many
foreign companies and foreign governments and their markets may be less
liquid and their prices more volatile than those securities of comparable
U.S. companies and the U.S. government.
6. SPECIAL SITUATION SECURITIES
The following security held by the Fund on June 30, 1997, is generally an
unrestricted security for which a reliable market price can be established.
The security is valued at its market price. However, because the process of
re-registering foreign securities in the Fund's name can take more than
seven days, the following shares of this security was deemed temporarily
restricted or illiquid in the hands of the Fund at June 30, 1997. The Fund
bears the cost of re-registering this security:
<TABLE>
<CAPTION>
ACQUISITION 6/30/97 VALUE % OF TOTAL
SECURITY DATE SHARES MARKET VALUE PER SHARE COST NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
Lippo Securities 06/25/96 140,000 $99,302 $0.71 $102,608 0.09%
</TABLE>
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1996, the Fund had available for Federal income tax purposes
unused capital losses of $84,636 expiring in 2004.
Under current tax law, net short-term capital losses realized after October
31 may be deferred and treated as occurring on the first day of the
following fiscal year. For the fiscal year ended December 31, 1996, the Fund
elected to defer net short-term capital losses of $14,382 occurring between
November 1, 1995 and December 31, 1996.
Such deferred losses will be treated as arising on the first day of the
fiscal year ended December 31, 1997.
8. SUBSEQUENT EVENT
On March 25, 1997, Montgomery Securities, the Manager and CAM Acquisition
LLC ("CAM"), a newly organized subsidiary of Commerzbank Aktiengesellschaft,
entered into an agreement providing for the transfer of substantially all
the assets composing the Manager's business to CAM. On June 23, 1997, the
shareholders of the Fund approved a new Investment Management Agreement with
CAM (renamed Montgomery Asset Management, LLC) that became effective upon
the closing of the Manager's transaction with CAM. Such transaction closed
on July 31, 1997.
19
