<PAGE>
Montgomery Variable Series:
Growth Fund
Semi-Annual Report
June 30, 1998
[LOGO]
Invest Wisely.(R)
The Montgomery Funds
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO HIGHLIGHTS
JUNE 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE YEAR ENDED JUNE 30, 1998?
A: For the year ended June 30, 1998, the Fund gained 19.84%. Although
this performance was strong in absolute terms, it lagged the Standard
& Poor's 500 Index. Market breadth has continued to narrow, with the
largest companies in the stock market generating the majority of
returns. A significant portion of S&P 500 returns were driven by a few
of the biggest large-capitalization stocks. Just six stocks--
Microsoft, GE, Lucent, Wal-Mart, Coca Cola and Pfizer--accounted for
more than 25% of the performance of the index year-to-date through
June 30. More than half of year-to-date index performance was driven
by only 18 stocks. Although people have been willing to pay high
prices for the perception of high-quality predictable earnings, we
believe that over the long term it is unwise to overpay for a company,
and thus valuation continues to be central to our analysis.
Because we focus on buying stocks of companies with the best forward
growth potential and the most reasonable valuations, our discipline
directed us away from many of the year's top-performing stocks, which
have very high price-to-earnings ratios but low growth rates. Although
this put us at a disadvantage relative to the S&P 500 over the past 12
months, we believe that in the long run our approach will generate
strong returns for our investors.
Q: CAN YOU DISCUSS A PORTFOLIO COMPANY THAT IS AN EXAMPLE OF YOUR
INVESTMENT PROCESS?
A: Dow Chemical is a good example of a stock that has not participated in
this year's market growth. Dow is a $20 billion global company that
has made meaningful changes in its business mix to improve returns and
consistency to shareholders across the cycle, yet it goes unrecognized
and unrewarded. In the previous cycle, following the 1989 peak,
commodity prices dropped 6% and Dow's earnings declined by 63%. In
this cycle, since the 1995 peak, commodity prices have dropped 11% and
Dow's earnings are down only modestly. Dow's stock has a 6% annualized
return over the past four years, compared with 28% for the S&P 500.
Moreover, the company continues to improve its business mix, make
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
Montgomery Variable Series: Growth Fund S&P 500 Index
<S> <C> <C>
1/96 $10,000
2/9/96 $10,000
2/96 $10,040 $10,093
3/96 $10,437 $10,190
4/96 $11,081 $10,340
5/96 $11,766 $10,607
6/96 $11,508 $10,647
7/96 $11,002 $10,177
8/96 $11,448 $10,392
9/96 $11,954 $10,976
10/96 $12,272 $11,279
11/96 $12,817 $12,131
12/96 $12,722 $11,890
1/97 $13,166 $12,633
2/97 $13,125 $12,732
3/97 $12,671 $12,210
4/97 $13,145 $12,938
5/97 $14,229 $13,729
6/97 $14,807 $14,339
7/97 $16,354 $15,480
8/97 $16,179 $14,613
9/97 $17,066 $15,413
10/97 $16,458 $14,899
11/97 $16,499 $15,588
12/97 $16,357 $15,856
1/98 $15,956 $16,031
2/98 $17,495 $17,187
3/98 $18,416 $18,066
4/98 $18,622 $18,251
5/98 $17,972 $17,938
6/98 $17,744 $18,666
</TABLE>
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger W. Honour...................................... Senior Portfolio Manager
Andrew Pratt................................................ Portfolio Manager
Kathryn M. Peters........................................... Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Average annual total returns for the
periods ended 6/30/98
- --------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES:
GROWTH FUND
Since inception (2/9/96).............................................. 27.13%
One Year.............................................................. 19.84%
S&P 500 INDEX
Since 1/31/96......................................................... 29.47%
One Year.............................................................. 30.20%
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
The Standard & Poor's 500 Index is composed of 500 widely held common stocks
listed on the NYSE, AMEX, and OTC market.
1
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO HIGHLIGHTS (continued)
JUNE 30, 1998
- --------------------------------------------------------------------------------
strategic acquisitions and divestitures, and buy back shares. Dow's
senior management have most of their net worth invested in Dow stock,
which provides them with meaningful motivation to improve shareholder
returns.
Q: FOR NEWER SHAREHOLDERS, WOULD YOU BRIEFLY DISCUSS YOUR INVESTMENT
PROCESS?
A: We use proprietary, quantitative screening techniques to help identify
long-term, positive fundamental change in a company's business and its
expected earnings. We then conduct fundamental analysis to determine
the validity and sustainability of the change. Finally, we apply our
valuation criteria to determine the future potential for the share
price. Our goal is to build portfolios of companies that have
sustainable growth prospects and are attractively valued.
TOP FIVE INDUSTRIES
(AS A PERCENTAGE OF NET ASSETS)
<TABLE>
---------------------------------------------------------
<S> <C>
Pulp and Paper................................ 7.3%
Telecommunications Equipment.................. 6.6
Software Systems.............................. 6.1
Retail Trade.................................. 5.8
Banks/Savings and Loan........................ 5.6
---------------------------------------------------------
</TABLE>
TOP TEN HOLDINGS
(AS A PERCENTAGE OF NET ASSETS)
<TABLE>
--------------------------------------------------------
<S> <C>
Nordstrom, Inc.................................... 3.8%
Avid Technology Inc............................... 3.3
Golden West Financial Corporation................. 3.2
Snyder Communications Inc......................... 2.9
Donnelley (R.R.) & Sons Company................... 2.7
Comverse Technology............................... 2.5
Canadian National Railway Company................. 2.3
Ericsson (L.M.) Telephone Company, Class B, ADR... 2.3
Boise Cascade Corporation......................... 2.1
Structural Dynamics Research Corporation.......... 2.0
--------------------------------------------------------
</TABLE>
2
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO INVESTMENTS
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS - 91.1% VALUE
SHARES (NOTE 1)
<S> <C> <C>
AIRLINES - 1.7%
4,250 FDX Corporation $ 266,687
-----------
APPAREL AND TEXTILES - 0.7%
2,050 VF Corporation 105,575
-----------
AUTO/AUTO PARTS - 2.0%
3,350 General Motors Corporation 223,822
1,700 PACCAR, Inc 88,666
-----------
312,488
-----------
BANKS/SAVINGS AND LOAN - 5.6%
1,500 BankAmerica Corporation 129,656
1,625 Citicorp 242,531
4,800 Golden West Financial Corporation 510,300
-----------
882,487
-----------
BROADCASTING/ADVERTISING - 2.9%
10,600 Snyder Communication Inc. 466,400
-----------
BUILDING MATERIALS - 1.6%
4,125 Masco Corporation 249,563
-----------
BUSINESS SERVICES - 4.7%
8,500 Caribiner International Inc 148,750
7,394 Cendant Corporation 154,350
2,800 Computer Sciences Corporation 179,200
6,700 Electronic Data Systems Corporation 268,000
-----------
750,300
-----------
CHEMICALS - 3.9%
3,050 Dow Chemical Company 265,891
2,100 Eastman Chemical Company 130,725
6,250 Nalco Chemical Company 219,531
-----------
616,147
-----------
COMPUTERS AND OFFICE EQUIPMENT - 1.3%
8,500 Data General Corporation 126,969
6,700 Sequent Computer Systems 81,866
-----------
208,835
-----------
CONGLOMERATES - 1.7%
4,100 Canadian Pacific, Ltd. 116,338
2,550 Tyco International Ltd. 160,650
-----------
276,988
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C> <C>
DIVERSIFIED FINANCIAL SERVICES - 1.2%
5,300 FirstPlus Financial Group $ 188,750
-----------
ELECTRICAL EQUIPMENT - 1.2%
1,150 Matsushita Electric Industrial Company, Ltd., ADR 184,863
-----------
ELECTRONICS - 1.0%
5,350 Raychem Corporation 158,159
-----------
FURNITURE - 1.3%
8,200 Steelcase Inc. 213,200
-----------
FOOD AND BEVERAGE - 3.3%
5,900 Dole Foods Company, Inc 293,156
12,650 Fleming Companies, Inc. 222,166
-----------
515,322
-----------
HEALTH CARE - 1.4%
7,500 First Health Group Corporation+. 214,688
-----------
HOME APPLIANCE - 1.1%
2,600 Whirlpool Corporation 178,750
-----------
HOUSEHOLD PRODUCTS - 1.0%
1,950 Unilever N.V., ADR 153,928
-----------
INSURANCE - 2.4%
1,100 Life Re Corporation 91,163
3,300 Loews Corporation 287,512
-----------
378,675
-----------
MACHINERY AND TOOLS - 1.5%
6,000 Manitowoc Company, Inc. 242,250
-----------
MEDICAL PRODUCTS - 1.1%
3,600 Bausch & Lomb Inc 180,450
-----------
METALS AND MINING - 1.4%
3,350 Aluminum Company of America (Alcoa) 220,891
-----------
NEWSPAPERS/PUBLISHING - 4.7%
9,200 Donnelley (R.R.) & Sons Company 420,900
1,950 Time Warner, Inc. 166,603
4,600 World Color Press, Inc 164,500
-----------
752,003
-----------
OIL - 3.7%
5,400 Amerada Hess Corporation 293,288
16,850 Union Pacific Resources Group, Inc. 295,928
-----------
589,216
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C> <C>
OILFIELD EQUIPMENT - 2.3%
6,900 R & B Falcon Corporation. $ 156,113
3,100 Schlumberger Ltd. 211,769
-----------
367,882
-----------
PIPELINES - 0.9%
2,750 Enron Corporation 148,672
-----------
PULP AND PAPER - 7.3%
10,000 Boise Cascade Corporation 327,500
2,950 Champion International Corporation 145,102
4,500 Chesapeake Corporation 175,218
7,200 International Paper Company 309,600
3,100 United Stationers, Inc. 200,919
-----------
1,158,339
-----------
RAILROAD - 3.7%
6,800 Canadian National Railway Company 361,250
5,000 Union Pacific Corporation 220,625
-----------
581,875
-----------
REAL ESTATE INVESTMENT TRUST - 2.4%
5,196 Meditrust Companies. 144,838
10,150 Patriot American Hospitality Inc 242,966
-----------
387,804
-----------
RETAIL TRADE - 5.8%
3,200 Dayton Hudson Corporation 155,200
7,850 Nordstrom, Inc. 606,167
6,400 TJX Companies, Inc. 154,400
-----------
915,767
-----------
SEMICONDUCTORS - 1.6%
3,200 Motorola Inc 168,200
1,600 Texas Instruments, Inc. 93,300
-----------
261,500
-----------
SOFTWARE SYSTEMS - 6.1%
15,500 Avid Technology Inc. 519,734
13,750 Structural Dynamics Research Corporation 316,680
19,200 Sybase, Inc. 133,800
-----------
970,214
-----------
STEEL - 1.0%
3,050 Carpenter Technology Corporation 153,263
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C> <C> <C>
TELECOMMUNICATIONS EQUIPMENT - 6.6%
10,950 Aspect Telecommunications Corporation $ 300,440
7,935 Comverse Technology 391,113
12,500 Ericsson (L.M.) Telephone Company, Class B, ADR 358,593
-----------
1,050,146
-----------
TRUCKING - 1.0%
7,650 Swift Transportation Company, Inc.+ 152,044
-----------
TOTAL COMMON STOCKS (Cost $12,844,276) 14,454,121
-----------
REPURCHASE AGREEMENTS - 9.0% (Cost $1,419,000)
PRINCIPAL AMOUNT
$1,419,000 Agreement with Greenwich Capital Markets, Tri-Party, 6.300%
dated 06/30/98, to be repurchased at $1,419,024, on 07/01/98,
collateralized by $1,447,380 market value of U.S. government
securities, having various maturities and various interest
rates. 1,419,000
-----------
TOTAL INVESTMENTS (Cost $14,263,276*) 100.1% 15,873,121
OTHER ASSETS AND LIABILITIES (Net) (0.1) (21,402)
----- -----------
NET ASSETS 100.0% $15,851,719
===== ===========
</TABLE>
_______________________________
* Aggregate cost for federal tax purposes.
+ Non-income producing security.
ABBREVIATION:
ADR American Depositary Receipt
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES JUNE
30, 1998 (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Identified cost $14,263,276)
(Note.1)
Securities.......................................................... $ 14,454,121
Repurchase agreements............................................... 1,419,000
------------
Total investments................................................... 15,873,121
Receivables:
Investment securities sold.......................................... 43,143
Dividends........................................................... 10,305
Interest............................................................ 248
Other Assets:
Organization costs (Note 1)......................................... 33,641
------------
Total Assets............................................................. 15,960,458
LIABILITIES:
Payables:
Investment securities purchased..................................... $ 87,596
Management fee (Note 2)............................................. 11,119
Trustees' fees and expenses (Note 2)................................ 4,713
Transfer agency and servicing fees.................................. 1,000
Cash overdraft...................................................... 754
Other accrued liabilities and expenses.............................. 3,557
------------
Total Liabilities........................................................ 108,739
------------
NET ASSETS............................................................... $ 15,851,719
============
NET ASSETS consist of:
Undistributed net investment income...................................... $ 36,129
Accumulated net realized gain on securities sold......................... 421,127
Net unrealized appreciation of investments............................... 1,609,845
Shares of beneficial interest............................................ 9,685
Additional paid-in capital............................................... 13,774,933
------------
NET ASSETS............................................................... $ 15,851,719
============
Net Asset Value, offering and redemption price per share
($15,851,719 / 968,483 shares of beneficial interest outstanding)........ $ 16.37
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $487)................ $ 64,892
Interest............................................................ 63,876
-----------
Total Investment Income............................................. 128,768
Expenses:
Management fee (Note 2)............................................. $ 147,798
Legal and audit fees................................................ 8,927
Amortization of organization expenses (Note 1)...................... 5,995
Trustees' fees and expenses (Note 2)................................ 3,819
Custodian fees...................................................... 1,857
Other............................................................... 7,050
Interest expense.................................................... 321
-----------
Total Expenses...................................................... 175,767
Fees deferred and expenses absorbed by Manager (Note 2)............. (82,093)
-----------
NET EXPENSES........................................................ 93,674
-----------
NET INVESTMENT INCOME............................................... 35,094
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 3):
Net realized gain on investments during the period.................. 418,747
Net unrealized appreciation of investments during the period........ 645,245
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS..................... 1,063,992
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $ 1,099,086
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six Months
Ended 6/30/98 For the Year
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS: (unaudited) Ended 12/31/97
------------------------------------------------
<S> <C> <C>
Net investment income............................................... $ 35,094 $ 124,367
Net realized gain on investments during the period.................. 418,747 431,903
Net unrealized appreciation of investments during the period........ 645,245 825,450
-------------- -------------
Net increase in net assets resulting from operations................ 1,099,086 1,381,720
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income............................ -- (123,377)
Distributions from net realized gains on investments................ -- (443,288)
BENEFICIAL INTEREST TRANSACTIONS:
Net increase from beneficial interest transactions (Note 4)......... 2,155,254 9,655,629
-------------- -------------
Net increase in net assets.......................................... 3,254,340 10,470,684
NET ASSETS:
Beginning of period................................................. 12,597,379 2,126,695
==============================================
End of period....................................................... $ 15,851,719 $ 12,597,379
==============================================
Undistributed net investment income................................. $ 36,129 $ 1,035
==============================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA FOR THE YEAR OR PERIOD ENDED:
<TABLE>
<CAPTION>
Six Months
Ended 6/30/98
(unaudited) 12/31/97 12/31/96*
<S> <C> <C> <C>
Net asset value--beginning of period $ 15.09 $ 12.33 $ 10.08
------------- ------------- --------------
Net investment income 0.04 0.16 0.15
Net realized and unrealized gain on investments 1.24 3.35 2.59
------------- ------------- --------------
Net increase in net assets resulting from investment operations 1.28 3.51 2.74
Distributions to Shareholders:
Distributions from net investment income -- (0.16) (0.15)
Distributions from net realized gains on investments -- (0.59) (0.34)
------------- ------------- -------------
Total Distributions........ -- (0.75) (0.49)
------------- ------------- -------------
Net asset value--end of period $ 16.37 $ 15.09 $ 12.33
============= ============= =============
Total return** 8.48% 28.57% 27.22%
============================================================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 15,852 $ 12,597 $ 2,127
Ratio of net investment income to average net assets 0.47%+ 1.74% 2.55%+
Ratio of operating expenses to average net assets, including
interest expense: 1.25%+ 0.35% 0.01%+
Ratio of operating expenses to average net assets, excluding
interest expense: 1.25%+ 0.34% --
Portfolio turnover rate 27% 53% 78%
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager $ (0.05) $ 0.01 $ (0.27)
Operating expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 2.36%+ 1.97% 6.98%+
</TABLE>
____________________________
* Montgomery Variable Series: Growth Fund commenced operations on February 9,
1996.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
9
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS (unaudited)
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 and was organized as a Delaware business
trust on August 24, 1994. As of June 30, 1998, 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. Prior to the public offerings of shares of the Funds, a
limited number of shares were sold to Montgomery Asset Management, LLC (or
its predecessor) 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). Information presented in these
financial statements pertains to the Montgomery Variable Series: Growth
Fund (the "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 are 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
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 by
management 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 from net investment income, if any, are declared and paid at
least annually. Distributions of net realized capital gains (including
net short-term capital gains) 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. 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 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 if 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 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.
D. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on a trade-date basis. Realized
gain and loss from securities transactions are computed on the
specific identified cost basis of the securities sold. Dividend income
is recognized on the ex-dividend date and interest income, including,
amortization of discount on short-term investments, is recognized on
an accrual basis.
10
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS (unaudited)
(continued)
E. 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 applicable requirements of the Code,
and by making distributions of taxable income to shareholders
sufficient to relieve the Fund from all or substantially all federal
income taxes. Accordingly, no provision for federal income taxes is
required.
F. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Fund
amounted to $62,066 and are amortized on a straight-line basis over a
period of sixty months from commencement of operations.
G. EXPENSES
General expenses of the Trust are allocated to the Fund and other
series of the Trust based upon 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
"Advisers Act"). The manager is a subsidiary of Commerzbank AG.
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 $500 Million Next $500 Million Over $1 Billion
1.00% 0.90% 0.80%
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. 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.
The Manager recouped previously deferred fees and/or absorbed expenses
during the six months ended June 30, 1998 in the amount of $72,827.
These amounts have been included with current management fees in the
Statement of Operations.
For the six months ended June 30, 1998, the Manager has deferred fees
of $74,971 and absorbed expenses of $7,122.
As of June 30, 1998, the deferred management fees and and absorbed
expenses subject to recoupment are $82,093.
b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager, "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).
MAM Securities LLC, ("MAM Securities"), an affiliate of the Manager,
serves as the Fund's transfer agent.
c. For the six months ended June 30, 1998, the Fund incurred total
brokerage commissions of $13,147.
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,
1998, were $6,290,189 and $3,492,561, respectively.
b. At June 30, 1998, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value for federal income tax
purposes were $2,430,903 and $821,058, respectively.
11
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS (unaudited)
(continued)
c. Under an unsecured Revolving Credit Agreement with DeutscheBank (New
York), the Montgomery Variable Series: Growth Fund, along with other
funds of The Montgomery Funds I, The Montgomery Funds II and The
Montgomery Funds III, may for one year starting August 6, 1997, borrow
(consistent with applicable law and its investment policies) up to 10%
of its net asset value, provided that the aggregate principal amount
of outstanding loans under the agreement to all Funds does not exceed
$250,000,000. The Fund pays its pro-rata share of the .08% quarterly
commitment fee of the unutilized credit line balance. For the six
months ended June 30, 1998, there was no borrowing under this
agreement.
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the periods indicated below were:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares Sold 341,593 $ 5,467,849 1,117,506 $15,968,560
Issued as Reinvestment of Dividends -- -- 38,314 566,665
Shares Redeemed (207,988) (3,312,595) (493,401) (6,879,596)
-------------------------------------------------------------------
Net Increase 133,605 $ 2,155,254 662,419 $ 9,655,629
===================================================================
</TABLE>
12
