<PAGE>
MONTGOMERY VARIABLE SERIES:
SMALL CAP OPPORTUNITIES FUND
SEMI-ANNUAL REPORT
JUNE 30, 1998
[LOGO]
Invest Wisely.(R)
THE Montgomery Funds
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
PORTFOLIO HIGHLIGHTS
JUNE 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE PERIOD ENDED JUNE 30, 1998?
A: The Montgomery Variable Series: Small Cap Opportunities Fund ended its
first two months of operation down 0.20%. The Fund outperformed its
benchmark, the Russell 2000 Index, by almost five percentage points for
this limited period.
Q: DESCRIBE THE INVESTMENT ENVIRONMENT FOR SMALL-CAP STOCKS OVER THE PAST
YEAR.
A: The past 12 months have been frustrating for U.S. small-cap investors,
as large-cap companies as represented by the Standard & Poor's 500
Index outperformed the Russell 2000 Index of small-cap stocks. This
trend continued through the second quarter of 1998, as Asia's economic
crisis took its toll on the U.S. economy. Although many small-cap
companies are domestically focused and are less exposed to Asia,
investors generally favored large, brand-name stocks. The market
awarded high valuations to large-cap companies relative to their growth
potential, while ignoring smaller companies with higher earnings growth
potential. In the Small Cap Opportunities Fund, our positions in energy
services and technology hurt our relative performance against small-cap
benchmarks.
Q: WHAT STRATEGIES DO YOU USE TO MANAGE THE FUND?
A: We manage the Fund using a bottom-up selection process that emphasizes
companies with improving business fundamentals that are not reflected
in their stock prices. Our sell discipline involves exposing portfolio
holdings to the same criteria that made them attractive investments.
Sales are made on the basis of excessive valuation or a deterioration
in fundamentals.
Q: WHAT'S YOUR OUTLOOK FOR SMALL-CAP STOCKS AND FOR THE MONTGOMERY
VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND?
A: Our outlook for the small-cap sector remains positive. When we look for
individual stocks for our portfolios, we look for undervalued growth.
The small-cap market offers a very fertile hunting ground for
inexpensive growth stocks right now. The holdings in the Variable
Series: Small Cap Opportunities Fund currently trade at a price-to-
earnings ratio based on expected forward earnings that is similar to
that of the Russell 2000, whereas expected earnings growth from our
holdings is greater than that of the Russell 2000. We are hopeful that
this relationship will be recognized by investors, as most mispriced
situations usually are.
<TABLE>
<CAPTION>
Montgomery Variable Series: Small Cap Opportunities Fund Russell 2000 Index
<S> <C> <C>
4/30/98 $10,000 $10,000
5/31/98 $ 9,390 $ 9,436
6/30/98 $ 9,980 $ 9,508
</TABLE>
The Russell 2000 Index is a capitalization-weighted total return index
which includes the smallest 2,000 companies within the Russell 3000 Index.
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------
Roger W. Honour........................................ Senior Portfolio Manager
Andrew Pratt.................................................. Portfolio Manager
Kathryn M. Peters............................................. Portfolio Manager
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Cumulative total returns for the period
ended 6/30/98
- --------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES:
SMALL CAP OPPORTUNITIES FUND
Since inception (4/30/98)................................................ -0.20%
RUSSELL 2000 INDEX
Since 4/30/98............................................................ -5.19%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
- --------------------------------------------------------------------------------
1
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
PORTFOLIO HIGHLIGHTS (continued)
JUNE 30, 1998
- ------------------------------------------------------------------------------
Stock picking is the most important driver in our performance. We have had some
disappointments in the past 2 months, mostly in areas that were directly
impacted by the Asian crisis. It is important to remember that we are taking a
long-term view when making our investments and are riding through some rough
periods in the name of this philosophy. The one thing we won't do right now is
change the way we do things. That means sticking with the investment process and
the long-term view. We are confident that we will be rewarded for doing so.
TOP FIVE INDUSTRIES
(AS A PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
----------------------------------------------------
<S> <C>
Software Systems.....................19.7%
Business Services....................10.6
Retail Trade..........................7.8
Medical Products......................7.1
Broadcasting/Advertising..............5.6
----------------------------------------------------
</TABLE>
TOP TEN HOLDINGS
(AS A PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
----------------------------------------------------
<S> <C>
Acxiom Corporation....................2.7%
PMT Services Inc......................2.3
Kaufman & Broad Home Corporation......2.2
ESC Medical Systems, Ltd..............2.2
Cooper Companies Inc..................2.2
Computer Task Group Inc...............2.2
Action Performance Companies Inc......2.1
Catalina Marketing Corporation........2.1
Ha-Lo Industries......................2.0
Inktomi Corporation...................2.0
----------------------------------------------------
</TABLE>
There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risks of price fluctuations.
2
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
PORTFOLIO INVESTMENTS
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS--96.0% VALUE
SHARES (NOTE 1)
<S> <C>
APPAREL AND TEXTILES - 3.2%
800 Jones Apparel Group, Inc.+ $ 29,250
1,050 The Men's Wearhouse Inc.+ 34,683
------------
63,933
------------
BANKS - 1.1%
700 Commercial Federal Corporation 22,138
------------
BROADCASTING/ADVERTISING - 5.6%
800 Catalina Marketing Corporation + 41,550
1,300 Ha-Lo Industries+ 40,462
700 Metro Networks, Inc.+ 30,122
------------
112,134
------------
BUILDING MATERIALS - 2.1%
1,200 Interface Inc. 24,224
600 TJ International, Inc. 18,038
------------
42,262
------------
BUSINESS SERVICES - 10.6%
800 Applied Graphics Technologies, Inc.+ 36,575
1,700 Caribiner International Inc.+ 29,750
1,300 Computer Task Group, Inc. 43,550
500 Fair Isaac & Company, Inc. 19,000
1,200 Interim Services, Inc.+ 38,550
1,800 PMT Services, Inc.+ 45,787
------------
213,212
------------
CHEMICALS - 1.3%
1,000 Ferro Corporation 25,313
------------
COMPUTERS AND OFFICE EQUIPMENT - 0.9%
600 Dialogic Corporation 17,775
------------
CONSUMER SERVICES - 2.9%
1,000 Budget Group, Inc.+ 31,938
800 Education Management Corporation + 26,400
------------
58,338
------------
CONTAINERS AND PACKAGING - 0.9%
800 Ivex Packaging Corporation+ 18,600
------------
DIVERSIFIED FINANCIAL SERVICES - 2.7%
1,800 BA Merchant Services, Inc.+ 36,337
800 Imperial Credit Industries+ 18,600
------------
54,937
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C>
ELECTRICAL EQUIPMENT - 0.8%
800 MRV Communications Inc.+ $ 16,675
------------
ELECTRONICS - 1.8%
1,200 SBS Technologies, Inc.+ 35,925
------------
FOOD AND BEVERAGE - 1.5%
500 Whole Foods Market, Inc.+ 30,281
------------
HEALTH CARE - 4.0%
1,700 Orthodontic Centers of America, Inc.+ 35,594
1,600 Pharmerica, Inc.+ 19,300
1,050 Sierra Health Services+ 26,447
------------
81,341
------------
HEAVY CONSTRUCTION - 2.2%
1,400 Kaufman & Broad Home Corporation 44,450
------------
INSURANCE - 1.4%
700 Berkley (W.R.) Corporation 28,065
------------
LODGING - 1.6%
1,800 Prime Hospitality Corporation+ 31,388
------------
MEDICAL PRODUCTS - 7.1%
1,200 Cooper Companies, Inc.+ 43,724
1,300 ESC Medical Systems, Ltd.+ 43,997
600 Sola International, Inc.+ 19,612
600 Waters Corporation + 35,363
------------
142,696
------------
NEWSPAPERS/PUBLISHING - 2.1%
700 Big Flower Holdings, Inc.+ 21,000
600 World Color Press Inc.+ 21,000
------------
42,000
------------
OIL - 2.1%
700 Cliffs Drilling Company+ 22,969
1,200 Marine Drilling Companies, Inc.+ 19,163
------------
42,132
------------
PHARMACY/DRUGS - 3.0%
700 Jones Pharma, Inc. 23,166
1,600 Roberts Pharmaceutical Corporation+ 36,800
------------
59,966
------------
POLLUTION CONTROL - 1.2%
1,000 Tetra Tech., Inc 24,500
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C>
RETAIL TRADE - 7.8%
900 Borders Group Inc.+ $ 33,300
1,300 Coldwater Creek Inc.+ 35,588
1,400 Eagle Hardware & Garden, Inc.+ 32,419
400 Ethan Allen Interiors Inc. 19,975
900 Proffitt's, Inc.+ 36,338
----------
157,620
----------
SOFTWARE SYSTEMS - 19.7%
1,700 Actel Corporation+ 18,381
2,200 Acxiom Corporation + 55,069
1,000 Analysts International Corporation 28,438
700 Aspen Technology, Inc.+ 35,481
1,600 Boole and Babbage, Inc.+ 38,300
1,100 Henry (Jack) & Associates 37,881
1,000 Inktomi Corporation+ 39,688
900 Kronos, Inc.+ 33,047
650 National Instruments Corporation+ 25,047
1,700 Structural Dynamics + 39,153
400 Symantec Corporation+ 10,425
800 Synopsis, Inc.+ 36,625
----------
397,535
----------
STEEL - 1.9%
750 Carpenter Technology Corporation 37,688
----------
TELECOMMUNICATIONS EQUIPMENT - 2.8%
700 Comverse Technology Inc.+ 36,334
1,300 Natural Microsystems+ 20,921
----------
57,255
----------
TOYS - 2.1%
1,300 Action Performance Companies, Inc.+ 41,884
----------
TRUCKING - 1.6%
1,000 U.S. Freightways Corporation 32,843
----------
TOTAL COMMON STOCKS (Cost $1,930,250) 1,932,886
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS - 3.6% (COST $73,000) VALUE
PRINCIPAL AMOUNT (NOTE 1)
<S> <C> <C>
$73,000 Agreement with Greenwich Capital Markets, Tri-Party, 6.300%
dated 06/30/98, to be repurchased at $73,012, on 07/01/98,
collateralized by $74,460 market value of U.S. government
securities, having various maturities and various interest rates. $ 73,000
----------
TOTAL INVESTMENTS (Cost $2,003,250*) 99.6% 2,005,886
OTHER ASSETS AND LIABILITIES (Net) 0.4 7,095
----- ----------
NET ASSETS 100.0% $2,012,981
===== ==========
</TABLE>
_________________
* Aggregate cost for federal tax purposes.
+ Non-income producing security.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Identified cost $2,003,250)(Note 1)
Securities...................................................................... $1,932,886
Repurchase agreements........................................................... 73,000
----------
Total investments............................................................... 2,005,886
Cash................................................................................. 184
Receivables:
Investment securities sold...................................................... 14,223
Expenses absorbed by Manager (Note 2)........................................... 2,136
Dividends....................................................................... 325
Interest........................................................................ 13
----------
Total Assets......................................................................... 2,022,767
==========
LIABILITIES:
Payables:
Investment securities purchased................................................. $ 4,575
Trustees' fees and expenses (Note 2)............................................ 1,287
Custodian fees.................................................................. 751
Other accrued liabilities and expenses.......................................... 3,173
==========
Total Liabilities.................................................................... 9,786
==========
NET ASSETS........................................................................... $2,012,981
==========
NET ASSETS consist of:
Accumulated net investment loss................................................. $ (1,407)
Accumulated net realized loss on securities sold................................ (3,705)
Net unrealized appreciation of investments,..................................... 2,636
Shares of beneficial interest................................................... 2,017
Additional paid-in capital...................................................... 2,013,440
==========
NET ASSETS........................................................................... $2,012,981
==========
Net Asset Value, offering and redemption price per share
($2,012,981 divided by 201,712 shares of beneficial interest outstanding)........... $ 9.98
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1998 (UNAUDITED)*
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest........................................................................................ $ 2,844
Dividends....................................................................................... 628
-----------
Total Investment Income......................................................................... 3,472
EXPENSES:
Management fee (Note 2)......................................................................... $ 3,913
Legal and audit fees............................................................................ 3,845
Trustees' fees and expenses (Note 2)............................................................ 1,287
Custodian fees.................................................................................. 751
Other........................................................................................... 1,132
-----------
Total Expenses.................................................................................. 10,928
Fees deferred and expenses absorbed by Manager (Note 2)......................................... (6,049)
NET EXPENSES.................................................................................... 4,879
-----------
NET INVESTMENT LOSS............................................................................. (1,407)
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 3):
Net realized loss on investments during the period............................................ (3,705)
Net unrealized appreciation of investments during the period.................................. 2,636
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS................................................. (1,069)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................ $ (2,476)
===========
</TABLE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Period
Ended 6/30/98
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: (unaudited)*
-----------
<S> <C>
Net investment loss............................................................................. $ (1,407)
Net realized loss on investments during the period.............................................. (3,705)
Net unrealized appreciation of investments during the period.................................... 2,636
-----------
Net decrease in net assets resulting from operations............................................ (2,476)
BENEFICIAL INTEREST TRANSACTIONS:
Net increase from beneficial interest transactions (Note 4)..................................... 15,457
-----------
Net increase in net assets...................................................................... 12,981
NET ASSETS:
Beginning of period............................................................................. 2,000,000
-----------
End of period................................................................................... 2,012,981
-----------
Accumulated net investment loss................................................................. $ (1,407)
===========
</TABLE>
________________
* Montgomery Variable Series: Small Cap Opportunities Fund commenced
operations on April 30, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
<PAGE>
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA FOR THE PERIOD ENDED:
<TABLE>
<CAPTION>
6/30/98
(unaudited)*
<S> <C>
Net asset value--beginning of period........................................................... $ 10.00
-----------
Net investment loss............................................................................ (0.01)
Net realized and unrealized loss on investments................................................ (0.01)
-----------
Net decrease in net assets resulting from investment operations................................ (0.02)
-----------
Net asset value--end of period................................................................. $ 9.98
===========
Total return**................................................................................. -0.20%
============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................................................... $ 2,103
Ratio of net investment loss to average net assets............................................. (0.43)%+
Ratio of operating expenses to average net assets.............................................. 1.50%+
Portfolio turnover rate........................................................................ 16%
Net investment loss before deferral of fees
and absorption of expenses by Manager.......................................................... $ (0.04)
Operating expense ratio before deferral of fees
and absorption of expenses by Manager.......................................................... 3.35%+
</TABLE>
________________
* Montgomery Variable Series: Small Cap Opportunities Fund commenced
operations on April 30, 1998.
** Total return represents aggregate total return for the period 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: Small Cap
Opportunities Fund and the Montgomery Variable Series: International Small
Cap 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: Small Cap
Opportunities Fund (the Fund). The Montgomery Variable Series: Growth Fund,
the Montgomery Variable Series: Emerging Markets Fund and the Montgomery
Variable Series: International Small Cap 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. 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 $250 Million Over $250 Million
1.20% 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 1.50%
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.
For the period ended June 30, 1998, the Manager has deferred fees of
$3,913 and absorbed expenses of $2,136.
As of June 30, 1998, deferred management fees and absorbed expenses
subject to recoupment are $6,049.
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 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.
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of investment securities,
other than short-term securities, for the period ended June 30, 1998,
were $2,238,009 and $291,577, 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 $112,911 and $110,275, respectively.
c. Under an unsecured revolving Credit Agreement with DuestcheBank (New
York), the Montgomery Variable Series: Small Cap Opportunities 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 period ended June 30, 1998, the was no borrowing
under this agreement.
11
<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 period indicated below were:
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998*
SHARES AMOUNT
<S> <C> <C>
Shares Sold 203,425 $2,031,908
Issued as Reinvestment of Dividends -- --
Shares Redeemed (1,713) (16,451)
---------------------
Net Increase 201,712 $2,015,457
=====================
</TABLE>
______________________
* Montgomery Variable Series: Small Cap Opportunities Fund commenced
operations on April 30, 1998 with initial funding of $2,000,000 and 200,000
shares.
12
