<PAGE>
Montgomery Variable Series:
Emerging Markets Fund
Semi-Annual Report
June 30, 1998
[LOGO]
Invest Wisely.(R)
The Montgomery Funds
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO HIGHLIGHTS
JUNE 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT REVIEW
Q: HOW DID THE FUND PERFORM DURING THE YEAR?
A: The year ended June 30, 1998, was the most difficult 12-month period
since the Fund's inception. The Fund returned -39.18%, compared with -
38.58% for the IFC Global Composite Index. Of the 33 emerging markets
included in the index, only eight showed positive results for the year.
Most markets suffered double-digit losses. Russia, Indonesia, and
Thailand declined by more than 50%.
Q: WHAT WERE SOME OF THE CONTRIBUTING FACTORS?
A: The global rout can be traced largely to events in Southeast Asia,
where a series of currency devaluations dampened investor sentiment
considerably in 1997. The markets rebounded sharply in the first
quarter after the announcement of several IMF-sponsored bailout
packages, but sentiment again turned sour when a declining Yen and a
confirmed recession in Japan renewed worries that Southeast Asian
economies would suffer additional devaluations. The financial turmoil
was aggravated by non-economic events including riots in Indonesia and
nuclear testing in India and Pakistan.
The IFC Global Latin America Index declined 25% for the year. Latin
American markets were hurt by the general decline in investor sentiment
for emerging markets as well as concerns about lower commodities
prices. Latin America is an important supplier of agricultural products
and metals. A drop in the price of oil added to already negative
investor sentiment in Venezuela, given that economy's reliance on oil-
related exports. Brazil was hit hard by profit taking despite the
implementation of major privatization programs. The Argentinean market
dropped too, on concerns about its ability to maintain its
convertibility plan when other emerging market currencies have become
more competitive. Chile, which fared relatively well following the
devaluation of the Mexican Peso in 1994, also suffered in recent months
due to lower copper prices, (its main export item) and because roughly
a third of its exports go to Asia.
Among the group, the developing markets of Europe displayed the best
performance. Investors sought safety from Asia in countries such as
Poland and Hungary, which stand to benefit from next year's EMU and are
candidates for accession to the European Union. The standout
performers, however, were Greece and Portugal, returning 46.3% and
56.6%, respectively, due to significant declines in interest rates.
<TABLE>
GROWTH OF A $10,000 INVESTMENT Montgomery Variable Series: MSCI Emerging Markets Free Index IFC Global Composite Index
Emerging Markets Fund
<S> <C> <C> <C>
1/96 $10,000 $10,000 $10,000
2/96 $ 9,720 $ 9,841 $ 9,937
3/96 $10,100 $ 9,918 $10,095
4/96 $10,330 $10,314 $10,846
5/96 $10,580 $10,268 $10,638
6/96 $10,560 $10,332 $10,793
7/96 $10,050 $ 9,626 $10,120
8/96 $10,500 $ 9,873 $10,345
9/96 $10,510 $ 9,958 $10,437
10/96 $10,310 $ 9,692 $10,205
11/96 $10,470 $ 9,855 $10,351
12/96 $10,679 $ 9,899 $10,260
1/97 $11,532 $10,575 $10,950
2/97 $11,782 $11,028 $11,448
3/97 $11,592 $10,738 $11,245
4/97 $11,542 $10,757 $11,247
5/97 $12,023 $11,085 $11,432
6/97 $12,915 $11,657 $12,016
7/97 $13,337 $11,831 $12,205
8/97 $12,003 $10,325 $10,884
9/97 $12,514 $10,611 $10,936
10/97 $10,499 $ 8,870 $ 9,271
11/97 $10,188 $ 8,547 $ 8,736
12/97 $10,617 $ 8,753 $ 8,768
1/98 $ 9,382 $ 8,066 $ 8,265
2/98 $ 9,914 $ 8,908 $ 9,116
3/98 $10,105 $ 9,295 $ 9,411
4/98 $10,236 $ 9,193 $ 9,337
5/98 $ 8,860 $ 7,933 $ 8,225
6/98 $ 7,855 $ 7,101 $ 7,380
</TABLE>
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
Jesus Duarte.............. Portfolio Manager
- ----------------------------------------------
FUND PERFORMANCE
- ----------------------------------------------
Average annual total returns for the periods
ended 6/30/98
- ----------------------------------------------
MONTGOMERY VARIABLE SERIES:
EMERGING MARKETS FUND
Since inception (2/2/96)............ -9.54%
One year............................ -39.18%
MSCI EMERGING MARKETS FREE INDEX
Since 1/31/96....................... -13.21%
One year............................ -39.08%
IFC GLOBAL COMPOSITE INDEX
Since 1/31/96....................... -11.82%
One year............................ -38.58%
- ----------------------------------------------
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 The Morgan Stanley Capital International Emerging Markets Free Index in an
unmanaged, capitalization-weighted composite index that covers individual
securities within the equity markets of approximately 25 emerging markets
countries.
2 The IFC Global Composite Index is comprised of more than 1,900 individual
stocks from 32 developing countries in Asia, Latin America, Middle East,
Africa and Europe.
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO HIGHLIGHTS (continued)
JUNE 30, 1998
- --------------------------------------------------------------------------------
Q: WHAT WAS THE FUND'S STRATEGY IN ASIA?
A: Throughout the year, we maintained an underweight position in Asian
markets, given the region's negative economic outlook. At the end of
June, the combined holdings in Korea, Malaysia, the Philippines, and
Thailand amounted to less than 7% of assets. The Portfolio has no
exposure to Indonesia, the most troubled market in our estimation.
Having such light positions helped us in 1997, but hindered our
relative performance in the first quarter of 1998, when several Asian
markets rebounded sharply.
Our 3% weighting in China/Hong Kong reflects our relatively positive
outlook for that economy. China's currency is not freely convertible
and thus has not come under the same speculative pressures as other
Asian currencies in recent months. China also enjoys the insulation of
a large domestic economy not heavily reliant on exports. In the absence
of strong Japanese economic policy, China has emerged as a leader in
Asia, pledging to keep its currency stable despite competitive
pressures.
Q: WHAT IS THE FUND'S STRATEGY IN OTHER REGIONS OF THE WORLD?
A: We continue to favor markets in Europe. Our combined 17% exposure to
Greece, Turkey, and Portugal helped boost relative performance during
the year. We have also maintained overweight positions in Brazil and
South Africa. These economies are in various stages of reform, with
ongoing privatizations and corporate restructuring and stocks are
cheap. Our weightings in Brazil and South Africa were a drag on
performance during the year, as Brazil succumbed to profit taking in
the latter part of the year and South Africa's currency weakened due to
speculative pressures and US$3 billion of foreign debt coming due this
year, prompting the central bank to raise interest rates.
Q: AFTER SUCH A DIFFICULT YEAR, WHAT CAN WE EXPECT FROM THE EMERGING
MARKETS IN THE COMING MONTHS?
A: Emerging markets around the world will likely remain volatile until the
Asian currency crisis subsides. We believe, however, that the negative
environment is creating a catalyst for positive change, building the
foundation for stronger and more competitive markets for the long term.
In markets from Brazil to Turkey, we are seeing an increased emphasis
on privatization and structural reforms, greater transparency in
financial reporting, and advances in capital market development. Just
as the U.S. market crash of 1987 now looks like a blip on a long-term
price chart, we believe the emerging markets will recover from this
calamity and share in the powerful trends toward long-term global
prosperity.
There are risks of investing in a fund of this type that invests in securities
of foreign countries, such as erratic market conditions, economic and political
instability, and fluctuations in currency exchange rates.
2
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO HIGHLIGHTS (continued)
JUNE 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES
(AS A PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Brazil............................................................. 19.5%
South Africa....................................................... 14.4
Turkey............................................................. 7.9
Portugal........................................................... 5.5
India.............................................................. 5.3
- --------------------------------------------------------------------------------
</TABLE>
TOP TEN INDUSTRIES
(AS A PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Banks.............................................................. 11.6%
Electric Utilities................................................. 9.4
Telephone/Networks................................................. 9.2
Oil................................................................ 6.7
Metals and Mining.................................................. 4.7
Retail Trade....................................................... 4.3
Food & Beverage.................................................... 4.2
Diversified Financial Services..................................... 4.2
Conglomerates...................................................... 3.8
Auto/Auto Parts.................................................... 3.2
- --------------------------------------------------------------------------------
</TABLE>
TOP TEN HOLDINGS
(AS A PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Telec Brasileiras - Telebras ON.................................... 3.4%
De Beers Centenary AG.............................................. 3.0
Telebras, ADR...................................................... 2.9
Cia Energetica De Minas Gerais..................................... 2.4
Liberty Life Association of Africa, Ltd............................ 2.1
Barlow Ltd......................................................... 2.0
Sasol Ltd.......................................................... 1.9
Yapi ve Kredi Bankasi A.S.......................................... 1.8
Turk Sise ve Cam................................................... 1.6
Haci Omer Sabanci Holding A.S...................................... 1.5
- --------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS - 83.7% VALUE
SHARES (NOTE 1)
<S> <C> <C>
ARGENTINA - 3.4%
23,800 Banco de Galicia, ADR (Banks) $ 432,862
129,000 Cresud S.A.+ (Real Estate) 206,430
167,200 Inversiones y Representaciones (Real Estate) 491,638
129,000 Siderar S.A. (Steel) 490,271
24,600 Telefonica de Argentina, Sponsored ADR (Telephone/Networks) 797,963
14,200 Y.P.F. Sociedad Anonima, ADS (Oil) 426,888
-----------
2,846,052
-----------
BRAZIL - 9.2%
14,562 Cemig, ADS (Electric Utilities) 451,422
38,510,000 Centrais Geradoras do Sul Brasil S.A.
- Gerasul+ (Electric Utilities) 52,610
1,225,000 Cia Saneamento Basico Estado (Water Utilities) 147,227
38,510,000 Electrobras(Electric Utilities) 1,132,108
29,000 Electrobas, ADR (Electric Utilities) 440,438
580 Electrobras, GDS*** (Electric Utilities) 43,500
21,000 Souza Cruz S.A. (Tobacco) 156,154
22,400 Telebras, ADR (Telephone/Networks) 2,445,800
36,570,000 Telec Brasileiras-Telebras ON (Telephone/Networks) 2,909,031
500,000 Telec do Rio Janeiro S.A. (Telephone/Networks) 20,535
500,000 Telerj Celular SA (Telecommunications/Other) 15,131
-----------
7,813,956
-----------
CHILE - 0.9%
29,900 Linea Aerea Nacional Chile S.A., ADR+ (Airlines) 242,938
7,800 Sociedad Quimica y Minera de Chile ADR (Chemicals) 261,300
33,400 Supermercados Unimarc S.A., ADR+ (Retail Trade) 258,850
-----------
763,088
-----------
CHINA/HONG KONG - 3.2%
438,000 Anhui Conch Cement Company, Ltd.+ (Cement) 61,053
15,000 China Telecom Ltd. ADR+ (Telephone/Wireless) 518,438
157,000 CLP Holdings Ltd. (Electric Utilities) 715,294
21,724 HSBC Holdings (Banks) 531,324
275,000 Shanghai Industrial Holdings Ltd. (Conglomerates) 647,748
20,500 Yanzhou Coal Mining Company Ltd.,+ ADR (Coal) 199,875
-----------
2,673,732
-----------
COLOMBIA - 1.3%
38,900 Almacenes Exito S.A. (Retail Trade) 76,720
141,001 Bavaria (Food and Beverage) 823,965
119,028 Valores Bavaria S.A (Holding) 204,321
-----------
1,105,006
-----------
</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, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (CONTINUED) VALUE
SHARES (NOTE 1)
<S> <C> <C>
CZECH REPUBLIC - 1.1%
21,390 Ceske Radiokomunikace, GDR**+ (Broadcasting/Advertising) $ 458,281
58,800 The Czech Value Fund+ (Mutual Funds) 389,550
28,500 Vynosovy I.F.+ (Mutual Funds) 199,189
-----------
1,047,020
-----------
EGYPT - 3.5%
36,300 Al-Ahram Beverages Company, GDR*** (Food and Beverage) 1,152,525
4,000 Al-Ahram Pyramid Beverages Company (Food and Beverage) 255,625
38,000 Amreya Cement (Cement) 657,237
47,500 Paints and Chemical Industries Company*** (Paint) 444,125
25,990 Tora Cement (Cement) 447,611
-----------
2,957,123
-----------
GREECE - 3.2%
7,900 Alpha Credit Bank (Banks) 640,502
5,800 Hellenic Petroleum S.A.+ (Oil) 47,377
14,999 Hellenic Telecommunication Organization S.A. (Telephone/Networks) 384,564
20,700 Heracles General Cement SA (Cement) 482,424
6,140 National Bank of Greece (Banks) 786,926
9,500 STET Hellas Telecommunications SA, ADR+ (Telecommunications/Wireless) 393,656
-----------
2,735,449
-----------
HUNGARY - 1.6%
20,000 Borsodchem Rt.+ (Chemicals) 585,194
6,500 EGIS Rt.+ (Pharmacy/Drugs) 228,999
10,000 Mol Magyar Olaj-es Gazipari Rt. (Oil) 269,949
3,500 Zalakeramia Rt., GDR+ (Building Materials) 124,428
16,900 Zalakeramia Rt., GDR*** (Building Materials) 117,455
-----------
1,326,025
-----------
INDIA - 5.3%
28,950 Bajaj Auto, Ltd., GDR (Auto/Auto Parts) 386,483
31,000 Bajaj Auto, Ltd., GDS*** (Auto/Auto Parts) 413,850
29,000 Bombay Suburban Electric Company, GDR (Electric Utilities) 299,425
21,000 BSES Ltd., GDR*** (Electric Utilities) 216,825
43,000 Hindalco Industries Ltd., ADR (Metals & Mining) 599,850
74,900 Indian Hotels, GDS (Euro) (Lodging) 580,475
75,000 State Bank of India, GDR (Banks) 885,000
110,000 Videsh Sanchar Nigam Ltd., GDR (Telephone/ Long Distance) 1,138,500
-----------
4,520,408
-----------
</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, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C> <C>
ISRAEL - 4.0%
365,000 Bank Leumi Le-Israel (Banks) $ 728,189
50,000 Dor Energy, Ltd., GDR+ (Oil) 360,000
21,400 ECI Telecom Ltd, ADR (Telecommunications/Equipment) 810,525
7,600 Formula Systems Ltd., ADR+ (Computer Software) 264,813
114,379 Makhteshim-Agan Industries Ltd. (Chemicals) 364,107
269,190 Supersol Ltd. (Retail Trade) 887,004
-------------
3,414,638
-------------
JORDAN - 0.3%
800 Arab Bank Group (Banks) 219,409
-------------
KOREA - 2.6%
55,700 LG Semiconductor Company+ (Semiconductor) 434,079
57,810 Lucky - Goldstar Chemical Ltd. (Chemicals) 319,997
17,400 Pusan City Gas Company Ltd. (Gas Utilities) 229,381
12,500 Seoul City Gas Company Ltd. (Gas Utilities) 186,635
110,000 Shinhan Bank (Banks) 365,331
16,140 Sindo Ricoh Company (Computers & Office Equipment) 439,647
11,000 Youngone Corporation (Apparel & Textiles) 215,513
-------------
2,190,583
-------------
MALAYSIA - 1.2%
190,500 Berjaya Sports Toto Berhad (Leisure Time) 282,290
214,000 Powertek Berhad (Electric Utilities) 226,878
1,119,000 Tan Chong International Ltd (Auto/Auto Parts) 156,381
373,000 Tan Chong Motor Holdings Berhad (Auto/Auto Parts) 67,855
462,000 YTL Power International Berhad (Electric Utilities) 251,580
-------------
984,984
-------------
MEXICO - 3.9%
1,348,000 Accel, S.A., Series B+ (Conglomerates) 171,022
130,000 Acer Computer Latino America S.A. de C.V+ (Computers and
Office Equipment) 76,679
25,000 Corporacion GEO, SA de C.V., Series B+ (Building Materials) 138,835
159,720 Corporacion Interamericana Entertainment S.A., Series B+
(Entertainment) 449,715
678,000 Grupo Financiero Banorte S.A. de C.V. (Banks) 754,549
38,000 Grupo Radio Central SA de CV, ADR.(Broadcasting/Advertising) 422,750
21,296 Interamericana Entrenamiento Corporation, Series L
(Entertainment) 49,771
12,400 Panamerican Beverages Inc., Class A (Food and Beverage) 389,825
20,000 Pepsi Gemex S.A., Sponsored ADR (Food & Beverage) 241,250
122,000 San Luis Corporacion S.A. de C.V. (Auto/Auto Parts) 475,210
2,400 Telefonos de Mexico SA, ADR (Telephone/Long Distance) 115,350
-------------
3,284,956
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENT
6
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C> <C>
MOROCCO - 0.0%#
2 Banque Marocaine du Commerce Exterieur, GDR*** (Banks) $ 48
-------------
PAKISAN - 0.6%
375,000 Fauji Fertilizer Company Ltd.** (Agriculture Commodities) 406,680
46,800 Pakistan State Oil** (Oil) 75,065
-------------
481,745
-------------
PERU - 0.5%
73,000 Ferreyros Enrique S.A. (Holding) 98,410
12,412 Ferreyros Enrique S.A., ADS*** (Metals and Mining) 333,185
-------------
431,595
-------------
PHILIPPINES - 1.1%
30,000 Benpres, GDR*** (Broadcasting/Advertising) 82,500
129,000 Manila Electric Company, Series B(Electrical Utilities) 340,288
234,300 Music Semiconductors Corporation+ (Semiconductor) 20,789
17,200 Philippine Long Distance Telephone, ADR (Telephone/Long
Distance) 389,150
1,405,000 Philippino Telephone Corporation (Telephone/Wireless) 111,187
-------------
943,914
-------------
POLAND - 0.8%
18,000 Bank Handlowy W Warszawie, GDR*** (Banks) 342,450
20,000 Prokom Software, GDR*** (Business Services) 343,500
-------------
685,950
-------------
PORTUGAL - 4.8%
27,500 Brisa-Auto Estradas+ (Auto/Auto Parts) 1,176,869
24,200 Cia de Segros Tranquilidade (Insurance) 655,471
19,000 Cimpor - Cimentos de Portugal (Building Materials) 667,985
10,500 Portugal Telecom SA+ (Telephone/Networks) 556,853
19,000 Sonae Investimentos (Retail Trade) 1,038,413
-------------
4,095,591
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENT
7
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C> <C>
RUSSIA - 2.3%
100,700 AO Tatneft, Sponsored ADR (Oil) $ 780,425
670,000 Bashkirenergo+ (Electric Utilities) 53,600
3,534 Chelyabinskvyazinform, ADR(Telephone/Regional-Local) 116,622
58,000 Irkutskenegro, ADR (Electric Utilities) 300,730
4,000 Kazkommerts Bank (Banks) 86,000
14,043 Krasnoyarskelectrosvyaz ADR(Telephone/Networks) 42,129
8,500 Krasny Oktyabr (Food and Beverage) 27,625
53,661 Murmansk Electrosvyaz, ADR (Telecommunications/Other) 44,270
18,507 Nizhnovyazinform, Sponsored ADR (Telephone/Regional-Local) 32,572
76,725 Orenburg Region Electrosvyez ADR (Telecommunications/Other) 9,974
4,767 Samarasvyazinform (Telephone/Regional-Local) 202,598
32,500 Uralmas Zavody, ADR** (Machinery & Tools) 211,250
3,999 Uraltelecom, ADR**+ (Telecommunications/Networks) 39,990
-----------
1,947,785
-----------
SOUTH AFRICA - 14.4%
319,694 Barlow, Ltd. (Conglomerates) 1,684,728
2,110,000 Consolidated African Mining Company+ (Metals & Minings) 459,005
143,000 De Beers Centenary AG (Metals & Mining) 2,512,749
5,000 De Beers Consolidated Mines Ltd., ADR (Metals & Mining) 87,188
115,000 Engen Ltd. (Oil) 318,044
149,550 JCI Ltd. (Diversified Financial Services) 778,013
2,900 Liberty Holdings Ltd. (Holding) 152,091
93,008 Liberty Life Association of Africa Ltd. (Insurance) 1,813,107
290,500 Molope Foods Ltd.+ (Food & Beverage) 347,816
70,200 Nasionale Pers Beperk (Holding) 461,686
290,000 NBS Boland Group Ltd (Diversified Financial Services) 376,560
491,100 Orion Selections Ltd. (Diversified Financial Services) 608,699
276,100 Sasol, Ltd. (Oil) 1,599,331
255,000 Smith (C.G.) Ltd. ORD+ (Conglomerates) 700,927
1,364 Truworths International Ltd.+ (Retail Trade) 920
135,000 Wooltru Ltd., (Retail Trade) 175,295
75,000 Wooltru Ltd., N Shares (Retail Trade) 96,121
-----------
12,172,280
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
8
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
<S> <C> <C>
TAIWAN - 4.4%
12,180 Bank Sinopac+ (Banks) 5,920
220,000 China Development Corporation (Diversified Financial Services) 509,015
260,400 Compal Electronics Inc.+ (Computers & Office Equipment) 701,008
129,000 Hon Hai Precision Industry (Computers & Office Equipment) 653,250
450,000 Kindom Construction (Real Estate) 687,563
147,000 Synnex Technology International Corporation (Computers & Office Equipment) 635,308
255,200 Taiwan Semiconductor Company+ (Semiconductor) 527,327
-----------
3,719,391
-----------
THAILAND - 1.6%
48,000 BEC World Public Company Ltd. (Entertainment) 185,402
108,100 BEC World Public Company (F) (Entertainment) 417,543
405,000 Cogeneration Public Company (F) (Electric Utilities) 163,152
819,000 Industrial Finance of Thailand (Securities Brokerage) 168,846
51,100 PTT Exploration (F) (Oil) 387,488
-----------
1,322,431
-----------
TURKEY - 7.9%
13,250,000 Akbank (Banks) 427,901
20,139,000 Haci Omer Sabanci Holding A.S.+ (Diversified Financial Services) 1,247,816
16,500,000 Dogan Sirketler Grubu Holdings A.S.+ (Holding) 1,006,853
2,300,000 Eregli Demir Ve Celik Fabrikalari T.A.S.+ (Steel) 358,430
18,250,000 Turkiye Halk Bankasi A.S.+ (Banks) 736,716
41,597,024 Turk Sise ve Cam+ (Glass) 1,374,592
58,692,310 Yapi ve Kredi Bankasi A.S. (Banks) 1,498,715
-----------
6,651,023
-----------
VENEZUELA - 0.4%
775,463 Electricidad de Caracas (Elecric Utilities) 350,063
3,300 Cia Anonima Telefono de Venezuela, ADR (Telephone/Networks) 82,500
-----------
432,562
-----------
TOTAL COMMON STOCKS (COST $87,511,438) 70,766,745
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
9
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCKS - 11.6% VALUE
SHARES (NOTE 1)
<S> <C> <C>
BRAZIL - 10.2%
17,600,000 Banco do Estado de Sao Paulo S.A. - Banespa (Banks) $ 814,298
90,000,000 Banco de Credito Nacional S.A. (Banks) 933,812
790,000 Celesc, GDS (Electric Utilities) 601,098
2,900 Centrais Geradoras do Sul do Brasil S.A. - Gerasul+ (Electric Utilities) 20,677
66,259,247 Cia Energetica de Minas Gerais (Electric Utilities) 2,062,456
40,583,000 Cia Paranaense de Energi (Electric Utilities) 378,969
550,000 Itausa Investimentos Itau (Holding) 347,153
65,880,000 Odebrecht S.A. (Heavy Construction) 210,761
5,000,000 Petroleo Brasileiro (Oil) 929,489
5,600,000 Telec de Minas Gerais S.A. (Telephone/Regional-Local) 389,780
6,530,000 Telec do Rio Janeiro S.A.+ (Telephone/Networks) 491,211
1,989,294 Telecomunicacoes de Sao Paulo (Telephone/Regional-Local) 467,847
5,400,000 Telesp Celular SA, Series B (Telephone/Wireless) 448,230
5,600,000 Telemig Celular SA, Series C+ (Telephone/Wireless) 169,470
6,530,000 Telerj Celular SA, Series B (Telecommunications/Other) 388,395
20,000 Vale do Rio Doce B (Metals and Mining) 0
--------------
8,653,646
--------------
GREECE - 0.1%
14,000 Delta Dairy S.A.+ (Food and Beverage) 161,528
--------------
PORTUGAL - 0.7%
42,000 Filmes Lusomundo Flupp In (Entertainment) 554,236
--------------
RUSSIA - 0.6%
58,600 LukOil Company, ADR (Oil) 468,800
--------------
TOTAL PREFERRED STOCKS (Cost $13,356,558) 9,838,210
--------------
RIGHTS - 0.0%#
BRAZIL - 0.0%#
3,444 Telec de Minas Gerais S.A., Rights, Expire 07/14/98+ (Telephone/Regional-Local) 0
63,403 Telec do Rio Janiero S.A., Rights, Expire 06/12/98+ (Telephone/Networks) 0
--------------
0
--------------
GREECE - 0.0%#
7,900 Alpha Credit Bank, Rights, Expire 07/22/98+ (Banks) 13,460
--------------
TOTAL RIGHTS (COST $0) 13,460
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
10
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
PORTFOLIO INVESTMENTS (continued)
JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
WARRANTS - 0.2% (COST $254,624) VALUE
SHARES (NOTE 1)
<S> <C> <C>
PHILIPPINE - 0.2%
520,000 Jollibee Foods Co, Warrants, Expire 02/24/03+ (Food & Beverage) $ 158,994
--------------
TOTAL SECURITIES (Cost $101,122,620) 80,777,408
--------------
REPURCHASE AGREEMENTS - 4.7%
PRINCIPAL AMOUNT
$1,993,500 Agreement with Bear Stearns, Tri-Party, 6.350% dated
6/30/98, to be repurchased at $1,993,852, on 07/01/98,
collateralized by $2,033,370 market value of U.S. government
securities, having various maturities and various interest rates 1,993,500
1,993,500 Agreement with Paine Webber Group, Inc., Tri-Party, 6.100%
dated 6/30/98 , to be repurchased at $1,993,838, on 07/01/98,
collateralized by $2,033,370 market value of U.S. government
securities, having various maturities and various interest rates 1,993,500
--------------
TOTAL REPURCHASE AGREEMENTS (Cost $3,987,000) 3,987,000
--------------
TOTAL INVESTMENTS (Cost $105,109,620*) 100.0% 84,764,408
OTHER ASSETS AND LIABILITIES (Net) 0.0 (186,270)
-------------- --------------
NET ASSETS 100.0% $84,578,138
============== ==============
</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
RDC Russian Depositary 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, 1998 (unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Identified cost $105,109,620)(Note 1)
Securities................................................................ $ 80,777,408
Repurchase agreements..................................................... 3,987,000
------------
Total investments.............................................................. 84,764,408
Foreign currency (Cost $377,726)............................................... 382,549
Forward Foreign currency exchange contracts:
Net unrealized appreciation of forward foreign currency exchange contracts..... 1,818
Receivables:
Investment securities sold................................................ 4,028,632
Dividends................................................................. 486,903
Interest.................................................................. 701
Other Assets:
Organization costs (Note 1)............................................... 32,292
------------
Total Assets.............................................................. 89,697,303
LIABILITIES:
Payables:
Cash overdraft............................................................ 3,260,425
Investment securities purchased........................................... 1,408,820
Management fee (Note 2)................................................... 247,307
Custodian fees............................................................ 85,612
Trustees' fees and expenses (Note 2)...................................... 6,181
Other accrued liabilities and expenses.................................... 110,820
------------
Total Liabilities.............................................................. 5,119,165
------------
NET ASSETS..................................................................... $ 84,578,138
============
NET ASSETS consist of:
Undistributed net investment income............................................ $ 359,149
Accumulated net realized loss on securities sold, forward foreign currency
exchange contracts and foreign currency transactions...................... (19,185,516)
Net unrealized depreciation of investments, forward foreign currency
exchange contracts, foreign currency transactions and other net assets.... (20,349,536)
Shares of beneficial interest.................................................. 108,101
Additional paid-in capital..................................................... 123,645,940
------------
NET ASSETS..................................................................... $ 84,578,138
============
Net Asset Value, offering and redemption price per share
($84,578,138/10,810,062 shares of beneficial interest outstanding)............. $ 7.82
============
</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, 1998 (unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $77,443)........................ $ 1,218,071
Interest....................................................................... 122,192
------------
Total Investment Income........................................................ 1,340,263
------------
EXPENSES:
Management fee (Note 2)........................................................ $ 683,826
Custodian fees................................................................. 102,965
Legal and audit fees........................................................... 31,290
Amortization of organization expenses (Note 1)................................. 6,165
Trustees' fees and expenses (Note 2)........................................... 3,808
Other.......................................................................... 187,051
Interest expense (Note 3)...................................................... 2,690
------------
Total Expenses................................................................. 1,017,795
Fees deferred by Manager (Note 2).............................................. (96,293)
------------
NET EXPENSES................................................................... 921,502
------------
NET INVESTMENT INCOME.......................................................... 418,761
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 3)
Net realized loss on:
Security transactions..................................................... (8,949,634)
Forward foreign currency exchange contracts............................... (356,890)
Foreign currencies transactions........................................... (9,104)
------------
Net realized loss on investments during the period............................. (9,315,628)
------------
Change in unrealized appreciation/(depreciation) of:
Securities transactions................................................... (20,024,331)
Forward foreign currency exchange contracts............................... 3,574
Foreign currency transactions and net other assets........................ (2,420)
------------
Net unrealized depreciation of investments during the period................... (20,023,177)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS................................ (29,338,805)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........................... $(28,920,044)
============
</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 6/30/97 Year
(unaudited) Ended 12/31/97
<S> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income.............................................................. $ 418,761 $ 565,662
Net realized loss on securities, forward foreign currency exchange contracts
and foreign currency transactions during the period........................... (9,315,628) (10,191,620)
Net unrealized depreciation of securities, forward foreign currency exchange
contracts, foreign currency transactions and net other assets during the
period........................................................................ (20,023,177) (952,556)
------------ ------------
Net decrease in net assets resulting from operations............................... (28,920,044) (10,578,514)
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income...................................... -- (186,920)
BENEFICIAL INTEREST TRANSACTIONS:
Net increase/(decrease) from beneficial interest transactions (Note 4)........ (1,338,426) 98,636,299
------------ ------------
Net increase/(decrease) in net assets.............................................. (30,258,470) 87,870,865
NET ASSETS:
Beginning of period................................................................ 114,836,608 26,965,743
------------ ------------
End of period...................................................................... $ 84,578,138 $114,836,608
============ ============
Undistributed net investment/(Accumulated net investment loss.).................... $ 359,149 $ ( 59,612)
============ ============
</TABLE>
Financial Highlights
Selected Per Share Data for the Year or Period Ended:
<TABLE>
<CAPTION>
6/30/98
(unaudited) 12/31/97 12/31/96*
<S> <C> <C> <C>
Net asset value - beginning of period.............................................. $ 10.57 $ 10.65 $ 10.00
------------ ------------ ------------
Net investment income.............................................................. 0.04 0.02 0.03
Net realized and unrealized gain/(loss) on investments............................. (2.79) (0.08) 0.65
------------ ------------ ------------
Net increase/(decrease) in net assets resulting from investment operations......... (2.75) (0.06) 0.68
Distributions to shareholders:
Distributions from net investment income...................................... -- (0.02) (0.03)
------------ ------------ ------------
Net asset value--end of period..................................................... $ 7.82 $ 10.57 $ 10.65
============ ============ ============
Total return**..................................................................... (26.02)% (0.58)% 6.79%
============ ============ ============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............................................... $ 84,578 $ 114,837 $ 26,966
Ratio of net investment income to average net assets............................... 0.82%+ 0.63% 0.81%+
Ratio of operating expenses to average net assets, including
interest expense.............................................................. 1.81%+ 1.76% 1.45%+
Ratio of operating expenses to average net assets, excluding
interest expense.............................................................. 1.75%+ 1.75% 1.44%+
Portfolio turnover rate............................................................ 56% 71% 43%
Net investment income/(loss) before deferral of fees and absorption of
expenses by Manager........................................................... $ 0.03 $ 0.05 $ (0.01)
Operating expense ratio before deferral of fees and absorption of
expenses by Manager, including interest expense............................... 2.00%+ 1.81% 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.
14
<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: Emerging
Markets Fund (the "Fund"). The Montgomery Variable Series: Growth 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. 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 by
management as determined in good faith 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. 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 are 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.
15
<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 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.
F. 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. 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 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.
H. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Fund
amounted to $62,160 and are amortized on a straight-line basis over a
period of sixty months from commencement of operations.
I. 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.
16
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS (unaudited)
(continued)
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
1.25% 1.00%
The Manager has voluntarily 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, 1998, the Manager recouped fees of $46,496.
As of June 30 1998, the deferred management fees subject to recoupment
are $96,293.
b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager, Montgomery Asset Management and/or Commerzbank AG,
"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 is 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 six months ended June 30,
1998, were $141,293,855 and $54,994,936, 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 $5,730,063 and $26,075,275, respectively.
The schedule of forward foreign currency exchange contracts at June
30, 1998 was as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
CONTRACT VALUE VALUE APPRECIATION OF
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO SELL: DATE (NOTE 1) CONTRACTS
(CONTRACT COST $40,206)
<S> <C> <C> <C>
1,696,708 Philippine Pesos 07/01/98 $ 40,688 $ 482
==================================
</TABLE>
17
<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: Emerging Markets 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 0.8% quarterly commitment fee of the unutilized credit
line balance. For the six months ended June 30, 1998, there were no
borrowings under this agreement.
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the 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 3,242,462 $ 30,636,794 12,138,870 $143,974,251
Issued as Reinvestment
of Dividends -- -- 18,254 186,920
Shares Redeemed (3,301,368) (31,975,220) (3,820,148) (45,524,972)
---------------------------------------------------------
Net Increase/(Decrease) (58,906) $ (1,338,426) 8,336,976 $ 98,636,299
=========================================================
</TABLE>
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 revaluation 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 Fund may not invest more than 15% of its net assets in illiquid
securities. The securities shown in the table below have been determined by
the Manager to be illiquid because they are restricted or because there is
an exceptionally low trading volume in the primary trading market for the
security at June 30, 1998. These securities are valued at market price.
<TABLE>
<CAPTION>
ACQUISITION 6/30/98 VALUE % OF TOTAL
SECURITY DATE SHARES MARKET VALUE PER SHARE COST NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
Ceske Radiokomunikae, GDR 05/25/98 21,390 $ 458,281 $21.43 $428,349 0.5%
Fauji Fetilizer Company Ltd. 10/21/97 375,000 $ 406,680 $ 1.08 802,138 0.5
Pakistan State Oil 10/21/97 39,000 $ 62,552 $ 1.60 357,285 0.1
Uralmas Zavody, ADR 10/28/97 32,500 $ 211,250 $ 6.50 277,875 0.2
Uraltelecom, ADR 02/20/98 3,999 $ 39,990 $10.00 116,521 0.1
---------------------------------------------------
$1,178,753 1.4%
===================================================
</TABLE>
18
