<PAGE>
Montgomery Variable Series:
Emerging Markets Fund
Annual Report
December 31, 1997
[LOGO OF THE MONTGOMERY FUNDS]
Invest wisely.(R)
The Montgomery Funds
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights
December 31, 1997
- --------------------------------------------------------------------------------
Investment Review
Q: How did the Fund perform during the second half of 1997?
A: The Fund led its benchmark, the IFC Global Index, over that period, though
both posted a loss. For 1997 as a whole, the Fund outperformed the index by
a significant margin-more than 13 percentage points-while keeping its losses
contained to the low single digits.
Q: What main factors contributed to that performance?
A: The Fund's underweighting in Southeast Asia was the single most positive
factor in its outperformance during the second half of 1997 and for the year
as a whole. As far back as late 1996 we had become concerned that countries
such as Thailand were overextended, and began to reduce the portfolio's
exposure there. By mid-1997, the Fund had just 1.8% in Thailand and a
collective 15.6% in Southeast Asia. As a result, the Fund was somewhat
buffered from the initial wave of volatility.
The volatility spread to other emerging markets later in the year. Investors
began to sell off Latin American and eastern European countries out of fear
that their currencies might be vulnerable to devaluation. The Brazilian Real
came under some of the heaviest pressure as investors became more and more
concerned about the country's sizable current account deficit. As a result,
Brazil's stock market dropped 22% in U.S. dollar terms in just one week--
October 27-31--according to the International Finance Corporation (IFC).
That erased much of the strong gains it had racked up earlier in the year,
as late as mid-October, its year-to-date return had been as much as 52% in
U.S. dollar terms. It nonetheless closed up about 24.5% in U.S. dollar
terms.
[GRAPH APPEARS HEAR]
[PLOT POINTS TO COME]
Throughout 1997, Brazil was the Fund's largest country weighting, averaging
about 20% of its assets. So, while the Fund initially benefited from its
underweighting in Southeast Asia, it did not escape the decline in Brazil and
other emerging markets later in the year.
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 12/31/97
- --------------------------------------------
Montgomery Variable Series:
Emerging Markets Fund
Since inception (2/2/96)...............3.18%
One year..............................-0.58%
IFC Global Composite Index
Since 1/31/96.........................-6.56%
One year.............................-14.42%
- --------------------------------------------
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 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.
2 The Lipper Emerging Markets Funds Average
universe consists of 94 funds.
1
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights (continued)
December 31, 1997
- --------------------------------------------------------------------------------
Q: Has the recent sell-off changed your opinion of Brazil?
A: No, we continue to believe there may be great long-term potential in
Brazil's market, which is why it remains the Fund's largest country
weighting. We think this year will be especially exciting there. The
government has agreed to speed up its privatization program, which could
create significant opportunities for investors. By our calculations,
Brazil's stock market is also one of the world's cheapest right now.
Brazil does need to reduce its large budget deficits, and we are encouraged
that its government has already taken at least two significant steps to do
so. On November 10, it announced a fiscal package that includes budget cuts
and tax increases totaling $18 billion. In addition, the government passed
fiscal reforms designed to reduce the country's excessive government
payrolls. We feel that these and the other policy measures that Brazil is
implementing clearly differentiate it from other countries that have not
made the difficult choices investors are demanding.
Q: And what's your outlook for Asia?
A: At the moment, the dust is far from settled there. During the first few
weeks of 1998, for example, Indonesia's stock market once again came under
intense pressure as its currency weakened drastically. Furthermore, some
Southeast Asian countries haven't yet made credible moves to address their
problems. Until we believe the situation has stabilized, we will continue
to significantly underweight the region. As of January 8, the Fund has just
1.4% of its assets in Southeast Asia. In addition, it had no exposure to
South Korea, a north Asian market that is grappling with severe structural
faults in its economy.
Q: Besides Brazil, what other markets are you favoring?
A: We continue to find Russia very intriguing. It's now the Fund's third
largest country weighting, accounting for about 10% of assets. As many
shareholders know, the Russian market went up like a rocket in 1996 and
1997. As a result, it's somewhat more expensive than it used to be, but we
still believe Russia offers tremendous asset values, especially in the
energy sector. The country is blessed with huge deposits of crude oil,
natural gas, and other natural resources. We're aiming to benefit from the
long-term development of those resources by investing in Russian companies
such as oil producer Tatneft, which was one of the Fund's top five holdings
at the end of 1997.
We've also added significantly to the portfolio's weighting in Turkey. The
Fund had just 1.6% of assets there in mid-1997; by year's end, the
weighting was up to 6%. Turkey's stock market can be quite volatile, but we
believe the country will gain long-term benefits from its continued
integration with greater Europe and from potentially growing economic
momentum on the Continent.
Q: There's no denying that 1997 was a difficult year for investors in the
emerging markets. Is there still a justification for investing there?
A: Yes, we are still convinced that there are many compelling reasons for
long-term investors to include at least some emerging markets exposure in
their portfolio. Most of the arguments we've made in the past for this
asset class-including the huge demographic, economic, and political
changes going on in the world's developing countries-are still in
place, despite last year's turbulence. Although we believe these trends
can't easily be derailed overnight, we also think they are not unlikely
to unfold overnight, either.
2
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights (continued)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Top Ten Countries
(as a percentage of total net assets)
<S> <C>
Brazil..............................................................18.4%
Mexico..............................................................12.6
Russia..............................................................10.3
India............................................................... 6.7
Turkey.............................................................. 6.0
Top Ten Industries
(as a percentage of total net assets)
Oil.................................................................13.9%
Telephone/Networks..................................................11.8
Electric Utilities.................................................. 8.5
Holding............................................................. 6.4
Banks............................................................... 5.4
Food & Beverage..................................................... 4.0
Conglomerates....................................................... 3.5
Telephone/Long Distance............................................. 3.1
Retail Trade........................................................ 2.7
Cement.............................................................. 2.4
Top Ten Holdings
(as a percentage of total net assets)
Compania Anonima Nacional Telefonos de Venezuela, ADR.............. 3.8%
Tatneft, Sponsored ADS............................................. 3.7
Telec Brasileiras-Telebras ON...................................... 3.2
Telefonos de Mexico S.A., ADR...................................... 3.1
Telebras, ADR...................................................... 3.0
Petroleo Brasileiro................................................ 2.3
Alfa S.A. de C.V................................................... 1.9
Bharat Petroleum Corporation Ltd................................... 1.7
LukOil Company, ADR................................................ 1.6
Turk Sise ve Cam................................................... 1.6
</TABLE>
3
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments
December 31, 1997
<TABLE>
<CAPTION>
Common Stocks-74.9% Value
Shares (Note 1)
<S> <C> <C>
Argentina-2.2%
48,000 Cresud S.A.+ (Real Estate) $ 96,018
121,000 Inversiones y Representaciones (Real Estate) 450,205
114,000 Siderar S.A. (Steel) 484,592
15,700 Telefonica de Argentina, Sponsored ADR 584,825
(Telephone/Networks)
27,700 Y.P.F. Sociedad Anonima, ADS (Oil) 946,994
-----------
2,562,634
-----------
Brazil-9.1%
11,900 Cemig, ADS (Electric Utilities) 511,700
1,225,000 Cia Saneamento Basico Estado+ (Water Utilities) 290,870
31,910,000 Electrobas (Electric Utilities) 1,586,850
29,000 Electrobas, ADR (Electric Utilities) 755,812
580 Electrobas, GDS (Electric Utilities) 63,220
8,000 Souza Cruz S.A. (Tobacco) 64,513
29,800 Telebras, ADR (Telephone/Networks) 3,469,837
36,570,000 Telec Brasileiras-Telebras ON (Telephone/Networks) 3,719,094
500,000 Telec do Rio Janeiro S.A.+ (Telephone/Networks) 43,905
-----------
10,505,801
-----------
Chile-1.4%
21,900 Empresa Nacional Electricidad S.A., ADR (Elecric Utilities) 387,356
33,500 Linea Aerea Nacional Chile S.A., ADR+ (Airlines) 456,437
7,800 Sociedad Quimica y Minera de Chile, ADR (Chemicals) 343,200
33,400 Supermercados Unimarc S.A., ADR+(Retail Trade) 411,238
-----------
1,598,231
-----------
China/Hong Kong-4.4%
1,030,000 Anhui Conch Cement Company, Ltd.+ (Cement) 179,442
32,000 Cheung Kong Holdings (Real Estate) 209,575
127,000 China Light and Power Company (Electric Utilities) 704,736
190,000 China National Aviation Corporation+ (Airlines) 40,212
267,000 China Resources Enterprises Ltd. (Holding) 596,090
17,400 China Telecom ADR+ (Telecommunications/Wireless) 583,988
97,000 Citic Pacific Ltd. (Holding) 385,547
25,300 HSBC Holdings (Banks) 623,603
85,000 Hutchison Whampoa Ltd. (Conglomerates) 533,101
131,000 New World Development Company Ltd. (Holding) 453,065
160,000 New World Infrastructure Ltd+ (Heavy Construction) 360,305
75,000 Shanghai Industrial Holdings Ltd. (Conglomerates) 278,746
480,000 Zhejiang Expressway Company Ltd.+ (Heavy Construction) 97,251
-----------
5,045,661
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
Common Stocks (continued) Value
Shares (Note 1)
<C> <S> <C>
Colombia-1.1%
38,900 Almacenes Exito S.A. (Retail Trade) $ 129,002
108,001 Bavaria (Food and Beverage) 1,107,788
----------
1,236,790
----------
Czech Republic-2.3%
18,000 Alpha-Effect+ (Mutual Funds) 419,476
15,000 Komercni Banka, ADR+ (Banks) 183,750
18,000 Komercni Banka, GDR*** (Banks) 220,500
11,800 Komercni Banka A.S., GDR (Banks) 144,550
23,800 Komercni Banka I.F.+ (Mutual Funds) 471,376
28,000 PIF+ (Mutual Funds) 338,403
58,800 The Czech Value Fund+ (Mutual Funds) 367,500
83,000 Vynosovy I.F.+(Mutual Funds) 448,285
----------
2,593,840
----------
Egypt-2.8%
30,800 Al-Ahram Beverages Company, GDR*** (Food and Beverage) 870,100
5,000 Al-Ahram Pyramid Beverages Company (Food and Beverage) 285,084
38,000 Amreya Cement (Cement) 887,877
52,500 Paints and Chemical Industries Company*** (Paint) 551,250
25,990 Tora Cement (Cement) 595,727
----------
3,190,038
----------
Greece-0.2%
9,000 Hellenic Telecommunication Organization S.A. (Telephone/Networks) 184,534
----------
Hungary-1.0%
28,000 Borsodchem Rt. (Chemicals) 1,008,984
16,900 Zalakeramia Rt., GDR***+ (Building Materials) 156,748
----------
1,165,732
----------
India-6.7%
19,950 Bajaj Auto, Ltd., GDR (Auto/Auto Parts) 403,988
32,400 Bajaj Auto, Ltd., GDS*** (Auto/Auto Parts) 656,100
187,000 Bharat Petroleum Corporation Ltd. (Oil) 1,985,682
59,900 Indian Hotels, GDS (Euro) (Lodging) 1,126,869
25,000 Indian Hotels, GDS*** (Lodging) 470,312
46,000 ITC Ltd., GDR**+ (Holding) 725,791
180,000 Mahangar Telephone Nigam, Ltd., GDR**+ (Telephone/Regional - Local) 1,184,694
142,700 Tata Engineering & Locomotive Company, Ltd., GDR*** (Auto/Auto Parts) 1,189,404
----------
7,742,840
Indonesia-0.1%
3,500 Gulf Indonesia Resources Ltd.+ (Oil) 77,000
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
Common Stocks (continued) Value
Shares (Note 1)
<C> <S> <C>
Israel-1.4%
295,000 Bank Leumi Le-Israel (Banks) $ 495,532
85,000 Supersol Ltd. (Retail Trade) 241,092
17,850 Teva Pharmaceuticals, ADR (Pharmacy/Drugs) 844,528
----------
1,581,152
----------
Kazakhstan-0.1%
4,000 Kazkommerts Bank+ (Banks) 84,000
----------
Mexico-12.3%
1,348,000 Accel, S.A., Series B+ (Conglomerates) 354,100
130,000 Acer Computer Latino America S.A. de C.V.+(Computers and Office Equipment) 386,593
321,000 Alfa S.A. de C.V. (Conglomerates) 2,159,755
18,500 Cifra S.A. de C.V., ADR+ (Retail Trade) 444,000
66,000 Corpacion Interamericana Entertainment S.A., Series B+ (Entertainment) 511,939
66,200 Empresas ICA Sociedad Controladora S.A. de C.V., ADR (Heavy Construction) 1,088,163
995,000 Grupo Financiero Banorte S.A. de C.V., Class B+ (Holding) 1,738,368
60,000 Grupo Industrial Maseca S.A. de C.V. (Food and Beverage) 930,000
480,000 Grupo Industrial Maseca S.A. de C.V., Class B (Food and Beverage) 496,029
38,000 Grupo Radio Central S.A. de C.V., ADR (Broadcasting/Advertising) 541,500
36,000 Pepsi-Gemex S.A. (Food and Beverage) 519,750
171,000 San Luis Corporacion S.A. de C.V. (Metals and Mining) 1,404,783
63,800 Telefonos de Mexico S.A., ADR (Telephone/Long Distance) 3,576,788
----------
14,151,768
----------
Morocco-0.0%#
2 Banque Marocaine du Commerce Exterieur, GDR (Banks) 41
----------
Pakistan-1.0%
375,000 Fauji Fertilizer Company Ltd.** (Agricultural Commodities) 717,942
46,800 Pakistan State Oil** (Oil) 398,278
----------
1,116,220
----------
Peru-0.8%
73,000 Ferreyros Enrique S.A. (Holding) 77,152
12,412 Ferreyros Enrique S.A., ADS*** (Metals and Mining) 294,009
23,300 Telefonica del Peru S.A., Series B, ADR (Telephone/Networks) 541,725
----------
912,886
----------
Philippines-0.4%
1,288,000 DMCI Holdings (Heavy Construction) 38,163
318,000 International Container Terminal Services, Inc. (Shipping) 39,259
262,200 Ionics Circuit, Inc. (Electronics) 106,822
779,900 Music Semiconductors Corporation (Semiconductor) 279,223
851,000 PCI Leasing and Finance, Inc.+ (Diversified Financial Services) 16,809
----------
480,276
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
Common Stocks (continued) Value
Shares (Note 1)
<C> <S> <C>
Poland-0.4%
8,500 NIF Privatization+ (Mutual Funds) $ 301,418
15,000 Prokom ADR***+ (Software Systems) 168,375
----------
469,793
----------
Portugal-2.8%
15,000 Brisa-Auto Estradas+ (Transportation) 537,327
766 Capital Portugal Fund+ (Mutual Funds) 126,412
16,500 Cia de Segros Tranquilidade (Insurance) 396,251
50,500 Cimpor - Cimentos de Portugal (Building Materials) 1,323,619
21,300 Sonae Investimentos (Retail Trade) 861,490
----------
3,245,099
----------
Russia-8.1%
670,000 Bashkirenergo+ (Electric Utilities) 361,800
22,000 Irkutskenegro, ADR (Electric Utilities) 211,750
9 Irkutskenegro, RDC***+ (Electric Utilities) 354,600
8,500 Krasny Oktyabr (Food and Beverage) 117,938
14,600 LukOil Company, ADR (Oil) 1,345,025
93 Russian Telecom Basket GEC 144A***+ (Telephone/Regional - Local) 837,640
3,000 Samarasvyazinform+ (Telephone/Local) 234,000
78,500 Surgutneftegaz, ADR (Oil) 799,915
3,900 Tatneft, ADR+ (Oil) 555,750
29,450 Tatneft, Sponsored ADS*** (Oil) 4,196,625
32,500 Uralmas Zavody+ (Holding) 300,625
----------
9,315,668
----------
South Africa-3.4%
81,000 Barlow, Ltd. (Building Materials) 687,414
1,950,000 Consolidated African Mining Company+ (Holding) 560,978
53,000 De Beers Centenary AG (Holding) 1,078,188
102,550 JCI Ltd. (Diversified Financial Services) 458,330
194,882 Lonrho (Conglomerates) 296,338
59,100 Sasol, Ltd. (Oil) 619,357
820,000 South Africa Iron and Steel Industrial Corporation (Steel) 242,638
----------
3,943,243
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
Common Stocks (continued) Value
Shares (Note 1)
<S> <C> <C>
Taiwan-2.1%
44,320 ASE (Semiconductor) $ 155,545
12,180 Bank Sinopac (Banks) 9,296
247,000 China Development Corporation (Diversified Financial Services) 704,092
152,400 Delta Electronic Industrial (Electrical Equipment) 607,264
171,000 Taiwan Semiconductor Company (Semiconductor) 587,034
92,400 Yageo Corporation (Electronics) 209,582
2,480 Yageo Corporation, GDR (Electronics) 28,210
6,020 Yageo Corporation, GDR (Electronics) 68,478
800 Yue Loong Motor Company (Auto/Auto Parts) 1,447
-----------
2,370,948
-----------
Thailand-0.2%
53,000 Central Pattana Public Company, Ltd. (F) (Real Estate) 27,820
110,100 Hernaraj Land and Development Public Company Ltd. (F)** (Real Estate) 113,815
58,400 Pizza Public Company Ltd. (F) (Food and Beverage) 106,352
41,800 Tipco Asphalt Public Company Ltd. (F) (Heavy Construction) 33,136
-----------
281,123
-----------
Turkey-6.0%
7,551,000 Akcansa Cimento A.S. (Cement) 1,056,594
3,039,000 Haci Omer Sabanci Holding A.S.+ (Diversified Financial Services) 186,959
4,129,999 Koc Holdings (Holding) 966,490
1,088,000 Migros Turk T.A.S. (Retail Trade) 984,318
25,198,558 Turk Sise ve Carn (Glass) 1,854,176
47,089,000 Yapi ve Kredi Bankasi A.S. (Banks) 1,794,949
-----------
6,843,486
-----------
Venezuela-4.6%
103,800 Compania Anonima Nacional Telefonos de Venezuela, ADR (Telephone/Networks) 4,320,675
810,547 Electricidad de Caracas (Electric Utilities) 972,399
-----------
5,293,074
-----------
Total Common Stocks (Cost $87,089,019) 85,991,878
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
Preferred Stocks-11.7% Value
Shares (Note 1)
<S> <C> <C>
Brazil-9.2%
185,308,000 Banco Bradesco (Banks) $ 1,826,431
90,000,000 Banco de Credito Nacional S.A. (Banks) 782,223
790,000 Celesc, GDS (Electric Utilities) 983,916
7,400,000 CESP-Cia Energetica de Sao Paulo (Electric Utilities) 444,245
23,800,000 Cia Energetica de Minas Gerais (Electric Utilities) 1,034,059
40,583,000 Cia Paranaense de Energi (Electric Utilities) 550,900
15,860,000 Electrobas, "B" (Electric Utilities) 810,017
550,000 Itausa Investimentos Itau (Holding) 428,744
65,880,000 Odebrecht S.A. (Heavy Construction) 442,722
11,100,000 Petroleo Brasileiro (Oil) 2,595,851
6,530,000 Telec do Rio Janeiro S.A. (Telephone/Networks) 678,715
20,000 Vale do Rio Doce "B" (Metals and Mining) 0
-----------
10,577,823
-----------
Greece-0.1%
12,000 Delta Dairy S.A. (Food and Beverage) 107,803
-----------
Portugal-0.2%
32,000 Lusomundo-SGPS (Entertainment) 292,964
-----------
Russia-2.2%
58,600 LukOil Company, ADR (Oil) 1,889,850
193,108 Orenburgneftegaz+ (Oil) 598,635
-----------
2,488,485
-----------
Total Preferred Stocks (Cost $12,662,486) 13,467,075
-----------
Convertible Bonds-0.4%
Principal Amount
Mexico-0.3%
$300,000 Alfa S.A. de C.V., 8.000% due 09/15/00*** (Conglomerates) 349,500
-----------
Thailand-0.1%
150,000 Central Pattana Public Company, Ltd., 2.750% due 04/10/01 (Real Estate) 82,500
-----------
Total Convertible Bonds (Cost $477,845) 432,000
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1997
<TABLE>
<CAPTION>
Rights-0.0%# Value
Shares (Note 1)
<S> <C> <C>
Brazil-0.0%#
7,922,875 Banco Bradesco, Expires 02/06/98+ (Banks) $ 28,396
8,000 Souza Cruz S.A., Expires 01/29/98+ (Tobacco) 63
-------------
28,459
-------------
Taiwan-0.0%#
12,740 Yuanta Securities Corporation, Expires 01/12/98+ (Securities Brokerage) 11,520
-------------
Total Rights (Cost $22,463) 39,979
-------------
Total Securities (Cost $100,251,813) 99,930,932
-------------
Repurchase Agreements-11.5%
Principal Amount
$6,615,000 Agreement with Bear Stearns, Tri-Party, 6.850% dated 12/31/97,
to be repurchased at $6,617,517, on 01/02/98, collateralized by
$6,890,523 market value of U.S. government securities, having
various maturities and various interest rates 6,615,000
6,615,000 Agreement with BZW Securities, Tri-Party, 6.900% dated 12/31/97,
to be repurchased at $6,617,536, on 01/02/98, collateralized by
$6,747,300 market value of U.S. government securities, having
various maturities and various interest rates 6,615,000
------------
Total Repurchase Agreements (Cost $13,230,000) 13,230,000
------------
Total Investments (Cost $113,481,813*) 98.5% 113,160,932
Other Assets and Liabilities (Net) 1.5 1,675,676
------- ------------
Net Assets 100.0% $114,836,608
======= ============
</TABLE>
* Aggregate cost for federal tax purposes was $113,631,079.
** 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
EURO Trades through Euroclear
(F) Foreign or alien share.
GDR Global Depositary Receipt
GDS Global Depositary Share
GEC Global Equity Certificate
RDC Russian Depository Certificate
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (Identified cost $113,481,813)(Note 1)
Securities................................................................. $ 99,930,932
Repurchase agreements...................................................... 13,230,000
------------
Total investments............................................................... 113,160,932
Cash............................................................................ 389,897
Foreign currency (Cost $688,139)................................................ 685,820
Receivables:
Investment securities sold................................................. 2,109,819
Dividends.................................................................. 407,920
Shares of beneficial interest sold......................................... 19,619
Interest................................................................... 12,583
Other Assets:
Organization costs (Note 1)................................................ 38,306
------------
Total Assets............................................................... 116,824,896
Liabilities:
Forward foreign currency exchange contracts:
Net unrealized depreciation of forward foreign
currency contracts (Note 3)............................................. $ 1,756
Payables:
Investment securities purchased............................................ 1,407,552
Shares of beneficial interest redeemed..................................... 366,449
Management fee (Note 2).................................................... 110,955
Trustees' fees and expenses (Note 2)....................................... 1,000
Other accrued liabilities and expenses..................................... 100,576
----------
Total Liabilities............................................................... 1,988,288
------------
Net Assets...................................................................... $114,836,608
------------
Net Assets consist of:
Accumulated net investment loss................................................. $ (59,612)
Accumulated net realized loss on securities sold, forward foreign currency
exchange contracts and foreign currency transactions....................... (9,869,888)
Net unrealized depreciation of investments, forward foreign currency
exchange contracts, foreign currency transactions and other net assets..... (326,359)
Shares of beneficial interest................................................... 108,690
Additional paid-in capital...................................................... 124,983,777
------------
Net Assets...................................................................... $114,836,608
------------
Net Asset Value, offering and redemption price per share
($114,836,608 divided by 10,868,968 shares of beneficial interest outstanding).. $ 10.57
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Investment Income:
<S> <C> <C>
Dividends (Net of foreign withholding taxes of $101,179)....... $ 1,512,049
Interest....................................................... 620,429
------------
Total Investment Income........................................ 2,132,478
Expenses:
Management fee (Note 2)........................................ $ 1,201,496
Custodian fees................................................. 192,621
Legal and audit fees........................................... 68,512
Amortization of organization expenses (Note 1)................. 12,470
Trustees' fees and expenses (Note 2)........................... 5,259
Other.......................................................... 127,486
Interest expense (Note 3)...................................... 5,468
------------
Total Expenses................................................. 1,613,312
Fees deferred by Manager (Note 2).............................. ( 46,496)
------------
Net Expenses................................................... 1,566,816
------------
Net Investment Income.......................................... 565,662
------------
Net Realized and Unrealized Loss on Investments
(Notes 1 and 3)
Net realized loss on:
Security transactions (Net of foreign capital gains tax
of $40,660)............................................ (9,589,243)
Forward foreign currency exchange contracts............... (290,108)
Foreign currencies transactions........................... (312,269)
------------
Net realized loss on investments during the year............... (10,191,620)
------------
Change in unrealized depreciation of:
Securities................................................ (947,717)
Forward foreign currency exchange contracts............... (3,526)
Foreign currency transactions and net other assets........ (1,313)
------------
Net unrealized depreciation of investments during the year..... (952,556)
------------
Net Realized and Unrealized Loss on Investments................ (11,144,176)
------------
Net Decrease in Net Assets Resulting from Operations........... $(10,578,514)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year For the Period
Ended 12/31/97 Ended 12/31/96*
<S> <C> <C>
Net Increase/(Decrease) in Net Assets Resulting from Operations:
Net investment income. $ 565,662 $ 68,556
Net realized loss on securities, forward foreign currency exchange contracts
and foreign currency transactions during the year (10,191,620) (119,260)
Net unrealized appreciation/(depreciation) of securities, forward foreign
currency exchange contracts, foreign currency transactions and net
other assets during the year (952,556) 626,197
------------ -----------
Net increase/(decrease) in net assets resulting from operations (10,578,514) 575,493
Distributions to Shareholders:
Distributions from net investment income (186,920) (65,918)
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (Note 4) 98,636,299 25,956,168
------------ -----------
Net increase in net assets 87,870,865 26,465,743
Net Assets:
Beginning of period 26,965,743 500,000
------------ -----------
End of period $114,836,608 $26,965,743
------------ -----------
Accumulated net investment loss. $ ( 59,612) $ (15,221)
------------ -----------
Financial Highlights
Selected Per Share Data for the Year or Period Ended:
<CAPTION>
12/31/97 12/31/96*
<S> <C> <C>
Net asset value - beginning of period $ 10.65 $ 10.00
------------ -----------
Net investment income 0.02 0.03
Net realized and unrealized gain/(loss) on investments (0.08) 0.65
------------ -----------
Net increase/(decrease) in net assets resulting from investment operations (0.06) 0.68
------------ -----------
Distributions to shareholders:
Distributions from net investment income (0.02) (0.03)
------------ -----------
Net asset value--end of period $ 10.57 $ 10.65
------------ -----------
Total return** (0.58)% 6.79%
------------ -----------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000's) $ 114,837 $ 26,966
Ratio of net investment income to average net assets 0.63% 0.81%+
Ratio of operating expenses to average net assets, including
interest expense 1.76% 1.45%+
Ratio of operating expenses to average net assets, excluding
interest expense 1.75% 1.44%+
Portfolio turnover rate 71% 43%
Average commission rate paid (a) $ 0.0012 $ 0.0002
Net investment income/(loss) before deferral of fees and absorption of
expenses by Manager $ 0.05 $ (0.01)
Operating expense ratio before deferral of fees and absorption of
expenses by Manager, including interest expense 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.
(a) Average commission rate paid per share of securities purchased and sold by
the Fund.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
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 December 31, 1997, the Trust had four series, the
Montgomery Variable Series: Growth Fund, the Montgomery Variable Series:
Emerging Markets Fund, the Montgomery Variable Series: International Small Cap
Fund and the Montgomery Variable Series: Small Cap Opportunities Fund. The
Montgomery Variable Series: Small Cap Opportunities Fund had not commenced
operations as of December 31, 1997. 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 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. The value of securities denominated in foreign currencies
and traded on foreign exchanges or in foreign markets are 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.
Permanent differences incurred during the year ended December 31, 1997,
resulting from differences in book and tax accounting have been
reclassified at year end to reflect a decrease to undistributed net
investment income of $423,133 and a decrease to accumulated realized
loss of $423,133.
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.
14
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(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 in the
event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period
while the Fund seeks to assert its rights. The Fund's investment
manager, acting under the supervision of the Board of Trustees, reviews
the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to
evaluate potential risks. The Fund may also participate on an individual
or joint basis in tri-party repurchase agreements which involve a
counterparty and a custodian bank.
f. Securities Transactions and Investment Income
Securities transactions are recorded on a trade-date basis. Realized
gain and loss from securities transactions are 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 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, one of the largest publicly
held commercial banks in Germany.
15
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
Pursuant to the investment management agreement ("Investment Management
Agreement"), the Manager provides the Fund with advice on buying and
selling securities, manages the investments of the Fund including the
placement of orders for portfolio transactions, furnishes the Fund with
office space and certain administrative services, and provides the
personnel needed by the Trust with respect to the Manager's
responsibilities under such Agreement. As compensation, the Fund pays the
Manager a monthly management fee (accrued daily) at the following annual
rates based upon the average daily net assets of the Fund:
First $250 Million Over $250 Million
------------------ -----------------
1.25% 1.00%
The Manager has 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 year ended December 31, 1997, the Manager recouped fees of $86,264.
For the year ended December 31, 1997, the Manager has deferred fees of
$46,496.
As of December 31, 1997, the deferred management fees subject to recoupment
are $46,496.
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") 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 year ended December 31, 1997, were
$141,293,855 and $54,994,936, respectively.
b. At December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value for federal income tax purposes were
$9,487,271 and $9,957,418, respectively.
The schedule of forward foreign currency exchange contracts at December 31,
1997 was as follows:
<TABLE>
<CAPTION>
Net Unrealized
Contract Value Value Depreciation of
Forward Foreign Currency Exchange Contracts to Buy: Date (Note 1) Contracts
<S> <C> <C> <C> <C>
211,817 Portuguese Escudo 01/05/98 $ 77,731 $ 229
324,300 South African Commercial Rand 01/06/98 66,599 173
--------- --------
Total Forward Foreign Currency Exchange Contracts to Buy
(Contract Cost $144,732) $144,330 $ 402
========= ========
Forward Foreign Currency Exchange Contracts to Sell:
3,197,700 Czech Koruna 01/02/98 $ 92,456 $ 171
2,345,803 Mexican Pesos 01/02/98 290,664 20
3,439,174 Philippine Pesos 01/02/98 84,910 780
1,040,769 Thai Bhat 01/05/98 22,294 383
--------- --------
Total Forward Foreign Currency Exchange Contracts to Sell
(Contract Cost $488,970) $490,324 $1,354
========= ========
</TABLE>
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
$300,000,000. The Fund pays its pro-rata share of the .08% quarterly
commitment fee of the unutilized credit line balance. For the year ended
December 31, 1997, there were no borrowings under this agreement.
16
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
4. Transactions in Shares of Beneficial Interest:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the periods indicated below were:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1997 December 31, 1996*
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Sold 12,138,870 $143,974,251 2,724,011 $28,483,626
Issued as Reinvestment of
Dividends 18,254 186,920 6,363 65,918
Shares Redeemed (3,820,148) (45,524,872) (248,382) (2,593,376)
---------- ------------ --------- -----------
Net Increase 8,336,976 $ 98,636,299 2,481,992 $25,956,168
- ----------------------- ========== ============ ========= ===========
</TABLE>
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996 with initial funds of $500,000 and 50,000 shares.
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. Illiquid and 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 December 31, 1997. These securities are valued at market price.
<TABLE>
<CAPTION>
Acquisition 12/31/97 Value % of Total
Security Date Shares Market Value Per Share Cost Net Assets
<S> <C> <C> <C> <C> <C> <C>
Hemaraj Land and Development
Public Company Ltd. 07/08/97 110,100 $ 113,815 $ 1.03 $ 375,550 0.10%
ITC Ltd., GDR 09/15/97 46,000 725,791 15.78 728,065 0.63
Mahangar Telephone Nigam, Ltd. 06/13/97 180,000 1,184,694 6.58 1,431,416 1.03
---------- ----
$2,024,300 1.76%
========== ====
</TABLE>
The following securities held by the Fund on December 31, 1997, are generally
unrestricted securities for which a reliable market price can be established.
The securities are valued at market price. However, because the process of re-
registering foreign securities in the Fund's name can take more than seven days,
the following shares were deemed temporarily restricted or illiquid in the hands
of the Fund at December 31, 1997. The Fund bears the cost of re-registering
these securities:
<TABLE>
<CAPTION>
Acquisition 12/31/97 Value % of Total
Security Date Shares Market Value Per Share Cost Net Assets
<S> <C> <C> <C> <C> <C> <C>
Fauji Fertilizer Company Ltd. 10/21/97 375,000 $ 717,942 $1.91 $801,273 0.62%
Pakistan State Oil 10/21/97 46,800 398,278 8.51 425,140 0.35
---------- ----
$1,116,220 0.97%
========== ====
</TABLE>
7. Capital Loss Carryforward
At December 31, 1997, the Fund had available for Federal income tax purposes
unused capital losses of $84,636 expiring in 2004 and $5,851,470 expiring in
2005.
17
<PAGE>
The Montgomery Funds III
Notes to Financial Statements
(continued)
Under current tax law, net capital and currency losses realized after
October 31 may be deferred and treated as occurring on the first day of the
following fiscal year. For the fiscal year ended December 31, 1997, the Fund
elected to defer net capital and currency losses of $3,946,030 occurring
between November 1, 1997 and December 31, 1997.
Such deferred losses will be treated as arising on the first day of the
fiscal year ending December 31, 1998.
8. Change of Control of Manager
On March 25, 1997, Montgomery Securities, the Manager and CAM Acquisition
LLC ("CAM"), a newly organized subsidiary of Commerzbank Aktiengesellschaft,
entered into an agreement providing for the transfer of substantially all
the assets comprising the Manager's business to CAM. On June 23, 1997, the
shareholders of the Fund approved a new Investment Management Agreement with
CAM (renamed Montgomery Asset Management, LLC) that became effective upon
the closing of the Manager's transaction with CAM. Such transaction closed
on July 31, 1997.
18
<PAGE>
Report of Independent Accountants
To the Trustees and Shareholders of the Montgomery Variable Series: Emerging
Markets Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Montgomery Variable Series:
Emerging Markets Fund (one of the portfolios constituting The Montgomery Funds
III, and hereafter referred to as the "Fund") at December 31, 1997, and the
results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of investments at December 31, 1997 by correspondence with the
custodian and brokers, and the application of alternative auditing procedures
where confirmations from brokers were not received, provides a reasonable basis
for the opinion expressed above.
The financial statements of Montgomery Variable Series: Emerging Markets Fund
for the period from February 2, 1996 (commencement of operations) through
December 31, 1996 were audited by other independent accountants whose report
dated January 31, 1997 expressed an unqualified opinion on those statements.
Price Waterhouse LLP
San Francisco, CA
February 11, 1998
19
<PAGE>
The Montgomery Funds III
Note: Results of Voting at Special Shareholders' Meeting (Unaudited)
A special meeting of the Fund's shareholders was held on June 23, 1997. The
results of votes taken among shareholders on proposals before them are
listed below (may not total 100% because of rounding):
Proposal 1
For the approval of the new Investment Management Agreement between the Fund
and CAM Acquisition, LLC ("New Montgomery") pursuant to which New Montgomery
will act as adviser with respect to the assets of the Fund, to become
effective upon the closing of the transaction by which substantially all the
assets of Montgomery Asset Management, L.P. will be acquired by New
Montgomery, as subsidiary of Commerzbank AG.
<TABLE>
<CAPTION>
Voting Result # of Shares Voted % of Shares Voted
<S> <C> <C>
For 5,363,953.403 87.343%
Against 332,449.272 5.413
Abstained 444,823.047 7.243
Total 6,141,225.722 100.000%
Proposal 2
For the approval of authority for the Board of Trustees to approve any
future conversion of the Fund to a feeder fund in a master/feeder fund
structure.
Voting Result # of Shares Voted % of Shares Voted
<S> <C> <C>
For 5,246,484.676 85.431%
Against 393,876.866 6.414
Abstained 500,864.180 8.156
Total 6,141,225.722 100.000%
Proposal 3
For the approval of certain changes to the fundamental investment
restrictions of the Fund, as described in the proxy statement.
Voting Result # of Shares Voted % of Shares Voted
<S> <C> <C>
For 5,222,266.377 85.036%
Against 429,883.812 7.000
Abstained 489,075.533 7.964
Total 6,141,225.722 100.000%
</TABLE>
20
<PAGE>
Tax Information
Fiscal Year Ended December 31, 1997
(Unaudited)
For the fiscal year ended December 31, 1997, foreign income and foreign taxes
paid relating to foreign sources and possessions in the United States on a per-
share basis were as follows:
Foreign Income Foreign Taxes
Variable Emerging Markets Fund $ 0.1484 $ 0.0096
21
