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[PICTURE APPEARS HERE]
The Montgomery Funds/SM/
Variable Series
Growth Fund
Semiannual Report
June 30, 1999
Invest wisely(R)
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I N V E S T ME N T R E V I E W
Q: How did the Fund perform for the quarter and year ended June 30, 1999?
A: For the quarter ended June 30, 1999, the Portfolio dramatically outperformed
its benchmark, returning 18.0% versus the S&P 500 Index's return of 7.0%. In our
1998 year-end shareholder letter, we discussed the fact that stock market
results were being driven by a small group of very large-cap companies with
extremely high stock valuations. The first quarter of 1999 showed a continuation
of these trends. Market dynamics shifted abruptly as we moved into the second
quarter, resulting in the Fund's outperforming the S&P 500 by more than 1,000
basis points. Because of the three prior quarters, however, for the 12-month
period the Fund returned 13.1% versus 22.7% for the S&P 500.
Q: What trends had the most impact on performance over that period?
A: Although the Fund invests primarily in U.S.-based companies, global trends
had the biggest impact on performance during the year. Following a long period
of impressive growth in the economies of Asia, the subsequent crisis in the
region had a tremendous negative effect on world commodity prices and demand for
capital goods. It was this effect that caused the ripple that brought down so
many other markets and contributed to the correction in the U.S. market in the
third quarter of 1998. Against this backdrop investors fled to the largest, most
liquid securities, which they believed could offer sustainable earnings growth
regardless of the global economic climate.
By April 1999, however, signs of a recovery in Asia, coupled with substantial,
continued strength in the U.S. economy, led to rising commodity prices
(especially energy). This helped awaken investors to opportunities in a broad
array of attractively valued companies likely to benefit from a resumption of
global growth. As a result, there was a market rotation away from richly valued
growth stocks into the previously neglected cyclical and smaller-cap sectors, in
which the Fund has a higher concentration of its assets.
Q: Did you make any significant changes to the portfolio in response to such
shifting market conditions?
A: In spite of the very narrow focus of the market through three of the four
quarters of the fiscal year, we maintained our strategy, which emphasizes buying
companies that exhibit reasonable valuations yet have substantial forward
growth prospects. Today two-thirds of the market capitalization of the S&P 500
Index trades at an average price-to-earnings multiple above 40, more than double
the historical norm. Furthermore, these historically high valuations are based
on company earnings that are themselves at historic highs (i.e., record net
profit margins).
In our opinion the narrowness of the market was due to a set of very unusual
global circumstances that caused investors to focus on the near term without
taking into consideration the long-term potential and risks. Our strategy, in
contrast, involves seeking out companies that are undergoing positive, long-term
fundamental change and are attractively valued. This led the portfolio to
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Montgomery
Variable Series
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Growth Fund
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Portfolio Highlights
(Unaudited)
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PORTFOLIO MANAGEMENT
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Roger Honour ............................................. Sr. Portfolio Manager
Kathryn Peters ............................................... Portfolio Manager
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FUND PERFORMANCE
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Average annual total returns for the period ended 6/30/99
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Montgomery Variable Series:
Growth Fund
Since inception (2/6/96) ............................................... 22.81%
One year ............................................................... 13.07%
Three years ............................................................ 20.36%
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S&P 500 Index
Since 1/31/96 ........................................................ 27.45%
One year ............................................................. 22.73%
Three years .......................................................... 29.07%
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Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
[LINE GRAPH APPEARS HERE]
Growth of a $10,000 Investment
Growth Fund S&P 500 Lipper
2/9/96 10,000 10,000 10,000
Feb-96 10,040 10,093 10,235
Mar-96 10,437 10,190 10,318
Apr-96 11,081 10,340 10,659
May-96 11,766 10,607 10,943
Jun-96 11,508 10,647 10,793
Jul-96 11,002 10,177 10,154
Aug-96 11,448 10,392 10,510
Sep-96 11,954 10,976 11,123
Oct-96 12,272 11,279 11,216
Nov-96 12,817 12,131 11,911
Dec-96 12,722 11,890 11,732
Jan-97 13,166 12,633 12,352
Feb-97 13,125 12,732 12,201
Mar-97 12,671 12,210 11,633
Apr-97 13,145 12,938 12,100
May-97 14,229 13,729 12,973
Jun-97 14,807 14,339 13,475
Jul-97 16,354 15,480 14,619
Aug-97 16,179 14,613 14,120
Sep-97 17,066 15,413 14,907
Oct-97 16,458 14,899 14,340
Nov-97 16,499 15,588 14,588
Dec-97 16,357 15,856 14,736
Jan-98 15,956 16,031 14,822
Feb-98 17,495 17,187 15,952
Mar-98 18,416 18,066 16,657
Apr-98 18,622 18,251 16,860
May-98 17,972 17,938 16,377
Jun-98 17,744 18,666 16,979
Jul-98 16,769 18,468 16,580
Aug-98 13,821 15,800 13,842
Sep-98 14,189 16,813 14,675
Oct-98 15,490 18,179 15,712
Nov-98 16,400 19,280 16,682
Dec-98 16,836 20,390 18,055
Jan-99 17,109 21,249 10,461
Feb-99 16,431 20,589 10,020
Mar-99 17,000 21,416 10,486
Apr-99 18,815 22,232 10,747
May-99 18,761 21,718 10,520
Jun-99 20,063 22,905 10,854
1 The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.
2 The Lipper Growth Funds Average universe consists of 585 funds
1
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Montgomery
Variable Series
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Growth Fund
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Portfolio Highlights
(Unaudited)
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TOP TEN HOLDINGS
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(as a percentage of total net assets)
Alcoa, Inc. ............................................................. 3.9%
Dow Chemical Company .................................................... 3.0%
Boise Cascade Corporation ............................................... 2.9%
Golden West Financial Corporation ....................................... 2.7%
Union Pacific Resources Group, Inc. ..................................... 2.7%
Raychem Corporation ..................................................... 2.6%
Amerada Hess Corporation ................................................ 2.4%
First Health Group Corporation .......................................... 2.4%
Republic Services, Inc., Class A ........................................ 2.3%
Whirlpool Corporation ................................................... 2.2%
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TOP FIVE INDUSTRIES
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(as a percentage of total net assets)
Paper ................................................................... 5.5%
Telecommunications Equipment ............................................ 4.6%
Railroads ............................................................... 4.0%
Aluminum ................................................................ 3.9%
Construction/Agriculture Equipment/
Trucks .................................................................. 3.6%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
be overweighted in basic materials stocks, global industrial stocks and
smaller-capitalization issues.
Q: Can you give an example of a stock that has performed well since the
prospects of a global economic recovery have broadened investor interest in the
market?
A: Alcoa (3.9% of net assets as of 6/30/99) is one of the Fund's commodity
sector holdings. It is the world's leading aluminum producer, and its shares
have performed very well since the market has begun to broaden. While prices of
aluminum were depressed, the company had undergone significant restructuring to
enable it to grow earnings even during periods of weak commodity prices. As a
result, any aluminum price increase will contribute directly to profits, a fact
that is now being recognized by the market.
Q: Which sectors do you think are the riskiest now that the market is trading at
all-time highs?
A: We believe that the highly valued growth stocks still represent the biggest
investment risk. Even though some of these stocks corrected from March through
June 1999, most are still expensive. Although many of these companies have
strong fundamentals, their excessive valuations make them risky investments. The
market is discounting a long stretch of rapid sales and earnings growth within
areas of the economy that typically have the greatest vulnerability to
competition and technological change. Against a background of rising interest
rates, these risks intensify.
By contrast, in our view there is still a lot of value to be found in the
broader market. Many cyclical companies may do well in a global recovery, and we
do not think their current potential is reflected in their stock prices.
Q: How is the Fund positioned in relation to these risks?
A: We have taken the opportunity to trim or eliminate stocks in companies that
we believe had become fully valued. In spite of the rally in stocks owned by the
Fund, we believe that our current holdings continue to represent attractive
long-term investments. Companies such as Alcoa are global players and still have
a lot of leverage to improve prices as world economic growth begins to
reaccelerate.
2
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----------------------
Montgomery
Variable Series
----------------------
Growth Fund
----------------------
Investments
P O R T F O L I O I N V E S T ME N T S
June 30, 1999 (Unaudited)
Shares Value (Note 1)
COMMON STOCKS-- 91.0%
Advertising -- 1.0%
5,500 Snyder Communications, Inc.+ ....................... $ 180,125
Aerospace/Defense -- 1.5%
7,000 Lockheed Martin Corporation ........................ 260,750
Air Freight/Delivery Services -- 1.7%
5,550 FDX Corporation+ ................................... 301,088
Aluminum -- 3.9%
11,000 Alcoa, Inc. ........................................ 680,625
Books/Magazines -- 1.0%
3,450 Harcourt General, Inc. ............................. 177,891
Clothing/Shoe/Accessory Stores -- 2.9%
9,450 Nordstrom, Inc. .................................... 316,575
5,800 TJX Companies, Inc. ................................ 193,212
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509,787
Computer Software -- 3.4%
9,200 Autodesk, Inc. ..................................... 272,262
19,800 Avid Technology, Inc.+ ............................. 317,419
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589,681
Construction/Agriculture Equipment/Trucks -- 3.6%
7,700 Manitowoc Company, Inc. ............................ 320,513
5,500 PACCAR, Inc. ....................................... 293,734
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614,247
Consumer Electronics/Appliances -- 2.2%
5,250 Whirlpool Corporation .............................. 388,500
Contract Drilling -- 0.4%
6,900 R&B Falcon Corporation+ ............................ 64,688
Discount Stores -- 1.5%
16,000 Kmart Corporation+ ................................. 263,000
Diversified Electronic Products -- 1.7%
1,450 Matsushita Electric Industrial Co., Ltd. ........... 287,553
Diversified Financial Services -- 1.5%
8,700 Stancorp Financial Group, Inc.+ .................... 261,000
Diversified Manufacture -- 1.0%
1,900 Tyco International Ltd. ............................ 180,025
Drugstore Chains -- 1.2%
6,600 Duane Reade, Inc.+ ................................. 202,125
EDP Services -- 2.8%
2,050 Computer Sciences Corporation+ ..................... 141,835
6,100 Electronic Data Systems Corporation ................ 345,031
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486,866
Electrical Products -- 2.6%
12,200 Raychem Corporation ................................ 451,400
Electrical Production Equipment -- 1.2%
1,900 Sony Corporation, ADR .............................. 209,712
Environmental Services -- 2.3%
16,400 Republic Services, Inc., Class A+.................. 405,900
Farming/Seeds/Milling -- 0.7%
7,500 Seminis, Inc.+ .................................... 112,735
Finance Companies -- 1.3%
4,050 Capital One Financial Corporation ................. 225,534
Food Distributors -- 1.3%
19,500 Fleming Companies, Inc. ........................... 226,688
Forest Products -- 1.6%
3,900 Weyerhauser Company ............................... 268,125
Industrial Machinery/Components -- 0.9%
5,900 Applied Power, Inc., Class A ...................... 161,144
Integrated Oil Companies -- 2.4%
7,100 Amerada Hess Corporation .......................... 422,450
Major Banks -- 1.4%
3,297 Bank of America Corporation ....................... 241,711
Major Chemicals -- 3.0%
4,050 Dow Chemical Company .............................. 513,844
Managed Health Care -- 2.4%
19,600 First Health Group Corporation+ ................... 422,012
Media Conglomerates -- 1.1%
6,000 News Corporation Ltd., ADR ........................ 189,375
Medical Specialties -- 2.0%
4,500 Bausch & Lomb, Inc. ............................... 344,250
Motor Vehicles -- 1.7%
4,450 General Motors Corporation ........................ 293,700
Movies/Entertainment -- 1.3%
8,100 Fox Entertainment Group, Inc., Class A+ ........... 218,194
Multi-Sector Companies -- 1.0%
2,200 Loews Corporation ................................. 174,075
Office/Plant Automation -- 1.3%
7,700 Newbridge Networks Corporation+ ................... 221,375
Oil and Gas Production -- 2.7%
28,450 Union Pacific Resources Group, Inc. ............... 464,091
Oilfield Services/Equipment -- 1.6%
4,450 Schlumberger Ltd. ................................. 283,409
Other Metals/Minerals -- 1.7%
4,400 Rio Tinto PLC, ADR ................................ 295,900
Package Goods/Cosmetics -- 0.6%
1,473 Unilever NV ....................................... 102,742
Paper -- 5.5%
11,800 Boise Cascade Corporation ......................... 507,400
3,900 Chesapeake Corporation ............................ 146,006
The accompanying notes are an integral part of these financial statements.
3
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Montgomery
Variable Series
- -----------------------
Growth Fund
- -----------------------
Investments
Shares Value (Note 1)
COMMON STOCKS -- continued
Paper -- continued
6,000 International Paper Company ...................... $ 303,000
-----------
956,406
Printing/Forms -- 1.9%
8,900 Donnelley (R.R.) & Sons Company .................. 329,856
Railroads -- 4.0%
4,700 Canadian National Railway Company ................ 314,900
6,400 Union Pacific Corporation ........................ 373,200
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688,100
Real Estate Investment Trusts -- 0.9%
12,800 Host Marriott Corporation ........................ 152,000
Savings and Loan Associations -- 2.7%
4,850 Golden West Financial Corporation ................ 475,300
Speciality Chemicals -- 1.7%
5,550 Nalco Chemical Company ........................... 287,906
Speciality Steels -- 1.0%
6,100 Carpenter Technology Corporation ................. 174,231
Telecommunication Equipment -- 4.6%
4,700 Carrier Access Corporation+ ...................... 205,772
4,502 Comverse Technology, Inc.+ ....................... 339,619
2,700 Motorola, Inc. ................................... 255,825
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801,216
Trucking -- 1.3%
10,025 Swift Transportation Company, Inc.+ .............. 220,237
Principal Amount Value (Note 1)
TOTAL COMMON STOCKS
(Cost $13,058,540) ............................................... 15,781,569
-----------
REPURCHASE AGREEMENT -- 8.7%
$ 1,504,000 Agreement with Prudential Securities,
Tri-Party, 5.050% dated 06/30/99, to be
repurchased at $1,504,210 on 07/01/99,
collateralized by $1,534,082 market value
of U.S. government and mortgage-backed
securities, having various maturities and
interest rates
(Cost $1,504,000) ................................... 1,504,000
-----------
TOTAL INVESTMENTS -- 99.7%
(Cost $14,562,540) ................................................ 17,285,569
OTHER ASSETS AND LIABILITIES -- 0.3%
(Net) ............................................................. 56,003
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NET ASSETS -- 100.0% .............................................. $ 17,341,572
===========
* Aggregate cost for federal tax purposes is substantially the same.
+ Non-income-producing security.
Abbreviations
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
4
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------------------------
Montgomery
Variable Series
------------------------
Statement of
Assets and Liabilities
------------------------
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Assets: Growth Fund
- -----------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities .................................................... $ 15,781,569
Repurchase agreements ......................................... 1,504,000
------------
Total Investments .................................................. 17,285,569
Cash ............................................................... 1,516,720
Receivables:
Investment securities sold .................................... 152,975
Dividends ..................................................... 16,310
Expenses absorbed by Manager .................................. 6,462
Interest ...................................................... 201
Deferred organization costs (note 1) ............................... 21,074
------------
Total Assets ....................................................... 18,999,311
------------
Liabilities:
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Payables:
Investment securities purchased ................................ 1,645,561
Custodian fees ................................................. 4,434
Trustees' fees and expenses .................................... 3,869
Accounting fees ................................................ 1,332
Transfer agency and servicing fees ............................. 100
Other accrued liabilities and expenses ......................... 2,443
------------
Total Liabilities .................................................. 1,657,739
------------
Net Assets ......................................................... $17,341,572
Investments at identified cost ..................................... $14,562,540
Net Assets Consist of:
- -----------------------------------------------------------------------------------
Undistributed net investment income ................................ $ 53,999
Accumulated net realized gain on securities sold ................... 751,638
Net unrealized appreciation of investments ......................... 2,723,029
Shares of beneficial interest ...................................... 9,460
Additional paid-in capital ......................................... 13,803,446
------------
Net Assets ......................................................... $17,341,572
------------
Net Assets:
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Net assets ......................................................... $17,341,572
Number of Fund shares outstanding .................................. 945,982
Net asset value, offering and redemption price per
share outstanding ................................................ $ 18.33
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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Montgomery
Variable Series
- --------------------------------
Statement of Operations
- --------------------------------
Six Months Ended June 30, 1999
(Unaudited)
Net Investment Income: Growth Fund
- --------------------------------------------------------------------------------
Investment Income:
Interest .......................................................... $ 21,837
Dividends ......................................................... 92,614
-----------
Total Income ...................................................... 114,451
-----------
Expenses:
Management fee (note 2) ........................................... 69,230
Legal and audit fees .............................................. 16,376
Custodian fee ..................................................... 8,464
Amortization of organization expenses (note 1) .................... 6,152
Printing fees ..................................................... 5,468
Accounting expenses ............................................... 3,131
Trustees' fees .................................................... 2,823
Transfer agency and servicing fees ................................ 2,626
Other ............................................................. 3,140
Registration fees ................................................. 1,069
Interest expense .................................................. 110
-----------
Total Expenses .................................................... 118,589
Fees deferred and/or expenses absorbed by Manager (note 2) ........ (31,312)
-----------
Net Expenses ...................................................... 87,277
Net Investment Income ............................................. 27,174
-----------
Net Realized and Unrealized Gain/(Loss) on Investments:
- --------------------------------------------------------------------------------
Net realized gain/(loss) from securities transactions ............ 619,140
Net change in unrealized appreciation/(depreciation) of investments 1,846,414
Net Realized and Unrealized Gain/(Loss) on Investments ............ 2,465,554
-----------
Net Increase/(Decrease) in Net Assets Resulting from Operations ... $ 2,492,728
-----------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
-----------------------------
Montgomery
Variable Series
-----------------------------
Statement of
Changes in Net Assets
-----------------------------
(Unaudited)
Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended
6/30/99 12/31/98
<S> <C> <C>
Increase/(Decrease) in Net Assets from Operations:
- -------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) ............................................................. $ 27,174 $ 80,695
Net realized gain/(loss) on securities ................................................... 619,140 197,527
Net unrealized appreciation/(depreciation) of securities during the period ............... 1,846,414 (87,985)
----------- ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations .......................... 2,492,728 190,237
Distributions to Shareholders:
- -------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income ................................. -- (53,870)
Distributions to shareholders from net realized gains .................................... -- (68,399)
----------- ------------
Total Distributions ...................................................................... -- (122,269)
Beneficial Interest Transactions:
- -------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4) ................... 1,397,209 786,288
----------- ------------
Net Increase/(Decrease) in Net Assets .................................................... 3,889,937 854,256
Net Assets:
- -------------------------------------------------------------------------------------------------------------------------
Beginning of Period ...................................................................... 13,451,635 12,597,379
End of Period ............................................................................ $17,341,572 $13,451,635
Accumulated Undistributed Net Investment Income .......................................... $ 53,999 $ 26,870
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
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Montgomery
Variable Series
- --------------------------
Financial Highlights
- --------------------------
<TABLE>
<CAPTION>
Growth Fund
Selected Per-Share Data for the Year or Period Ended: 6/30/99 Fiscal Year Ended December 31,
------------------------------
(Unaudited) 1998 1997 1996(a)
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Period ................................................ $ 15.39 $ 15.09 $ 12.33 $ 10.08
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) ......................................................... 0.03 0.09 0.16 0.15
Net realized and unrealized gain/(loss) on investments ............................... 2.91 0.35 3.35 2.59
- --------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from investment operations ........... 2.94 0.44 3.51 2.74
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ................................................. -- (0.06) (0.16) (0.15)
Distributions from net realized capital gains ........................................ -- (0.08) (0.59) (0.34)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions .................................................................. -- (0.14) (0.75) (0.49)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period ...................................................... $ 18.33 $ 15.39 $ 15.09 $ 12.33
- --------------------------------------------------------------------------------------------------------------------------------
Total Return(*) ...................................................................... 19.17% 2.93% 28.57% 27.22%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000s) .................................................... 17,342 13,452 12,597 2,127
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets .......................... 0.39%+ 0.57% 1.74% 2.55%+
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager ...................... (0.00)@$ 0.07 $ 0.01 $ (0.27)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate .............................................................. 40% 57% 53% 78%
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense ..................................... 1.27%+ 1.25% 0.35% 0.01%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including interest and tax expense . 1.72%+ 1.40% 1.97% 6.98%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense ..................................... 1.25%+ 1.25% 0.34% --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Montgomery Variable Series: Growth Fund commenced operations on February 9,
1996
(*) Total return represents aggregate total return for the periods indicated.
+ Annualized.
@ Amount represents less than $0.01.
The accompanying notes are an integral part of these financial statements.
8
<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, 1999, the Trust had three series: the Montgomery Variable
Series: Growth Fund, Montgomery Variable Series: Emerging
Markets Fund, and Montgomery Variable Series: Small Cap
Opportunities Fund. Information presented in these financial
statements pertains to the Montgomery Variable Series: Growth
Fund (the "Fund"). The Montgomery Variable Series: Emerging
Markets Fund and the Montgomery Variable Series: Small Cap
Opportunities Fund are presented under separate cover.
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
Portfolio securities are valued using current market valuations: either the last
reported sale price or, in the case of securities for which there is no reported
last sale, the mean of the closing bid and ask prices.
Portfolio securities that are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sale price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market or on the NASDAQ national market are valued at the mean between the last
available bid and ask prices prior to the time of valuation.
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision of
the Trust's officers in accordance with methods authorized by the Trust's Board
of Trustees. 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 of the Fund are declared and paid at least
annually. Distributions of net realized capital gains (including net short-term
capital gains) are distributed no less frequently than annually. Additional
distributions of net investment income and capital gains for the Fund may be
made in order to avoid the application of a 4% non deductible excise tax on
certain undistributed amounts of ordinary income and capital gains. Income
distributions and capital-gain distributions are determined in accordance with
income-tax regulations, which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income and gains on various investment securities held by the Fund, timing
differences and differing characterizations of distributions made by the Fund.
c. Repurchase Agreements
The Fund may engage in repurchase agreements 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 in which the Fund seeks to assert its
rights. The Fund's 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 that involve a counterparty and a
custodian bank.
d. Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are computed on the specific identified cost
basis of the securities sold. Dividend income is recognized on the ex-dividend
date. Interest income, including, accretion/amortization of premium/discount on
short-term investments, is recognized on the accrual basis.
e. Federal Income Taxes
The Fund has elected and qualified, and it is the intention of the Fund to
continue to qualify, as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), by complying with the
applicable requirements of the Code and by making distributions of taxable
income to shareholders sufficient to relieve the Fund of all or substantially
all federal income taxes. Accordingly, no provision for federal income taxes is
required.
9
<PAGE>
- -------------------------
The Montgomery
Funds III
- -------------------------
Notes
- -------------------------
to Financial Statements
(Unaudited)
f. Organization Costs
Expenses incurred in connection with the organization of the Fund are amortized
on a straight-line basis over a period of five years from commencement of
operations.
g. Expenses
General expenses of the Trust are allocated to the Fund based on 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 Manager is a subsidiary of Commerz-bank
AG.
Pursuant to the Investment Management Agreement (the "Agreement") between the
Manager and the Trust with respect to the Fund, 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 the Agreement. As compensation, the Fund pays the Manager a monthly
management fee (accrued daily) at the following annual rates based on the
average daily net assets of the Fund:
First Next Over
$500 Million $500 Million $1 Billion
------------ ------------ ----------
1.00% 0.90% 0.80%
Under an Operating Expense Agreement with the Trust, the Manager has agreed to
reduce some or all of its management fee or absorb Fund expenses if necessary to
keep the Fund's annual operating expenses, exclusive of any Rule 12b-1 fees,
interest, extraordinary expenses or taxes, at or below 1.25% of the average
daily net assets of the Fund. Any reductions or absorptions made to the Fund by
the Manager are subject to recovery within the following three years, provided
the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Operating Expense Agreement has a rolling
10-year term. For the six months ended June 30, 1999, the Manager deferred fees
of $31,312 and absorbed no expenses. As of June 30, 1999, the deferred
management fees and absorbed expenses subject to recoupment are $241,257.
b. Certain officers and Trustees of the Trust are, with respect to the Trust's
Manager, "affiliated persons" as defined in the 1940 Act. Each Trustee who is
not an affiliated person will receive an annual retainer and quarterly meeting
fee totaling $55,000 per annum, as well as reimbursement for expenses, for
services as a Trustee of all three Trusts advised by the Manager ($5,000 of
which will be allocated to The Montgomery Funds III).
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of investment securities, other
than short-term securities, for the six-month period ended June 30, 1999, were
$6,022,576 and $5,349,541, respectively.
b. At June 30, 1999, 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 $3,239,329 and $516,300,
respectively.
c. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New York,
the Montgomery Variable Series: Growth Fund, along with other Funds of The
Montgomery Funds, The Montgomery Funds II and The Montgomery Funds III, may for
one year starting August 13, 1998, 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 $175,000,000. The Fund pays its pro rata share of the quarterly
commitment fee of 0.08% per annum of the unutilized credit line balance. For the
six-month period ended June 30, 1999, there were no borrowings under this
agreement.
10
<PAGE>
------------------------
The Montgomery
Funds III
------------------------
Notes
------------------------
to Financial Statements
(Unaudited)
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-Month Period Ended
6/30/99 Year Ended 12/31/98
(Unaudited)
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 607,009 $10,180,368 683,115 $10,396,707
Issued as reinvestment of dividends -- -- 8,317 122,269
Redeemed (535,262) (8,783,159) (652,075) (9,732,688)
- ------------------------------------------------------------------------------------------------
Net increase/(decrease) 71,747 $ 1,397,209 39,357 $ 786,288
- ------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, shareholders of the Fund with ownership of 10% or greater
included three shareholders, comprising ownership of 76.62% of the total
aggregate shares outstanding.
11
<PAGE>
[GRAPHIC APPEARS HERE]
[LETTERHEAD APPEARS HERE]
