<PAGE>
Montgomery Variable Series:
Emerging Markets Fund
Annual Report
December 31, 1998
[OWL ARTWORK APPEARS HERE]
Invest wisely. (R)
THE MONTGOMERY FUNDS/SM/
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights
December 31, 1998
- --------------------------------------------------------------------------------
Investment Review
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED DECEMBER 31, 1998?
A: After a very challenging six months, the Fund returned -15.56% for the
second half of the year, compared with a return of -7.98% for its
benchmark, the Morgan Stanley Capital International (MSCI) Emerging
Markets Free Index.
The losses suffered by both the Fund and the index were concentrated in
the third quarter. During this period all emerging markets were hit by a
tide of extremely negative sentiment, which was exacerbated by the
collapse of the Russian ruble and Russia's subsequent default on its debt.
This led investors to reduce their allocation to emerging markets, in
preference for what they perceived to be less risky investments.
By the fourth quarter, however, following interest rate cuts in the United
States and Europe as central banks sought to ease a potential credit
crunch and restore confidence to global markets, the specter of a global
financial depression began to recede. Investors revisited their
allocations and poured funds back into the emerging markets. But unlike
the bout of selling that took place a couple of months earlier, investors
took a more discriminating approach, basing their decisions on
fundamentals rather than sentiment. The Asian and European markets
benefited most from this trend. It became obvious that some of the worst
hit Asian economies had bottomed out or were showing signs of a fledgling
recovery; and in Europe investors revisited the benefits the emerging
markets would enjoy from their association with the European Union.
Q: WHICH MARKETS DETRACTED MOST FROM THE FUND'S PERFORMANCE AND WHY?
A: A number of factors detracted from the Fund's performance over the period.
The portfolio was underweighted in Korea and absent from Indonesia. In the
fourth quarter, these markets rebounded rapidly from their third-quarter
sell-off. In our view, because of the tentative nature of Korea's economic
recovery and the uncertain political situation in Indonesia, the risks of
investing in these two countries outweighed the potential rewards.
Our exposure to Brazil also proved a negative contributor to performance
throughout the period, even though our weighting had been progressively
reduced by the fourth quarter from an overweight position to a neutral
one. This was very disappointing given the high hopes we had for this
economy at the end of the first half of the year. At that point the
country's fundamentals were improving, the government appeared committed
to reforming its fiscal imbalances, and we were hopeful of the positive
impact on the market of the privatization of the state-owned
telecommunications company, Telebras (3.87% of assets as of 12/31/98).
Portfolio Management
- -------------------------------------------------------------------------------
Josephine S. Jimenez, CFA...................Senior Portfolio Manager
Bryan L. Sudweeks, Ph.D., CFA...............Senior Portfolio Manager
Frank Chiang................................Portfolio Manager
Jesus Duarte................................Regional Portfolio Manager
Stuart Quint................................Regional Portfolio Manager
- -------------------------------------------------------------------------------
Fund Performance
- -------------------------------------------------------------------------------
Average annual total returns for the periods
ended 12/31/98
- -------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES:
EMERGING MARKETS FUND
Since inception (2/2/96)....................(13.15)%
One year....................................(37.53)%
MSCI EMERGING MARKETS FREE INDEX/1/
Since 1/31/96...............................(13.57)%
One year....................................(25.34)%
IFC GLOBAL COMPOSITE INDEX/2/
Since 1/31/96...............................(11.85)%
One year....................................(21.07)%
- -------------------------------------------------------------------------------
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.
There are risks of investing in a fund of this type that invests in
securities of foreign countries, such as erratic market conditions,
economic and political instability, and fluctuations in currency exchange
rates.
<TABLE>
<CAPTION>
Montgomery Variable MSCI Emerging IFC Global Lipper Emerging
Series: Variable Markets Free Index/1/ Composite Index/2/ Markets Funds
Emerging Markets Average/3/
<S> <C> <C> <C> <C>
2/2/96 $10,000 $10,000 $10,000 $10,000
2/96 $ 9,720 $ 9,841 $ 9,937 $ 9,917
3/96 $10,100 $ 9,918 $10,095 $ 9,955
4/96 $10,330 $10,314 $10,846 $10,350
5/96 $10,580 $10,268 $10,638 $10,454
6/96 $10,560 $10,332 $10,793 $10,489
7/96 $10,050 $ 9,626 $10,120 $ 9,845
8/96 $10,500 $ 9,872 $10,345 $10,086
9/96 $10,510 $ 9,958 $10,437 $10,162
10/96 $10,310 $ 9,692 $10,205 $ 9,898
11/96 $10,470 $ 9,855 $10,351 $10,121
12/96 $10,679 $ 9,899 $10,260 $10,281
1/97 $11,532 $10,575 $10,950 $11,058
2/97 $11,782 $11,028 $11,448 $11,449
3/97 $11,592 $10,738 $11,245 $11,188
4/97 $11,542 $10,757 $11,247 $11,242
5/97 $12,023 $11,065 $11,432 $11,673
6/97 $12,915 $11,657 $12,016 $12,305
7/97 $13,337 $11,831 $12,205 $12,699
8/97 $12,003 $10,325 $10,884 $11,439
9/97 $12,514 $10,611 $10,936 $11,900
10/97 $10,499 $ 8,870 $ 9,271 $10,043
11/97 $10,188 $ 8,547 $ 8,736 $ 9,719
12/97 $10,617 $ 8,753 $ 8,768 $ 9,863
1/98 $ 9,382 $ 8,066 $ 8,268 $ 9,211
2/98 $ 9,914 $ 8,908 $ 9,120 $ 9,970
3/98 $10,105 $ 9,295 $ 9,413 $10,373
4/98 $10,236 $ 9,193 $ 9,338 $10,480
5/98 $ 8,860 $ 7,933 $ 8,227 $ 9,146
6/98 $ 7,855 $ 7,101 $ 7,379 $ 8,302
7/98 $ 8,267 $ 7,326 $ 7,591 $ 8,583
8/98 $ 5,756 $ 5,208 $ 5,662 $ 6,202
9/98 $ 6,047 $ 5,538 $ 5,942 $ 6,360
10/98 $ 6,449 $ 6,122 $ 6,549 $ 6,859
11/98 $ 6,981 $ 6,631 $ 7,039 $ 7,233
12/98 $ 6,633 $ 6,535 $ 6,921 $ 7,177
</TABLE>
- --------------
/1/ The Morgan Stanley Capital International Emerging Markets Free Index is an
unmanaged, capitalization-weighted composite index that covers individual
securities within the equity markets of approximately 25 emerging markets
countries.
/2/ The IFC Global Composite Index is comprised of more than 1,900 individual
stocks from 32 developing countries in Asia, Latin America, Middle East,
Africa and Europe.
/3/ The Lipper Emerging Markets Funds universe consists of 92 funds.
1
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights
December 31, 1998
- --------------------------------------------------------------------------------
Unfortunately, this promising picture was changed irrevocably by events
following the collapse of the Russian ruble. After the Russian
devaluation, there was a great deal of speculation about other markets
that might have to devalue their currencies. Because of its large current
account deficit, Brazil was targeted as a country that may have problems,
so many investors began to withdraw their funds. The result could have
been a self-fulfilling prophecy, if the government had not chosen to raise
interest rates to just under 50% and spend a large amount of currency
reserves defending the value of the real. By the fourth quarter, even the
promise of emergency International Monetary Fund (IMF) funding and the
passage of key reforms could not counteract the recessionary impact of
high rates. The Brazilian Congress's failure to implement a key piece of
fiscal reform legislation also dampened confidence in the market. As a
result, while many other emerging markets experienced strong recoveries in
the fourth quarter, and some registered double- or even triple-digit
gains, the Brazilian bolsa returned less than 1%.
Q: WERE THERE POSITIONS IN THE FUND THAT PERFORMED PARTICULARLY WELL OVER THE
PERIOD?
A: We were very encouraged by the performance of our positions in Greece and
Israel. In the fourth quarter, these two markets rebounded. A couple of
stocks performed particularly well for us in the European markets over the
period: National Bank of Greece (2.00% of assets as of 12/31/98) and
Turkey's Sabanci Holdings (0.37% of assets as of 12/31/98). In spite of
the strong run-up in these markets, we still like Greece in particular. We
anticipate that interest rates will continue to drop and fiscal discipline
will be strict as Greece attempts to meet the criteria for entry into the
club of euro currencies in 2001.
Q: GIVEN THE GOOD RETURNS IN DEVELOPED MARKETS IN 1998, WHY SHOULD INVESTORS
CONSIDER BUYING INTO OR INCREASING THEIR ALLOCATION IN AN EMERGING MARKETS
PORTFOLIO?
A: The fate of the emerging markets over the past year amply demonstrates
that neither good nor bad returns are guaranteed forever. Investors in
emerging Asia suffered very poor returns for most of the year, but the
recovery in the fourth quarter demonstrated how rapidly this situation can
turn around. Indeed, in the fourth quarter the benchmark MSCI All-Country
Asia Free (ex-Japan) Index returned 34.3%, beating the S&P 500 which
returned 21.3%, and the benchmark for the developed international markets,
the MSCI EAFE Index, which returned 20.7%. Looking forward, U.S. corporate
earnings growth is generally anticipated to slow in 1999, whereas many
emerging markets economies-and therefore companies-are in a recovery mode.
This suggests that these markets could outperform into the New Year and at
the very least should continue to play a part in a well-diversified stock
portfolio. Investors should keep in mind, however that there are risks of
investing in a fund of this type that invests in securities of foreign
countries such as erratic market conditions, economic and political
instability and fluctuations in currency exchange rates.
2
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights (continued)
December 31, 1998
- --------------------------------------------------------------------------------
TOP FIVE COUNTRIES AS OF 12/31/98
(AS A PERCENTAGE OF TOTAL NET ASSETS)
-----------------------------------------------------------------
South Africa 12.9%
Brazil 12.0
India 8.7
Greece 8.0
Korea 6.0
-----------------------------------------------------------------
TOP TEN INDUSTRIES AS OF 12/31/98
(AS A PERCENTAGE OF TOTAL NET ASSETS)
-----------------------------------------------------------------
Banks 10.8%
Holding 8.2
Electric Utilities 7.6
Telephone Networks 5.2
Metals & Mining 5.1
Oil 4.6
Conglomerates 4.0
Telephone/Long Distance 3.7
Computers & Office Equipment 3.2
Retail Trade 2.9
-----------------------------------------------------------------
TOP TEN HOLDINGS AS OF 12/31/98
(AS A PERCENTAGE OF TOTAL NET ASSETS)
-----------------------------------------------------------------
Videsh Sanchar Nigam Ltd., GDR (Telephone/Long Distance) 2.5%
Barlow, Ltd. (Conglomerates) 2.3
Telec Brasileiras-Telebras, Receipts (Holding) 2.3
ITC Ltd., GDR (Tobacco) 2.1
National Bank of Greece (Banks) 2.0
Liberty Life Association of Africa Ltd. (Insurance) 2.0
Alpha Credit Bank (Banks) 1.8
Telecomunicacoes Brasileiras S.A. - Telebras, ADR (Holding) 1.6
Sonae Investimentos (Retail Trade) 1.5
Brisa-Auto Estradas (Auto/Auto Parts) 1.5
-----------------------------------------------------------------
3
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments
December 31, 1998
COMMON STOCKS -- 83.1% VALUE
SHARES (NOTE 1)
ARGENTINA - 2.9%
137,743 Cresud S.A.+ (Real Estate) $ 165,446
170,178 Inversiones y Representaciones (Real Estate) 466,724
27,600 Telefonica de Argentina, Sponsored,
ADR (Telephone/Networks) 771,075
24,400 YPF Sociedad Anonima, ADS (Oil) 681,675
------------
2,084,920
------------
BRAZIL - 4.4%
14,562 Cemig, ADS (Electric Utilities) 276,678
38,510,000 Centrais Geradoras do Sul Brasil SA - Gerasul +
(Electric Utilities) 662,949
3,080 Electrobras, GDS***
(Electric Utilities) 141,680
21,000 Souza Cruz S.A. (Tobacco) 135,568
36,920,000 Telec Brasileiras-Telebras, Receipts (Holding) 1,650,056
500,000 Telec do Rio Janeiro S.A. (Telephone/Regional-Local) 7,863
3,600,000 Telecomunicacoes de Sao Paulo S.A. - Telesp
(Telephone/Regional-Local) 309,870
500,000 Telerj Celular S.A. (Telecommunications/Other) 7,883
------------
3,192,547
------------
CHILE - 2.3%
15,400 Compania de Telefonos de Chile S.A.,
ADR (Telephone/Networks) 318,588
16,200 Distribucion y Servicio S.A., ADR
(Food & Beverage) 186,300
27,400 Enersis S.A., ADR (Electric Utilities) 707,263
13,200 Sociedad Quimica y Minera de Chile, ADR (Chemicals) 444,675
------------
1,656,826
------------
CHINA/HONG KONG - 3.3%
438,000 Anhui Conch Cement Company, Ltd. + (Cement) 48,619
34,000 Cheung Kong Holdings Ltd. (Real Estate) 244,656
14,000 China Telecom Ltd., ADR + (Telephone/Wireless) 486,500
13,200 HSBC Holdings (Banks) 328,824
363,000 New World Infastructure Ltd. + (Heavy Construction) 531,784
160,000 Shanghai Industrial Holdings Ltd. (Conglomerates) 323,197
656,000 Yanzhou Coal Mining Company Ltd. + (Coal) 110,073
39,240 Yanzhou Coal Mining Company Ltd., ADR + (Coal) 296,753
------------
2,370,406
------------
CZECH REPUBLIC - 2.3%
26,790 Ceske Radiokomunikace, GDR + (Broadcasting/Advertising) 863,978
63,500 Sporitelni Vynosovy Investiani Fund (Mutual Funds) 442,125
73,800 The Czech Value Fund** + (Mutual Funds) 396,675
------------
1,702,778
------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1998
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
EGYPT - 3.2%
25,300 Al-Ahram Beverages Company, GDR***
(Food & Beverage) $ 730,538
4,000 Al-Ahram Pyramid Beverages Company (Food & Beverage) 228,739
19,000 Amreya Cement (Cement) 284,164
116,666 Egyptian Mobile Phone Network + (Telephone/Networks) 709,917
19,990 Tourah Portland Cement Company (Cement) 340,005
------------
2,293,363
------------
GREECE - 8.0%
12,777 Alpha Credit Bank (Banks) 1,333,943
8,400 Commercial Bank of Greece S.A. (Banks) 826,554
22,999 Hellenic Telecommunication Organization
S.A. (Telephone/Networks) 612,200
24,700 Heracles General Cement S.A. (Cement) 670,716
6,440 National Bank of Greece (Banks) 1,449,621
28,500 STET Hellas Telecommunications S.A., ADR +
(Telecommunications/Other) 910,219
------------
5,803,253
------------
HUNGARY - 2.4%
21,000 Borsodchem Rt. + (Chemicals) 546,329
10,500 EGIS Rt. + (Pharmacy/Drugs) 239,019
25,000 Mol Magyar Olaj-es Gazipari Rt (Oil) 685,815
4,000 Mol Magyar Olaj-es Gazipari Rt, GDR (Oil) 110,500
7,500 Zalakeramia Rt + (Building Materials) 90,939
26,900 Zalakeramia Rt, GDR*** (Building Materials) 69,940
------------
1,742,542
------------
INDIA - 8.7%
70,100 BSES Ltd, GDR (Electric Utilities) 893,775
21,000 BSES Ltd, GDR*** (Electric Utilities) 267,750
51,500 Hindalco Industries Ltd., ADR (Metals & Mining) 603,838
68,600 ITC Ltd., GDR **(Tobacco) 1,528,064
44,200 Mahanagar Telephone Nigam Ltd., GDR**
(Telecommunications/Other) 539,240
75,000 State Bank of India, GDR*** (Banks) 624,375
149,600 Videsh Sanchar Nigam Ltd., GDR
(Telephone/ Long Distance) 1,832,600
------------
6,289,642
------------
ISRAEL - 2.9%
445,000 Bank Leumi Le-Israel (Banks) 628,537
17,400 ECI Telecom Ltd, ADR (Telecommunications/Equipment) 616,069
13,600 Formula Systems Ltd, ADR + (Software Systems) 343,825
114,379 Makhteshim-Agan Industries Ltd (Chemicals) 247,276
99,190 Supersol Ltd (Retail Trade) 246,128
------------
2,081,835
------------
KAZAKHSTAN - 0.0%#
4,000 Kazkommerts Bank, GDR*** (Banks) 14,000
------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1998
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
KOREA - 4.6%
76,690 Hanjin Heavy Industries (Heavy Construction) $ 586,490
12,290 Pohang Iron & Steel Company, Ltd., (Steel) 790,728
6,500 Pohang Iron & Steel Company, Ltd., ADS (Steel) 109,688
32,270 Pusan City Gas Company Ltd., (Gas Utilities) 885,212
16,140 Sindo Ricoh Company (Computers & Office Equipment) 578,249
12,860 Youngone Corporation (Apparel & Textiles) 345,285
------------
3,295,652
------------
MALAYSIA - 0.6%
190,500 Berjaya Sports Toto Berhad** (Leisure Time) 180,444
462,000 YTL Power International Berhad** (Electric Utilities) 276,046
------------
456,490
------------
MEXICO - 3.1%
159,720 Corporacion Interamericana Entertainment S.A.,
Series B** + (Entertainment) 435,380
4,500 Fomento Economico Mexicano, S.A. de CV, ADR
(Food & Beverage) 119,813
143,000 Grupo Financiero Banamex Accival S.A. de CV,
Series B - Banacci + (Banks) 187,683
103,000 Grupo Mexico S.A., Series B (Metals & Mining) 228,773
38,000 Grupo Radio Central S.A. de CV, ADR
(Broadcasting/Advertising) 204,250
21,296 Interamericana Entrenamiento Corporation, Series L
(Entertainment) 44,936
21,400 Telefonos de Mexico S.A., ADR (Telephone/Networks) 1,041,913
------------
2,262,748
------------
MOROCCO - 0.0%#
2 Banque Marocaine du Commerce Exterieur, GDR*** (Banks) 47
------------
PAKISTAN - 0.6%
375,000 Fauji Fertilizer Company Ltd.**
(Agriculture Commodities) 345,226
46,800 Pakistan State Oil** (Oil) 73,704
------------
418,930
------------
PERU - 1.6%
24,900 Compania de Minas Buenaventura S.A., ADR
(Metals & Mining) 323,700
17,100 Credicorp Ltd (Banks) 153,900
134,101 Ferreyros Enrique S.A. (Machinery & Tools) 121,060
14,741 Ferreyros Enrique S.A., ADS*** (Machinery & Tools) 259,810
20,800 Telefonica del Peru S.A., ADR (Telephone/Networks) 263,900
------------
1,122,370
------------
PHILIPPINES - 3.8%
900,000 Ayala Corporation (Conglomerates) 318,123
871,000 Ayala Land, Inc (Real Estate) 246,298
125,000 Bank of Philippine Islands (Banks) 265,103
600,000 Benpres Holdings, GDR*** (Holding) 97,171
301,000 Manila Electric Company, Series B (Electric Utilities) 967,224
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
6
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1998
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
PHILIPPINES (continued)
29,000 Philippine Long Distance Telephone,
ADR (Telephone/Long Distance) $ 752,188
1,405,000 Philippino Telephone Corporation (Telephone/Wireless) 130,026
------------
2,776,133
------------
POLAND - 1.5%
15,000 Bank Handlowy W Warszawie S.A. (Banks) 185,043
35,000 Bank Handlowy W Warszawie, GDR*** (Banks) 453,250
20,000 Prokom Software, GDR*** (Business Services) 377,000
15,500 Telekomunikacja Polska S.A., GDR*** +
(Telephone/Long Distance) 79,050
------------
1,094,343
------------
PORTUGAL - 3.7%
18,500 Brisa-Auto Estradas + (Auto/Auto Parts) 1,089,479
15,000 Cia de Segros Tranquilidade (Insurance) 478,949
23,000 Sonae Investimentos (Retail Trade) 1,118,631
------------
2,687,059
------------
RUSSIA - 0.2%
199,542 Bashkirenergo (F)**+ (Electric Utilities) 3,991
58,000 Irkutskenegro, Sponsored, ADR** (Electric Utilities) 87,000
14,043 Krasnoyarskelectrosvyaz, ADR** (Electric Utilities) 8,426
8,500 Krasny Oktyabr (F)** (Food & Beverage) 11,050
53,661 Murmansk Electrosvyaz, ADR**
(Telecommunications/Other) 5,420
18,507 Nizhnosvyazinform, Sponsored ADR**
(Telephone/Regional-Local) 5,552
76,725 Orenburg Region Electrosvyaz, ADR**
(Telecommunications/Other) 3,836
3,999 Uraltelecom, ADR** + (Telephone/Networks) 13,997
------------
139,272
------------
SOUTH AFRICA - 12.9%
57,000 Anglo American Investment Trust Ltd. (Holding) 679,810
19,500 AngloGold Ltd. (Metals & Mining) 758,779
911,355 BOE Corporation Ltd., N Shares (Holding) 518,321
430,338 Barlow, Ltd (Conglomerates) 1,651,142
3,110,000 Consolidated African Mining Company + (Metals & Mining) 422,393
37,800 De Beers Centenary AG (Metals & Mining) 481,304
5,000 De Beers Consolidated Mines Ltd., ADR (Metals & Mining) 63,594
12,500 Liberty Holdings Ltd. (Holding) 436,739
102,608 Liberty Life Association of Africa Ltd. (Insurance) 1,411,018
350,500 Molope Foods Ltd. + (Holding) 313,889
140,200 Nasionale Pers Beperk (Holding) 547,447
276,100 Sasol, Ltd. (Oil) 1,042,948
255,000 Smith (CG) Ltd., ORD + (Conglomerates) 577,947
139,674 Wooltru Ltd. (Retail Trade) 175,711
181,534 Wooltru Ltd. N Shares (Retail Trade) 221,900
------------
9,302,942
------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
7
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1998
COMMON STOCKS (continued) VALUE
SHARES (NOTE 1)
TAIWAN - 5.9%
13,118 Bank Sinopac + (Banks) $ 4,763
270,000 Compal Electronics Inc. + (Computers & Office Equipment) 879,888
180,000 Hon Hai Precision Industry (Electronics) 994,413
562,500 Kindom Construction + (Real Estate) 541,201
197,317 Synnex Technology International Corporation
(Computers & Office Equipment) 875,738
425,200 Taiwan Semiconductor Company + (Semiconductor) 936,971
------------
4,232,974
------------
THAILAND - 2.8%
90,000 BEC World Public Company (F) (Entertainment) 495,186
819,000 Industrial Finance of Thailand (F) (Securities Brokerage) 337,964
293,000 Krung Thai Bank Public Company Ltd. + (Banks) 159,195
7,400 PTT Exploration and Production Public
Company Ltd. (F) (Oil) 52,116
74,700 PTT Exploration and Production Public
Company Ltd. (F) (Oil) 526,085
275,000 Thai Farmers Bank Public Company Ltd. (F) (Banks) 484,181
------------
2,054,727
------------
TURKEY - 1.4%
17,347,500 Haci Omer Sabanci Holding AS + (Holding) 266,707
9,915,000 Hurriyet Gazetecilik ve Matbaacilik AS
(Newspapers/Publishing) 150,865
350,000 Migros Turk TAS (Retail Trade) 349,490
18,950,464 Yapi ve Kredi Bankasi AS (Banks) 219,265
------------
986,327
------------
TOTAL COMMON STOCKS (COST $74,459,216) 60,062,126
------------
PREFERRED STOCKS 9.9%
SHARES
BRAZIL - 7.6%
11,200,000 Banco do Estado de Sao Paulo S.A. - Banespa (Banks) 463,480
790,000 Celesc, GDS (Electric Utilities) 353,073
2,900 Centrais Geradoras do Sul do Brasil S.A. -
Gerasul + (Electric Utilities) 18,125
20,859,247 Cia Energetica de Minas Gerais (Electric Utilities) 397,072
40,583,000 Cia Paranaense de Energi (Electric Utilities) 292,217
9,300,000 Eletrobras, Series B (Electric Utilities) 178,572
550,000 Itausa Investimentos Itau (Holding) 304,987
65,880,000 Odebrecht S.A. (Heavy Construction) 163,575
5,600,000 Telec de Minas Gerais S.A. (Telephone/Regional-Local) 163,609
15,800 Telecomunicacoes Brasileiras S.A--
Telebras, ADR (Holding) 1,148,463
1,989,294 Telecomunicacoes de Sao Paulo (Telephone/Regional-Local) 271,166
13,200,000 Telemig Celular S.A., Series C + (Telephone/Wireless) 258,920
6,530,000 Telerj Celular S.A., Series B (Telecommunications/Other) 154,029
10,850,000 Telesp Celular S.A., Series B (Telephone/Wireless) 476,834
44,200 Usinas Siderurgicas de Minas Gerais S.A.--
Usiminas (Steel) 97,673
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
8
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1998
PREFERRED STOCKS - (continued) VALUE
SHARES (NOTE 1)
BRAZIL (continued)
61,500 Vale do Rio Doce Series A (Metals & Mining) $ 788,951
20,000 Vale do Rio Doce Series B (Metals & Mining) 0
------------
5,530,746
KOREA - 1.4%
30,020 Samsung Electronics Ltd. + (Electronics) 988,190
------------
PORTUGAL - 0.7%
42,000 Lusomundo-SGPS, S.A. + (Entertainment) 487,299
------------
RUSSIA - 0.2%
45,600 LukOil Company, ADR** (Oil) 159,600
------------
TOTAL PREFERRED STOCKS (COST $6,862,441) $7,165,835
------------
RIGHTS -- 0.0%# (COST $0)
TAIWAN - 0.0%#
540 Compal Electronics Inc., Rights, Expire 01/22/99 +
(Electronics) 419
------------
WARRANTS -- 0.3% (COST $254,624)
PHILIPPINES - 0.3%
520,000 Jollibee Foods Company, Warrants,
Expire 02/24/03 + (Food & Beverage) 247,301
------------
TOTAL SECURITIES (COST $81,576,281) $67,475,681
------------
REPURCHASE AGREEMENT -- 4.0% (COST $2,882,000)
PRINCIPAL AMOUNT
$2,882,000 Agreement with Prudential Securities, Tri-Party, 5.150% dated
12/31/98, to be repurchased at $2,883,649 on 01/04/99,
collateralized by $2,939,640 market value of U.S. government
securities, having various maturities and various interest
rates. 2,882,000
------------
TOTAL INVESTMENTS (COST $84,458,281*) 97.3% 70,357,681
OTHER ASSETS AND LIABILITIES (NET) 2.7 1,964,842
------ ------------
NET ASSETS 100.0% $72,322,523
====== ============
- --------------
* Aggregate cost for federal tax purposes is $84,843,248.
** illiquid Security or Special Situation Security (See Note 6 to Financial
Statements)
*** Security exempt from may be resold in transactions registration under
Rule exempt from registration, 144A of the Securities Act normally
to qualified of 1933. These securities institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
ABBREVIATIONS:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or alien share
GDR Global Depositary Receipt
GDS Global Depositary Share
ORD Ordinary
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
9
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Assets and Liabilities
December 31, 1998
ASSETS:
Investments in securities, at value (Identified cost $84,458,281) (Note 1)
Securities $ 67,475,681
Repurchase agreements 2,882,000
------------
Total investments 70,357,681
Foreign currency (Cost $158,357) 171,200
Receivables:
Shares of beneficial interest sold 956,431
Investment securities sold 876,252
Dividends 365,346
Interest 412
Other Assets:
Deferred organization costs (Note 1) 25,874
------------
Total Assets 72,753,196
------------
LIABILITIES:
Payables:
Investment securities purchased $ 112,020
Cash overdraft due to custodian 84,325
Custodian fees 75,768
Accounting fees 32,080
Professional fees 31,013
Management fee (Note 2) 28,812
Trustees' fees and expenses (Note 2) 3,359
Other accrued liabilities and expenses 63,296
------------
Total Liabilities. 430,673
------------
NET ASSETS $ 72,322,523
============
NET ASSETS consist of:
Distributions in excess of net investment income $ (61,259)
Accumulated net realized loss on securities sold,
forward foreign currency exchange contracts and
foreign currency transactions (37,875,564)
Net unrealized depreciation of investments,
forward foreign currency exchange contracts,
foreign currency transactions and other net assets (14,082,310)
Shares of beneficial interest 109,803
Additional paid-in capital 124,231,853
------------
NET ASSETS $ 72,322,523
============
Net Asset Value, offering and redemption price per share
($72,322,523 divided by 10,980,349 shares of beneficial
interest outstanding) $6.59
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
10
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Operations
For the Year Ended December 31, 1998
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $97,086) $ 1,978,740
Interest 192,425
------------
Total Investment Income 2,171,165
------------
EXPENSES:
Management fee (Note 2) $ 1,146,101
Custodian fees 224,921
Accounting fees 74,773
Professional fees 37,937
Printing fees 22,493
Amortization of organization
expenses (Note 1) 12,432
Trustees' fees and expenses
(Note 2) 7,680
Insurance fees 4,172
Tax Expense 40,428
Other 13,747
------------
Total Expenses. 1,584,684
------------
NET INVESTMENT INCOME 586,481
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on:
Security transactions (27,881,104)
Forward foreign currency exchange contracts (159,701)
Foreign currencies transactions (413,763)
------------
Net realized loss on investments during the year (28,454,568)
------------
Change in unrealized appreciation/(depreciation) of:
Securities transactions (13,779,719)
Forward foreign currency exchange contracts 1,756
Foreign currency transactions and net other assets 22,012
------------
Net unrealized depreciation of investments during the year (13,755,951)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (42,210,519)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(41,624,038)
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
11
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
Statement of Changes in Net Assets
Year Ended Year Ended
12/31/98 12/31/97
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net investment income. $ 586,481 $ 565,662
Net realized loss on Securities,
forward foreign currency exchange
contracts and Foreign currency
transactions during the year (28,454,568) (10,191,620)
Net unrealized depreciation of securities,
forward foreign currency exchange
contracts and foreign currency
transactions and net other assets
during the year (13,755,951) (952,556)
Net decrease in net assets
resulting from operations (41,624,038) (10,578,514)
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (139,238) (186,920)
BENEFICIAL INTEREST TRANSACTIONS:
Net increase/(decrease) from beneficial
interest transactions (Note 4) (750,809) 98,636,299
------------ ------------
Net increase/(decrease) in
net assets (42,514,085) 87,870,865
NET ASSETS:
Beginning of year 114,836,608 26,965,743
------------ ------------
End of year $ 72,322,523 $114,836,608
============ ============
Distributions in excess of net
investment income $ (61,259) $ (59,612)
============ ============
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA FOR THE YEAR OR PERIOD ENDED:
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96*
<S> <C> <C> <C>
Net asset value-beginning of year $10.57 $10.65 $10.00
------ ------ ------
Net investment income 0.01 0.02 0.03
Net realized and unrealized gain/(loss) on investments (3.98) (0.08) 0.65
------ ------ ------
Net increase/(decrease) in net assets resulting from
investment operations (3.97) (0.06) 0.68
Distributions to shareholders:
Distributions from net investment income (0.01) (0.02) (0.03)
------ ------ ------
Net asset value--end of year 6.59 $10.57 $10.65
====== ====== ======
Total return** (37.53)% (0.58)% 6.79%
====== ====== ======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) $72,323 $114,837 $26,966
Ratio of net investment income to average net assets 0.67% 0.63% 0.81%+
Ratio of operating expenses to average net assets,
including interest and tax expense 1.80% 1.76% 1.45%+
Ratio of operating expenses to average net assets,
excluding interest and tax expense 1.75% 1.75% 1.44%+
Portfolio turnover rate 112% 71% 43%
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager 0.01 $0.02 $(0.01)
Ratio of operating expenses before deferral of fees and
absorption of expenses by Manager, including interest
and tax expense N/A 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.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
12
<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, 1998, the Trust had three series, the
Montgomery Variable Series: Growth Fund, the Montgomery Variable Series:
Emerging Markets Fund and the Montgomery Variable Series: Small Cap
Opportunities Fund. On December 28, 1998, the Montgomery Variable Series:
International Small Cap Fund (previously a series of the Trust) returned paid in
capital to shareholders thus liquidating the fund. 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: Small Cap Opportunities Fund are presented under
separate covers.
1. SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ 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,
1998, resulting from differences in book and tax accounting have been
reclassified at year end to reflect a decrease to undistributed net
investment income of $448,890, a decrease to accumulated realized
loss of $448,880 and a decrease to additional paid-in capital of $10.
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.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
13
<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 are included in net realized gains/losses.
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. Dividend income on
foreign securities is recognized as soon as the Fund is informed of
the ex-dividend date. Interest income, including
accretion/amortization of premium/discount on short-term investments,
is recognized on an accrual basis.
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. The Fund may be subject to foreign taxes on income, gains
on investment or currency repatriation, a portion of which may be
recoverable . The Fund will accrue such taxes and recoveries as
applicable, based upon their current interpretation of tax rules and
regulations that exist in the markets in which they invest.
h. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Fund 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.
14
<PAGE>
The Montgomery Funds III
Notes to Financial Statements (continued)
Pursuant to the investment management agreement (the "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 the 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 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 effect such reimbursement and remain in
compliance with applicable expense limitations. For the year ended
December 31, 1998, the Manager recouped fees of $46,496 deferred
during the year ended December 31, 1997. The recouped fees are
included in current year management fee expenses and are part of the
annual rates expressed above.
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 $55,000 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 (iMAM Securitiesi) serves as the Fund's transfer
agent.
3. SECURITIES TRANSACTIONS:
a. The aggregate amounts of purchases and sales of investment
securities, other than short-term securities, for the year ended
December 31, 1998, were $102,613,438 and $93,358,460, respectively.
b. At December 31, 1998, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value for federal income tax
purposes were $5,667,661 and $20,153,228, respectively.
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, 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 year ended December 31, 1998, there were
no borrowings under this agreement.
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the years indicated below were:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Sold 8,125,454 $ 62,925,477 12,138,870 $143,974,251
Issued as Reinvestment of Dividends 21,354 139,014 18,254 186,920
Shares Redeemed (8,035,427) (63,815,300) (3,820,148) (45,524,872)
------------------------------------------------------
Net Increase/(Decrease) 111,381 $ (750,809) 8,336,976 $ 98,636,299
======================================================
</TABLE>
At December 31, 1998, shareholders with ownership of 10% or greater included one
shareholder comprising ownership of 90.11% of the total aggregate shares
outstanding.
15
<PAGE>
The Montgomery Funds III
Notes to Financial Statements (continued)
5. FOREIGN SECURITIES
The Fund purchases securities in emerging markets 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 markets 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, 1998. These securities are valued at market
price.
<TABLE>
<CAPTION>
Acquisition 12/31/98 Value % of Total
Security Date Shares Market Value Per Share Cost Net Assets
<S> <C> <C> <C> <C> <C> <C>
Bashkirenergo 8/14/97 199,542 $ 3,991 $0.02 $ 179,588 0.0%*
Berjaya Sports Toto Berhad 2/19/98 190,500 180,444 0.95 540,880 0.2%
Corporacion Interamericana
Entertainment S.A., Series B 10/29/97 159,720 435,380 2.73 401,442 0.6%
The Czech Value Fund 5/14/96 73,800 396,675 5.38 583,175 0.5%
Fauji Fertilizer Company, Ltd. 10/21/97 375,000 345,226 0.92 802,145 0.6%
Irkutskenegro, Sponsored, ADR 2/04/97 58,000 87,000 1.50 490,144 0.1%
ITC Ltd., GDR 11/19/98 68,600 1,528,064 22.27 1,418,569 2.1%
Krasnoyarskelectrosvyaz, ADR 2/20/98 14,043 8,426 0.60 161,925 0.0%*
Krasny Oktyabr 7/14/97 8,500 11,050 1.30 146,625 0.0%*
Mahanagar Telephone 9/9/98 44,200 539,240 12.20 515,375 0.8%
Murmansk Electrosvyaz, ADR 2/20/98 53,661 5,420 0.10 136,126 0.0%*
Nizhnosvyazinform, Sponsored, ADR 2/20/98 18,507 5,552 0.30 114,957 0.0%*
Orenburg Region Electrosvyaz, ADR 2/20/98 76,725 3,836 0.05 44,020 0.0%*
Pakistan State Oil 10/21/97 46,800 73,704 1.57 425,218 0.1%
YTL Power International Berhad 2/10/98 462,000 276,046 0.60 425,918 0.4%
LukOil Company, Pfd., ADR 6/9/97 45,600 159,600 3.50 1,601,025 0.2%
Uraltelecom, ADR 2/20/98 3,999 13,997 3.50 116,521 0.0%*
----------- ------
$4 ,073,651 5.7%
=========== ======
</TABLE>
7. Capital Loss Carryforward
At December 31, 1998, 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 and $26,489,358 expiring in 2006.
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, 1998, the
Fund elected to defer net capital and currency losses of $5,065,135
occurring between November 1, 1998 and December 31, 1998.
Such deferred losses will be treated as arising on the first day of the
fiscal year ending December 31, 1999.
- --------------------------
* Amount represents less than 0.1%
16
<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, 1998 and the results of its operations for the year
then ended and the changes in its net assets and the financial highlights
for each of the two years in the period 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 audits. We
conducted our audits 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 audits, which included
confirmation of investments at December 31, 1998 by correspondence with the
custodian and brokers, and the application of alternative auditing
procedures where confirmations from brokers were not received, provide 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.
PRICEWATERHOUSECOOPERS LLP
SAN FRANCISCO, CA
FEBRUARY 12, 1999
17
