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[GRAPHIC APPEARS HERE]
The Montgomery Funds(TM)
Variable Series
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Small Cap Opportunities
Semiannual Report
June 30, 1999
Invest wisely(R)
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Montgomery
Variable Series
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Small Cap
Opportunities Fund
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Portfolio Highlights
(Unaudited)
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PORTFOLIO MANAGEMENT
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Roger Honour ...................................... Senior Portfolio Manager
Kathryn Peters............................................ Portfolio Manager
Andrew Pratt, CFA .........................................Portfolio Manager
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FUND PERFORMANCE
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Average annual total returns
for the period ended 6/30/99
Montgomery Variable Series:
Small Cap Opportunities Fund
Since inception (5/1/98) ........................................... (8.20)%
One year............................................................ (9.32)%
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Russell 2000 Index/1/
Since 4/30/98 ...................................................... (3.24)%
One year............................................................ 1.50%
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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.
/1/The Russell 2000 Index is a capitalization-weighted total return index that
includes the smallest 2,000 companies within the Russell 3000 Index.
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TOP TEN HOLDINGS
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(as a percentage of total net assets)
Kronos, Inc. .......................................................... 5.5%
Acxiom Corporation..................................................... 5.3%
Comverse Technology, Inc............................................... 4.7%
U.S. Freightways Corporation .......................................... 3.8%
TJ International, Inc. ................................................ 3.7%
Tetra Technologies, Inc................................................ 3.7%
Metro Networks, Inc.................................................... 3.3%
Men's Warehouse, Inc. (The)............................................ 2.6%
Kaufman & Broad Home Corporation ...................................... 2.5%
Ferro Corporation ..................................................... 2.4%
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TOP FIVE INDUSTRIES
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(as a percentage of total net assets)
Office/Plant Automation ............................................... 5.5%
EDP Services........................................................... 5.3%
Telecommunications Equipment........................................... 4.7%
Diversified Commercial Services ....................................... 3.8%
Trucking............................................................... 3.8%
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
1
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Montgomery
Variable Series
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Small Cap
Opportunities Fund
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PORTFOLIO INVESTMENTS
June 30, 1999 (Unaudited)
Shares Value (Note 1)
COMMON STOCKS - 64.7%
Advertising - 2.0%
600 TMP Worldwide, Inc.+................................. $ 38,213
Broadcasting - 3.3%
1,200 Metro Networks, Inc.+................................ 63,975
Building Products - 3.7%
2,300 TJ International, Inc. .............................. 71,012
Clothing/Shoe/Accessory Stores - 2.6%
1,950 Men's Wearhouse, Inc. (The)+......................... 50,091
Computer Software - 1.1%
400 Synopsys, Inc.+...................................... 22,063
Construction/Agriculture Equipment/Trucks - 2.3%
1,050 Manitowoc Company, Inc. ............................. 43,706
Containers/Packaging - 3.3%
700 Aptar Group, Inc. ................................... 21,000
1,900 Ivex Packaging Corporation+.......................... 41,800
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62,800
Diversified Commercial Services - 3.8%
400 Catalina Marketing Corporation+...................... 36,800
3,750 HA-LO Industries, Inc.+.............................. 37,031
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73,831
EDP Services - 5.3%
4,100 Acxiom Corporation+.................................. 102,372
Environmental Services - 3.7%
4,250 Tetra Technologies, Inc.+............................ 70,656
Homebuilding - 3.6%
1,200 Champion Enterprises, Inc.+.......................... 22,350
1,900 Kaufman & Broad Home Corporation .................... 47,263
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69,613
Investment Bankers/Brokers/Services - 1.3%
900 Waddell & Reed Financial, Inc., Class A ............. 24,694
Office/Plant Automation - 5.5%
2,400 Kronos, Inc.+........................................ 106,950
Other Consumer Services - 2.6%
1,500 Education Management Corporation+.................... 31,078
1,050 Regis Corporation ................................... 20,114
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51,192
Package Goods/Cosmetics - 1.7%
2,100 Playtex Products, Inc.+.............................. 32,681
Paints/Coatings - 2.4%
1,700 Ferro Corporation ................................... 46,750
Printing/Forms - 2.5%
1,000 Big Flower Holdings, Inc.+........................... 31,875
600 World Color Press, Inc.+............................. 16,500
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48,375
Recreational Products/Toys - 1.4%
800 Action Performance Companies, Inc.+.................. 26,375
Savings and Loan Associations - 1.8%
1,500 Commercial Federal Corporation ...................... 34,781
Semiconductors - 2.3%
3,000 Actel Corporation+................................... 43,875
Telecommunications Equipment - 4.7%
1,200 Comverse Technology, Inc.+........................... 90,525
Trucking - 3.8%
1,600 U.S. Freightways Corporation ........................ 73,650
TOTAL COMMON STOCKS
(Cost $1,064,412) ............................................... 1,248,180
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Principal Amount
REPURCHASE AGREEMENTS - 38.2%
$ 368,000 Agreement with Prudential Securities, Tri-Party,
5.100% dated 06/30/99, to be repurchased at $368,051 on
07/01/99, collateralized by $375,361 market value of
U.S. government and mortgage-backed securities, having
various maturities and interest rates.............. 368,000
368,000 Agreement with Paine Webber, Tri-Party, 5.050% dated
06/30/99, to be repurchased at $368,051 on 07/01/99,
collateralized by $368,732 market value of U.S.
government and mortgage-backed securities, having
various maturities and interest rates.............. 368,000
TOTAL REPURCHASE AGREEMENTS
(Cost $736,000).................................................. 736,000
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TOTAL INVESTMENTS - 102.9%
(Cost $1,800,412*)............................................... 1,984,180
OTHER ASSETS AND LIABILITIES - (2.9)% ........................... (56,045)
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NET ASSETS - 100.0% ............................................ $1,928,135
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* Aggregate cost for federal tax purposes is substantially the same.
+ Non-income-producing security.
2
The accompanying notes are an integral part of these financial statements.
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Montgomery
Variable Series
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Statement of
Assets and Liabilities
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J u n e 3 0, 1 9 9 9
(Unaudited)
Assets: Small Cap Opportunities Fund
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Investments in securities, at value (note 1)
Securities .................................................. 1,248,180
Repurchase agreements ....................................... 736,000
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Total Investments ................................................ 1,984,180
Cash ............................................................. 183
Receivables:
Investment securities sold .................................. 738,000
Dividends ................................................... 373
Interest .................................................... 102
Other assets ..................................................... 38,869
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Total Assets ..................................................... 2,761,707
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Liabilities:
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Payables:
Investments purchased ....................................... 736,000
Management fees ............................................. 69,706
Trustees' fees and expenses ................................. 5,453
Custodian fees .............................................. 2,128
Transfer agency and servicing fees .......................... 1,095
Accounting fees ............................................. 893
Other accrued liabilities and expenses ...................... 18,297
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Total Liabilities ................................................ 833,572
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Net Assets ....................................................... $ 1,928,135
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Investments at identified cost ................................... $ 1,800,412
Net Assets Consist of:
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Accumulated net investment loss .................................. $ (9,204)
Accumulated net realized gain/(loss) on securities ............... (358,467)
Net unrealized appreciation of investments ....................... 183,768
Shares of beneficial interest .................................... 2,131
Additional paid-in capital ....................................... 2,109,907
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Net Assets ....................................................... $ 1,928,135
Net Assets:
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Net assets ....................................................... $ 1,928,135
Number of Fund shares outstanding ................................ 213,125
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Net asset value, offering and redemption price per
share outstanding. ............................................... $ 9.05
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3
The accompanying notes are an integral part of these financial statements.
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Montgomery
Variable Series
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Statement of Operations
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Six Months Ended June 30, 1999
(Unaudited)
Net Investment Income: Small Cap Opportunities Fund
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Investment Income:
Interest ......................................................... $ 9,997
Dividends ........................................................ 2,196
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Total Income ..................................................... 12,193
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Expenses:
Management fee (note 2) .......................................... 11,145
Legal and audit fees ............................................. 9,480
Trustees' fees ................................................... 4,803
Custodian fee .................................................... 2,715
Other ............................................................ 2,673
Transfer agency and servicing fees ............................... 2,099
Printing fees .................................................... 1,175
Accounting expenses .............................................. 659
Registration fees ................................................ 574
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Total Expenses ................................................... 35,323
Fees deferred and/or expenses absorbed by Manager (note 2) ....... (21,452)
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Net Expenses ..................................................... 13,871
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Net Investment Income/(Loss) ..................................... (1,678)
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Net Realized and Unrealized Gain/(Loss) on Investments:
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Net realized gain/(loss) from securities transactions ............ (140,750)
Net change in unrealized appreciation/depreciation of investments 94,307
Net Realized and Unrealized Gain/(Loss) on Investments ........... (46,443)
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Net Increase/(Decrease) in Net Assets Resulting from Operations .. $ (48,121)
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4
The accompanying notes are an integral part of these financial statements.
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Montgomery
Variable Series
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Statement of
Changes in Net Assets
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(Unaudited)
<TABLE>
<CAPTION>
Small Cap Opportunities Fund
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Six Months
Ended Period Ended
Increase/(Decrease) in Net Assets from Operations: 6/30/99 12/31/98(a)
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<S> <C> <C>
Net investment income/(loss) ................................................................... $ (1,678) $ (7,526)
Net realized gain/(loss) on securities ......................................................... (140,750) (217,717)
Net unrealized appreciation/(depreciation) of securities ....................................... 94,307 89,461
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Net Increase/(Decrease) in Net Assets Resulting from Operations ................................ (48,121) (135,782)
Beneficial Interest Transactions:
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Net increase/(decrease) from beneficial interest transactions (note 4) ......................... 30,653 81,385
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Net Increase/(Decrease) in Net Assets .......................................................... (17,468) (54,397)
Net Assets:
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Beginning of Period ............................................................................ $ 1,945,603 $ 2,000,000
End of Period .................................................................................. $ 1,928,135 $ 1,945,603
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) .............. $ (9,204) $ (7,526)
</TABLE>
(a)Montgomery Variable Series: Small Cap Opportunities Fund commenced operations
on May 1, 1998.
5
The accompanying notes are an integral part of these financial statements.
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Montgomery
Variable Series
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Financial Highlights
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<TABLE>
<CAPTION>
Small Cap Opportunities Fund
Selected Per-Share Data for the Year or Period Ended: 6/30/99 Fiscal Year Ended December31,
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(Unaudited) 1998(a)
<S> <C> <C>
Net Asset Value -- Beginning of Period $ 9.28 $ 10.00
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Net investment income/(loss) (0.01) (0.04)
Net realized and unrealized gain/(loss) on investments (0.22) (0.68)
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Net increase/(decrease) in net assets resulting from investment operations (0.23) (0.72)
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Net Asset Value -- End of Period $ 9.05 $ 9.28
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Total Return* (2.48)% (7.20)%
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Ratios to Average Net Assets/Supplemental Data:
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Net assets, end of year (in 000s) $ 1,928 $ 1,946
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Ratio of net investment income/(loss) to average net assets (0.18)%+ (0.64)%+
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Net investment income/(loss) before deferral of fees by Manager $ (0.11) $ (0.16)
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Portfolio turnover rate 18% 82%
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Expense ratio including interest and tax expense 1.50%+ 1.50%+
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Expense ratio before deferral of fees by Manager, including interest and tax expense 3.80%+ 3.71%+
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Expense ratio excluding interest and tax expense -- --
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</TABLE>
(a) Montgomery Variable Series: Small Cap Opportunities Fund commenced
operations on May 1, 1998.
* Total return represents aggregate total return for the periods indicated.
+ Annualized.
6
The accompanying notes are an integral part of these financial statements.
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The Montgomery
Funds III
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Notes
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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 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. Montgomery Variable Series: Small Cap Opportunities Fund
commenced operations on May 1, 1998, with an initial funding of $2,000,000 and
200,000 shares. Information presented in these financial statements pertains to
the Montgomery Variable Series: Small Cap Opportunities Fund (the "Fund"). The
Montgomery Variable Series: Growth Fund and the Montgomery Variable Series:
Emerging Markets Fund are presented under separate covers.
1. SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies.
a. Portfolio Valuation
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 and in the case of fixed-income securities, 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, 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% nondeductible 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 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 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.
7
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The Montgomery
Funds III
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Notes
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to Financial Statements
(Unaudited)
f. Expenses
General expenses of the Trust are allocated to the Fund and other series of the
Trust 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 Commerzbank
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
$200 Million $300 Million $500 Million
------------ ------------ ------------
1.20% 1.10% 1.00%
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 1.50% 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-month period ended June 30, 1999, the Manager deferred fees of
$11,145 and absorbed fees of $10,307 during the year ended December 31, 1998.
The recouped fees are included in current-year management fee expenses and are
part of the annual rates expressed above. As of June 30, 1999, the deferred
management fees and absorbed expenses subject to recoupment are $47,509.
b. Certain officers and Trustees of the Trust are, with respect to the Trust's
Managers, "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 amounts of purchases and sales of investment securities, other
than short-term securities, for the six months ended June 30, 1999, were
$1,004,737 and $828,136, 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 $247,896 and $64,128,
respectively.
c. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New York,
the Montgomery Variable Series: Small Cap Opportunities 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.
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Transactions in shares of beneficial interest
for the period indicated below were:
<TABLE>
<CAPTION>
Six-Month Period End
6/30/99 Year Ended 12/31/98
(Unaudited)
Shares Amount Shares Amount
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<S> <C> <C> <C> <C>
Sold 9,287 $ 82,641 13,660 $114,412
Issued as reinvestment of dividends -- -- -- --
Redeemed (5,910) (51,988) (3,912) (33,027)
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Net increase/(decrease) 3,377 $ 30,653 9,748 $ 81,385
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</TABLE>
At Decemeber 31, 1998, shareholders of the Fund with ownership of 10% or greater
included one shareholder, comprising ownership of 100% of the total aggregate
shares outstanding.
8
<PAGE>
[GRAPHIC APPEARS HERE]
Invest wisely(R)
THE MONTGOMERY FUNDS(TM)
101 California Street
San Francisco, CA 94111-9361
