<PAGE> 1
The Montgomery Funds (SM)
VARIABLE SERIES
EMERGING MARKETS
ANNUAL REPORT
December 31, 1999
Invest wisely(R)
<PAGE> 2
Montgomery
Variable Series
Emerging Markets Fund
Portfolio Highlights
I N V E S T M E N T R E V I E W
Q: HOW DID THE FUND PERFORM DURING THE YEAR ENDED DECEMBER 31, 1999?
A: A strong fourth-quarter outperformance offset a slight underperformance
during the first half of the year and resulted in the Fund's performing roughly
in line with its benchmark, the Morgan Stanley Capital International (MSCI)
Emerging Markets Free Index. The Fund returned 64.81%, versus a return of 66.41%
for the benchmark.
Q: WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A: Our strategy maintains a slight bias toward small- and mid-cap companies. We
believe that identifying smaller, well-managed, fundamentally sound and
attractively valued companies before the market recognizes their potential can
add value to the Fund over the long term. This worked against us during the
first half of the year, but due to a recovery in interest in such stocks,
especially in Asia, the Fund's relative performance improved significantly. In
fact, the more favorable investment environment, combined with good market and
stock selection on our part, led to a much more robust relative performance for
the Fund in the final months of the year.
Based on our fundamental macroeconomic and company analysis during the second
half of the year, the Fund was well positioned to take advantage of upturns in
such markets as Turkey, Mexico, China/Hong Kong and Korea. The Turkish market
benefited from the removal of Greek objections to Turkey's inclusion in the
European Union. In Mexico the economy continued to show a strong recovery,
helped by a rise in oil prices and robust growth in the United States.
China/Hong Kong and Korea also revised upward their estimates for economic
growth, but the main driving force behind these and other northern Asian markets
during the quarter were the technology and telecommunications sectors.
Our sector bets also proved fruitful. Based on our assessment of continuing
improvement in the global economy, we overweighted specific commodity stocks
such as platinum and pulp and paper. Both of these industries experienced a
strong increase in demand over the course of the year, boosting company
valuations. Fund returns also received a lift from our telecommunications and
technology holdings, particularly in Asia, as investors took their lead from the
United States and favored these issues above most others.
Q: WERE THERE ANY STOCKS THAT MADE A PARTICULARLY STRONG CONTRIBUTION TO
PERFORMANCE?
A: Reflecting market trends, the Fund's technology holdings and Mexican telecom
were undisputedly the strongest performers of the period. These included Grupo
Financiero Banamex (1.13% of net assets as of 12/31/99), Egyptian Company for
Mobile Services (2.58% of net assets as of 12/31/99) and Korea Telecom (1.74% of
net assets as of 12/31/99).
Banamex, a Mexican bank, benefited from a strengthening Mexican market, falling
interest rates and positive sentiment toward the market. Egyptian Company for
Mobile Services benefited from positive market sentiment and continued growth in
its
PORTFOLIO MANAGEMENT
<TABLE>
<S> <C>
Josephine Jimenez, CFA.. Sr. Portfolio Manager
Frank Chiang ........... Portfolio Manager
</TABLE>
FUND PERFORMANCE
Average annual total returns
for the period ended 12/31/99
Montgomery Variable Series:
Emerging Markets Fund
<TABLE>
<S> <C>
Since inception (2/2/96) 2.30%
One year 64.81%
Three years 0.78%
</TABLE>
MSCI Emerging Markets Free Index
<TABLE>
<S> <C>
Since 1/31/96 2.16%
One year 66.41%
Three years 3.18%
</TABLE>
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.
The performance figures provided do not reflect the effect of (i) any securities
purchased or sold by the Fund after 12/31/99 but that were effective on 12/31/99
or (ii) any purchases or redemptions of Fund shares completed after 12/31/99
that were effective on 12/31/99.
<TABLE>
<CAPTION>
Variable Emerging Markets MSCI Index Lipper
<S> <C> <C> <C>
2/2/96 10000 10000 10000
Mar-96 10100 9918 9955
Apr-96 10330 10314 10350
May-96 10580 10268 10454
Jun-96 10560 10332 10489
Jul-96 10050 9626 9845
Aug-96 10500 9872 10086
Sep-96 10510 9958 10162
Oct-96 10310 9692 9898
Nov-96 10470 9855 10121
Dec-96 10679 9899 10281
Jan-97 11532 10575 11058
Feb-97 11782 11028 11449
Mar-97 11592 10738 11188
Apr-97 11542 10757 11242
May-97 12023 11065 11673
Jun-97 12915 11657 12305
Jul-97 13337 11831 12699
Aug-97 12003 10325 11439
Sep-97 12514 10611 11900
Oct-97 10499 8870 10043
Nov-97 10188 8547 9719
Dec-97 10617 8753 9863
Jan-98 9382 8066 9211
Feb-98 9914 8908 9970
Mar-98 10105 9295 10373
Apr-98 10236 9193 10480
May-98 8860 7933 9146
Jun-98 7855 7101 8302
Jul-98 8267 7326 8583
Aug-98 5756 5208 6202
Sep-98 6047 5538 6360
Oct-98 6449 6122 6859
Nov-98 6981 6631 7233
Dec-98 6633 6535 7177
Jan-99 6402 6429 7035
Feb-99 6231 6492 6993
Mar-99 7106 7347 7772
Apr-99 7962 8256 8794
May-99 7751 8208 8688
Jun-99 8707 9140 9546
Jul-99 8486 8892 9341
Aug-99 8436 8972 9233
Sep-99 8114 8669 8897
Oct-99 8345 8853 9212
Nov-99 9281 9647 10225
Dec-99 10933 10874 12079
</TABLE>
(1) The Morgan Stanley Capital International Emerging Markets Free Index Fund
is an unmanaged, capitalization-weighted composite index that covers
individual securities within the equity markets of approximately 25
emerging markets countries.
(2) The Lipper Emerging Markets Funds Average universe consists of 25 funds.
1
<PAGE> 3
Montgomery
Variable Series
Emerging Markets Fund
Portfolio Highlights
TOP TEN HOLDINGS
(as a percentage of total net assets)
<TABLE>
<S> <C>
Telefonos de Mexico S.A., ADR ...... 4.7%
Samsung Electronics Company ........ 4.6%
Videsh Sanchar Nigam Ltd., GDR ..... 3.2%
Egyptian Company for Mobile Services 2.6%
Hon Hai Precision Industry ......... 2.5%
Vale do Rio Doce, Series A ......... 2.5%
Taiwan Semiconductor Manufacturing
Company, Ltd. ...................... 2.2%
Pohang Iron & Steel Company, Ltd. .. 2.0%
Alpha Credit Bank .................. 1.9%
Embratel Participacoes, ADR ........ 1.9%
</TABLE>
TOP FIVE COUNTRIES
(as a percentage of total net assets)
<TABLE>
<S> <C>
Mexico..... 14.2%
Brazil..... 13.2%
India...... 12.6%
Korea...... 11.6%
Taiwan..... 8.7%
</TABLE>
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
There are risks associated with 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.
subscriber base. Korea Telecom saw rapid growth of its subscriber base and its
dominant position in the domestic wireless market.
Q: WERE THERE ANY DISAPPOINTMENTS?
A: Unfortunately, not all of our holdings lived up to expectations. Most of
those that disappointed were listed on the Indian market, which, apart from
technology issues, turned in a lackluster performance toward the end of the year
due to Y2K worries and profit taking. Given the recently elected government's
stronger-than-anticipated commitment to reform, however, and the positive
outlook for the economy in 2000, we believe that this market is likely to revive
and that our holdings in India may begin making a more positive contribution to
performance.
Q: WHERE DO YOU BELIEVE THE BEST OPPORTUNITIES IN THE EMERGING MARKETS WILL
BE IN THE NEW YEAR?
A: Moving into the New Year, we continue to see plenty of opportunities across
the emerging markets. We believe that strong markets and reductions in interest
rates have helped boost consumer confidence and may continue to stimulate growth
in the year ahead. In addition, companies that withstood the 1997/98 crisis are
now more robust and many have implemented restructuring that will make them more
competitive in the long run.
In terms of individual country exposure, while we continue to like the prospects
for Mexico, we are also becoming more optimistic about Brazil. The Brazilian
economy is likely to see a recovery in 2000, and we believe that specific,
well-placed, domestically oriented companies may begin to enjoy improving growth
prospects. We also like China/Hong Kong, where, similar to Brazil, economic
growth is accelerating, which may attract funds to certain sectors, such as
property, that have recently been out of favor.
We are also very excited about some of the Asian technology companies,
particularly DRAM chip manufacturers. Some semiconductor companies are currently
experiencing impressive top-line growth, and we believe that this trend will
continue. In view of this, we are currently overweighted in this sector. We will
continue to seek out similarly attractive ideas and well-managed companies and
through this strategy strive to add value to your Fund.
2
<PAGE> 4
Montgomery
Variable Series
Emerging Markets Fund
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1999
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
COMMON STOCKS - 86.9%
ARGENTINA - 1.0%
42,800 Telefonica de Argentina, ADR
(Other Telephone/Communication) .............. $1,321,450
BRAZIL - 4.7%
26,200 Aracruz Celulose S.A., ADR (Paper) ........... 687,750
89,300 Embratel Participacoes, ADR
(Other Telephone/Communication) .............. 2,433,425
29,900 Tele Celular Sul Participacoes S.A
(Cellular Telephone) ......................... 949,325
20,700 Tele Centro Sul Participacoes S.A., ADR
(Other Telephone/Communication) .............. 1,878,525
8,500 Vale do Rio Doce
(Other Metals/Minerals) ...................... 197,620
----------
6,146,645
CHILE - 0.7%
51,900 Cia de Telecom de Chile S.A., ADR
(Other Telephone/Communication) .............. 947,175
CHINA/HONG KONG - 2.9%
65,000 Cheung Kong (Holdings) Ltd. (Real Estate) .... 825,722
14,200 China Telecom Ltd., ADR+
(Other Telephone/Communication) .............. 1,825,588
732,000 Cosco Pacific Ltd. (Marine Transportation) ... 607,371
42,000 HSBC Holdings PLC (Non-U.S. Banks) ........... 588,924
----------
3,847,605
CZECH REPUBLIC - 0.5%
18,090 Ceske Radiokomunikace, GDR+
(Other Telephone/Communication) .............. 660,285
EGYPT - 4.0%
12,000 Al-Ahram Beverages Company+
(Alcoholic Beverages) ........................ 236,755
83,200 Al-Ahram Beverages Company, GDR+
(Alcoholic Beverages) ........................ 1,639,040
73,866 Egyptian Company for Mobile Services
(Cellular Telephone) ......................... 3,384,783
----------
5,260,578
GREECE - 2.7%
31,811 Alpha Credit Bank (Non-U.S. Banks) ........... 2,493,418
41,800 Hellenic Telecommunications S.A., ADR
(Other Telephone/Communication) .............. 990,830
----------
3,484,248
HUNGARY - 1.2%
21,600 Mol Magyar Olaj-es Gazipari Rt.
(Integrated Oil Companies) ................... 448,280
18,270 OTP Bank Rt. (Non-U.S. Banks) ................ 1,070,514
----------
1,518,794
INDIA - 12.6%
16,600 Dr. Reddy's Laboratories (Generic Drugs) ...... $ 550,281
47,600 Hindalco Industries Ltd., GDR (Aluminum) ...... 1,122,170
125,000 Housing Development and Finance
Corporation (Finance Companies) ............... 821,839
76,800 ICICI Ltd., ADR+
(Diversified Financial Services) .............. 1,065,600
5,870 Infosys Technologies Ltd.
(Diversified Electronics Products) ............ 1,958,860
143,000 Larsen & Toubro Ltd. (Construction/
Agriculture Equipment/Trucks) ................. 1,827,441
9,880 NIIT Ltd. (Computer Software) ................. 753,049
131,000 Reliance Industries Ltd. (Textiles) ........... 703,786
134,200 Reliance Industries Ltd., GDR (Textiles) ...... 1,919,060
55,000 Sri Adhikari Brothers Telephone
Network Ltd. (Broadcasting) ................... 1,629,517
169,400 Videsh Sanchar Nigam Ltd., GDR
(Other Telephone/Communication) ............... 4,167,240
----------
16,518,843
INDONESIA - 0.5%
517,000 PT Indofood Sukses Makmur Tbk
(Specialty Foods/Candy) ....................... 647,406
ISRAEL - 3.7%
1,013,000 Bank Leumi Le-Israel (Non-U.S. Banks) ......... 2,134,019
147,100 Bezeq Israeli Telecommunication
Corporation Ltd.+
(Other Telephone/Communication) ............... 733,940
2,400 Check Point Software Technologies+
(Computer Software) ........................... 477,000
17,400 ECI Telecom Ltd.
(Telecommunications Equipment) ................ 551,362
12,600 NICE Systems Ltd., ADR+
(Telecommunications Equipment) ................ 620,944
4,350 Orbotech Ltd.+
(Electronic Production Equipment) ............. 337,941
----------
4,855,206
KOREA - 11.6%
73,829 Kookmin Bank (Non-U.S. Banks) ................. 1,157,337
140,600 Korea Electric Power Corporation, ADR
(Non-U.S. Utilities) .......................... 2,355,050
4,440 Korea Telecom Corporation
(Other Telephone/Communication) ............... 699,920
21,100 Korea Telecom Corporation, ADR
(Other Telephone/Communication) ............... 1,577,225
22,110 Pohang Iron & Steel Company Ltd.
(Steel/Iron Ore) .............................. 2,628,666
14,300 Pohang Iron & Steel Company, ADS
(Steel/Iron Ore) .............................. 500,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
Montgomery
Variable Series
Emerging Markets Fund
I n v e s t m e n t s
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
COMMON STOCKS - CONTINUED
KOREA - CONTINUED
25,666 Samsung Electronics Company
(Diversified Electronic Products) ............ $6,012,467
26,000 Shinhan Bank Company Ltd.
(Non-U.S. Banks) ............................. 281,638
----------
15,212,803
MALAYSIA - 2.1%
1,195,000 Public Bank Berhad (Non-U.S. Banks) .......... 1,044,039
265,000 Resorts World Berhad (Hotels/Resorts) ........ 760,122
317,000 Tenaga Nasional Berhad
(Non-U.S. Utilities) ......................... 817,515
75,600 YTL Corporation Berhad
(Engineering and Construction) ............... 120,362
----------
2,742,038
MEXICO - 14.2%
54,200 Cemex S.A. de C.V., Sponsored ADR+
(Building Materials) ......................... 1,510,825
675,000 Cifra S.A. de C.V.+
(Other Specialty Stores) ..................... 1,352,848
631,000 Controladora Comercial Mexicana
(Department Stores) .......................... 845,327
181,975 Corporacion Interamericana
Entretanimiento S.A.+ (Advertising) .......... 726,556
52,900 Fomento Economico Mexicano S.A. de C.V
(Soft Drinks) ................................ 2,354,050
370,000 Grupo Financiero Banamex Accival S.A. de
C.V., Series B-Banacci+ (Non-U.S. Banks) ..... 1,483,123
420,000 Grupo Mexico S.A
(Other Metals/Minerals) ...................... 2,080,063
19,400 Grupo Televisa S.A., GDR+
(Broadcasting) ............................... 1,324,050
199,000 Kimberly-Clark de Mexico S.A. de C.V
(Package Goods/Cosmetics) .................... 776,688
54,600 Telefonos de Mexico S.A., ADR
(Other Telephone/Communication) .............. 6,142,500
----------
18,596,030
PERU - 0.5%
20,100 Compania de Minas Buenaventura S.A.,
ADR (Precious Metals) ........................ 322,856
12,400 Credicorp Ltd. (Non-U.S. Banks) .............. 148,800
16,000 Telefonica del Peru S.A., ADR
(Other Telephone/Communication) .............. 214,000
----------
685,656
PHILIPPINES - 0.4%
1,302,000 Ayala Corporation
(Multi-Sector Companies) ..................... 379,616
146,000 San Miguel Corporation, Class B
(Alcoholic Beverages) ......................... 206,501
----------
586,117
POLAND - 0.7%
44,200 Elektrim Spolka Akcyjna S.A.+
(Wholesale Distributors) ...................... 438,259
34,000 Prokom Software, GDR (EDP Periphals) .......... $ 530,400
----------
968,659
SOUTH AFRICA - 6.7%
194,000 ABSA Group Ltd. (Non-U.S. Banks) ............... 870,634
33,800 Anglo American Platinum Corporation
Ltd. (Precious Metals) ......................... 1,027,740
12,300 AngloGold Ltd. (Precious Metals) ............... 633,200
62,600 De Beers Centenary AG
(Other Metals/Minerals) ........................ 1,822,016
14,200 Impala Platinum Holdings Ltd.
(Precious Metals) .............................. 574,927
625,000 Old Mutual PLC+ (Life Insurance) ............... 1,641,260
86,800 Sappi Ltd. (Paper) ............................. 858,120
156,100 Sasol Ltd. (Coal Mining) ....................... 1,317,332
----------
8,745,229
TAIWAN - 8.7%
502,550 Far East Textiles Ltd. (Textiles) ............. 1,200,932
448,200 Hon Hai Precision Industry+
(EDP Services) ................................ 3,341,685
198,010 Synnex Technology
International Corporation
(Electronic Distributors) ..................... 1,299,667
549,536 Taiwan Semiconductor
Manufacturing Company Ltd.
(Electronic Production Equipment) ............. 2,924,088
623,000 United Microelectronics Corporation, Ltd.+
(Semiconductors) .............................. 2,223,228
976,000 Yang Ming Marine Transport
(Transportation) .............................. 469,575
----------
11,459,175
THAILAND - 2.2%
2,521,000 National Finance Public Company Ltd. (F)
(Non-U.S. Banks) .............................. 1,121,114
155,400 PTT Exploration and Production Public
Company Ltd. (F) (Oil and Gas Production) ..... 957,196
503,400 Thai Farmers Bank Public Company Ltd.
(F) (Non-U.S. Banks) .......................... 842,007
----------
2,920,317
TURKEY - 5.0%
12,957,000 Arcelik A.S.
(Consumer Electronics/Appliances) .............. 848,034
44,500,000 Dogan Sirketler Grubu Holdings A.S
(Diversified Manufacture) ...................... 1,312,684
43,400,000 Turkiye Is Bankasi, Class C
(Non-U.S. Banks) ............................... 2,080,384
75,080,835 Yapi Ve Kredi Bankasi S.A
(Non-U.S. Banks) ............................... 2,318,590
----------
6,559,692
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
Montgomery
Variable Series
Emerging Markets Fund
I n v e s t m e n t s
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
COMMON STOCKS - CONTINUED
VENEZUELA - 0.3%
14,800 Compania Anonima Nacional
Telefonos de Venezuela, ADR
(Other Telephone/Communication) $ .............. 364,450
TOTAL COMMON STOCKS
(Cost $78,710,554) ........................................ 114,048,401
-----------
PREFERRED STOCKS - 9.2%
BRAZIL - 8.5%
66,205,000 Cia Paranaense de Energi
(Non-U.S. Utilities) ........................... 641,343
1,419,000 Itausa Investimentos Itau
(Multi-Sector Companies) ....................... 1,468,879
5,800,000 Petroleo Brasileiro S.A.+
(Integrated Oil Companies) ..................... 1,284,155
89,400,000 Tele Norte Leste Participacoes S.A.
(Other Telephone/Communication) ................ 2,400,166
2,650,000 Telesp Celular S.A., Series B
(Cellular Telephone) ........................... 209,770
7 Telesp Participacoes S.A.
(Other Telephone/Communication) ................ --
331,800 Usinas Siderurgicas de Minas Gerais, GDR
(Steel/Iron Ore) ............................... 1,799,968
119,500 Vale do Rio Doce, Series A
(Other Metals/Minerals) ........................ 3,307,501
20,000 Vale do Rio Doce, Series B
(Other Metals/Minerals) ........................ --
-----------
11,111,782
RUSSIA - 0.7%
80,600 LUKoil Company, ADR
(Integrated Oil Companies) ...................... 967,200
TOTAL PREFERRED STOCKS
(Cost $9,668,626) .......................................... 12,078,982
-----------
TOTAL SECURITIES
(Cost $88,379,180) ......................................... 126,127,383
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount Value (Note 1)
<S> <C>
REPURCHASE AGREEMENTS - 1.4%
$1,887,000 Agreement with Greenwich Capital
Markets, Tri-Party, 5.500% dated
12/31/99, to be repurchased at
$1,887,853 on 01/03/00, collateralized
by $1,924,778 market value of U.S.
government and mortgage-backed securities,
having various maturities and interest
rates (Cost $1,887,000) .................... $ 1,887,000
------------
TOTAL INVESTMENTS - 97.5%
(Cost $90,266,180*) ........................................ 128,014,383
OTHER ASSETS AND LIABILITIES - 2.5%
(Net) ...................................................... 3,182,191
------------
NET ASSETS - 100.0% ........................................ $131,196,574
============
</TABLE>
* Aggregate cost for federal tax purposes.
+ Non-income-producing security.
ABBREVIATIONS
ADR American Depositary Receipt
ADS American Depositary Shares
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
Montgomery
Variable Series
Statement of
Assets and Liabilities
D e c e m b e r 3 1 , 1 9 9 9
<TABLE>
<CAPTION>
ASSETS: EMERGING MARKETS FUND
<S> <C>
Investments in securities, at value (note 1)
Securities ......................................................... $ 126,127,383
Repurchase agreements .............................................. 1,887,000
-------------
Total Investments 128,014,383
Foreign currency, at value (Cost $2,877,013) (note 1) ................... 2,876,604
Receivables:
Shares of beneficial interest sold ................................. 820,314
Dividends .......................................................... 258,173
Interest ........................................................... 2,256
Deferred organization costs (note 1) .................................... 13,445
-------------
Total Assets 131,985,175
-------------
LIABILITIES:
Payables:
Cash overdrafts payable to custodian ............................... 483,334
Management fees (note 2) ........................................... 146,036
Custodian fees ..................................................... 73,699
Shares of beneficial interest redeemed ............................. 21,536
Accounting fees .................................................... 10,912
Transfer agency and servicing fees ................................. 634
Trustees' fees and expenses (note 2) ............................... 247
Other accrued liabilities and expenses ............................. 52,203
-------------
Total Liabilities 788,601
-------------
Net Assets $ 131,196,574
Investments at identified cost .......................................... $ 90,266,180
NET ASSETS CONSIST OF:
Distributions in excess of net investment income ........................ $ (151,372)
Accumulated net realized loss on securities sold ........................ (39,548,946)
Net unrealized appreciation of investments .............................. 37,741,231
Shares of beneficial interest ........................................... 120,780
Additional paid-in capital .............................................. 133,034,881
-------------
Net Assets $ 131,196,574
NET ASSETS:
Net Assets .............................................................. $ 131,196,574
Number of Fund shares outstanding ....................................... 12,078,046
Net asset value, offering and redemption price per share outstanding .... $ 10.86
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
Montgomery
Variable Series
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
NET INVESTMENT INCOME: EMERGING MARKETS FUND
- ---------------------- ---------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $85,566) $ 1,560,650
Interest ............................................... 201,212
------------
Total Income 1,761,862
------------
EXPENSES:
Management fee (note 2) ................................ 1,188,824
Custodian fees ......................................... 204,348
Accounting expenses .................................... 48,245
Legal and audit fees ................................... 43,145
Transfer agency fees ................................... 15,111
Overdraft expense ...................................... 15,018
Trustees' fees and expenses (note 2) ................... 12,699
Amortization of organization expenses (note 1) ......... 12,429
Interest expense ....................................... 8,328
Printing fees .......................................... 5,100
Registration fees ...................................... 3,483
Country tax expense .................................... 2,844
Tax preparation expense ................................ 1,515
Other .................................................. 9,513
------------
Total Expenses 1,570,602
------------
NET INVESTMENT INCOME 191,260
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from:
Securities transactions ........................... (1,234,982)
Foreign currency transactions and other net assets (1,067,553)
------------
Net Realized Loss on Investments (2,302,535)
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................ 51,848,803
Foreign currency transactions and other net assets (25,262)
------------
Net Change in Unrealized Appreciation of Investments 51,823,541
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 49,521,006
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 49,712,266
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 9
Montgomery
Variable Series
Statements of
Changes in Net Assets
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
----------------------------
Year Ended Year Ended
NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS: 12/31/99 12/31/98
- ------------------------------------------------------ -------- --------
<S> <C> <C>
Net investment income .............................................................. $ 191,260 $ 586,481
Net realized loss on securities transactions, forward foreign-currency exchange
contracts, foreign-currency transactions and other net assets ................... (2,302,535) (28,454,568)
Net change in unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, foreign-currency transactions and
other net assets ................................................................ 51,823,541 (13,755,951)
------------- -------------
Net Increase/(Decrease) in Net Assets Resulting from Operations 49,712,266 (41,624,038)
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions to shareholders from net investment income ........................... (13,165) (139,238)
BENEFICIAL INTEREST TRANSACTIONS:
Net increase/(decrease) in net assets from beneficial interest transactions (note 4) 9,174,950 (750,809)
------------- -------------
Net Increase/(Decrease) in Net Assets 58,874,051 (42,514,085)
NET ASSETS:
Beginning of Period ................................................................ 72,322,523 114,836,608
End of Period $ 131,196,574 $ 72,322,523
Distributions in Excess of Net Investment Income $ (151,372) $ (61,259)
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 10
Montgomery
Variable Series
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
Selected Per-Share Data for the Year or Period Ended: Fiscal Year Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996(a)
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 6.59 $ 10.57 $ 10.65 $ 10.00
Net investment income 0.02 0.01 0.02 0.03
Net realized and unrealized gain/(loss) on investments 4.25 (3.98) (0.08) 0.65
--------- ---------- ---------- ---------
Net increase/(decrease) in net assets resulting from
investment operations 4.27 (3.97) (0.06) 0.68
--------- ---------- ---------- ---------
Distributions:
Dividends from net investment income (0.00)@ (0.01) (0.02) (0.03)
--------- ---------- ---------- ---------
NET ASSET VALUE - END OF PERIOD $ 10.86 $ 6.59 $ 10.57 $ 10.65
========= ========== ========== =========
TOTAL RETURN* 64.81% (37.53)% (0.58)% 6.79%
========= ========== ========== =========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000s) $ 131,197 $ 72,323 $ 114,837 $ 26,966
--------- ---------- ---------- ---------
Ratio of net investment income to average net assets 0.20% 0.67% 0.63% 0.81%+
--------- ---------- ---------- ---------
Net investment income/(loss) before deferral of fees by Manager $ 0.02 $ 0.01 $ 0.02 $ (0.01)
--------- ---------- ---------- ---------
Portfolio turnover rate 124% 112% 71% 43%
--------- ---------- ---------- ---------
Expense ratio including interest and tax expense 1.65% 1.80% 1.76% 1.45%+
--------- ---------- ---------- ---------
Expense ratio before deferral of fees by Manager, including
interest and tax expense 1.65% -- 1.81% 2.47%+
--------- ---------- ---------- ---------
Expense ratio excluding interest and tax expense 1.62% 1.75% 1.75% 1.44%+
--------- ---------- ---------- ---------
</TABLE>
(a) Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 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.
9
<PAGE> 11
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, 1999, the Trust had two series: the
Montgomery Variable Series: Growth Fund and the Montgomery Variable Series:
Emerging Markets Fund. Information presented in these financial statements
pertains to the Montgomery Variable Series: Emerging Markets Fund (the "Fund").
The Montgomery Variable Series: Growth Fund is presented under a 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, if any, are declared and paid at least
annually. Distributions of net realized capital gains (including net short-term
capital gains) are distributed at least 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.
Permanent book and tax differences incurred during the year ended December 31,
1999, resulting in reclassification of $268,208 to decrease undistributed net
investment income, $629,153 to increase accumulated net realized gain and
$360,945 to decrease paid-in capital.
Permanent book-tax differences, if any, are not included in ending undistributed
net investment income (loss) for the purposes of calculating net investment
income (loss) per share in the Financial Highlights.
c. FORWARD FOREIGN-CURRENCY EXCHANGE CONTRACTS
The Fund may engage in forward foreign-currency exchange contracts ("forward
contracts") as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. A forward contract is a commitment
to purchase or sell a foreign currency at the settlement date at a negotiated
rate.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies, and unrealized gain/(loss) is recorded daily. Realized
and unrealized gains and losses that represent the difference between the value
of the forward contract to buy and the forward contract to sell are included in
net realized and unrealized gain/(loss) from foreign-currency-related
transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
d. FOREIGN CURRENCY
The accounting records of the Fund are maintained in U.S. dollars. Investment
securities and all other assets and liabilities of the Fund denominated in a
foreign-currency are translated into U.S. dollars at the exchange rate each day.
Purchases and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the exchange rate in effect on the date of the
respective transactions.
The Fund does not isolate the portion of the fluctuations on investments
resulting from changes in foreign currency exchange rates from the fluctuations
in market prices of investments held. Such fluctuations are included with the
net realized gain/(loss) and unrealized appreciation/(depreciation) from
investments.
e. 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
government debt obligations as collateral. The Fund also agrees with the
counterparty to allow the counterparty to repurchase, and the
10
<PAGE> 12
The Montgomery
Funds III
NOTES
to Financial Statements
Fund to resell, the obligations 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.
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 the 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 of 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 on 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 five years from commencement of
operations.
i. 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 Commerz-bank
AG.
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 on the average daily net assets of the Fund:
<TABLE>
<CAPTION>
First $250 Million Over $250 Million
------------------ -----------------
<S> <C>
1.25% 1.00%
</TABLE>
The effective management fee and management fee including effect of fee reduced
were 1.25% for the year ended December 31, 1999. 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 1.75% 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.
The Manager has not deferred or recouped any management fees during the year
ended December 31, 1999. No recoupable balance is outstanding.
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 receives an annual retainer and quarterly meeting fee
totaling $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).
11
<PAGE> 13
The Montgomery
Funds III
NOTES
to Financial Statements
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, 1999, were
$134,972,645 and $126,935,576, respectively.
b. At December 31, 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 $40,406,651 and
$2,658,448, respectively.
c. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New York,
the 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, 1999,
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, 1999,
borrowings by the Fund under the agreement were as follows:
<TABLE>
<CAPTION>
Amount Outstanding Average Amount Maximum Average Average Debt
at 12/31/99 Outstanding Debt Outstanding Interest Rate Average Shares per Share
----------- ----------- ---------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
-- $177,717 $9,700,000 5.53% 12,420,784 $0.01
</TABLE>
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 12/31/99 Year Ended 12/31/98
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sold 18,681,262 $ 153,220,187 8,125,454 $ 62,925,477
Issued as reinvestment of dividends 1,330 13,165 21,354 139,014
Redeemed (17,584,895) (144,058,402) (8,035,427) (63,815,300)
------------ ------------- ----------- ------------
Net increase/(decrease) 1,097,697 $ 9,174,950 111,381 $ (750,809)
------------ ------------- ----------- ------------
</TABLE>
At December 31, 1999, one shareholder held 92.49% of the total aggregate shares
outstanding.
5. FOREIGN SECURITIES:
The Fund purchases securities in emerging markets countries. Securities of
foreign companies and foreign governments involve 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 governments and their markets may be
less liquid and their prices more volatile than those of securities of
comparable U.S. companies and the U.S. government.
6. CAPITAL LOSS CARRYFORWARD:
At December 31, 1999, the Fund had available for federal income tax purposes
unused capital losses of $84,636 expiring in 2004, $5,851,470 expiring in 2005,
$26,489,358 expiring in 2006 and $6,909,499 expiring in 2007.
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, 1999, the Fund elected to
defer net capital and currency losses of $108,884 occurring between November 1,
1999, and December 31, 1999.
Such deferred losses will be treated as arising on the first day of the
fiscal year ending December 31, 2000.
12
<PAGE> 14
The Montgomery
Funds III
Independent
Auditors' Report
TO THE BOARD OF TRUSTEES AND THE 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 the Montgomery Variable Series:
Emerging Markets Fund (one of the portfolios constituting The Montgomery Funds
III, hereafter referred to as the "Fund") at December 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the periods presented, in conformity with accounting principles generally
accepted in the United States. 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 financial statements in accordance with auditing standards
generally accepted in the United States, 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 securities at December
31, 1999, by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
February 4, 2000
13
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[GRAPHIC OMITTED]
Invest Wisely(R)
THE MONTGOMERY FUNDS
103 California Street
San Francisco, CA 94011-9361
800.527.FUND [3863]
www.montgomeryasset.com
