<PAGE> 1
[OWL Graphic]
THE MONTGOMERY FUNDS(SM)
VARIABLE SERIES
GROWTH FUND
ANNUAL REPORT
DECEMBER 31, 1999
INVEST WISELY
<PAGE> 2
MONTGOMERY
VARIABLE SERIES
GROWTH 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 IN 1999?
A: The Montgomery Variable Series: Growth Fund enjoyed strong absolute results
of 20.79% but fell just slightly short of the S&P 500 Index's 20.98% gain.
Q: WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A: Two important areas contributed to the Fund's performance: stock selection
and risk control. In terms of stock selection, our strategy is to invest in
strong companies that we believe offer an opportunity for future earnings growth
and buy them when they are available at reasonable prices. At the same time, by
not overpaying for current growth we are able to dampen the risk exposure of the
portfolio. In fact, the risk of the Montgomery Growth Fund, as measured by its
beta, is 20% less than that of the overall market. This inclusion of risk
management caused us to underweight the most highly valued technology and
telecom stocks, the market's best performers for much of 1999.
Q: WERE THERE ANY STOCKS THAT PERFORMED PARTICULARLY WELL OVER THE PERIOD?
A: Technological innovation is having an increasingly positive impact on our
economy and our lives and, likewise, the Fund profited from our holdings in
several technology companies, especially in the latter half of the year.
Examples of strong contributors include Motorola, Sony and Comverse Technology.
Each of these companies is a leader within its respective industry. In 1998,
the impact of the Asian crisis had a negative effect on the revenue and earnings
growth rate of these companies. Despite a temporary slowdown, we believed in
their long-term growth prospects and used the weakness created by the Asian
crisis to add to the Fund's positions in each of them. Of course, they benefited
both from a snap-back in the global markets as well as continued growth in the
areas of wireless communications and the Internet. As their stocks have moved
sharply higher, we have recently trimmed each of these holdings.
We also own companies that benefit from implementing and using new technologies.
FedEx (2.46% of net assets as of 12/31/99) positively contributed to the
Fund's performance and is an example of just such a company. It effectively uses
the latest available technology for the benefit of its business and customers.
By leveraging technology in areas such as route optimization, package tracking
and cargo sorting, FedEx can reduce its operating costs, add new markets and
build customer loyalty. This should help drive the company's growth for years to
come.
Good stock selection in the basic materials sector was another positive factor
in the Fund's performance. For example, the shares of aluminum producer Alcoa
(5.45% of net assets as of 12/31/99) were up more than 100% in 1999, making
Alcoa the single best performer in the Dow Jones Industrial Average. The company
is a dominant global competitor and has proven its ability to produce solid
earnings growth even while the
PORTFOLIO MANAGEMENT
Roger Honour .................... Senior Portfolio Manager
Kathryn Peters .................. Portfolio Manager
FUND PERFORMANCE
Average annual total returns
for the period ended 12/31/99
MONTGOMERY VARIABLE SERIES:
GROWTH FUND
<TABLE>
<S> <C>
Since inception (2/6/96) ....................... 20.00%
One year ....................................... 20.79%
Three years .................................... 16.92%
</TABLE>
S&P 500 INDEX
<TABLE>
<S> <C>
Since 1/31/96 .................................. 25.94%
One year ....................................... 20.98%
Three years .................................... 27.55%
</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.
[Growth of a $10,000 Investment graph]
<TABLE>
<CAPTION>
Growth Fund S&P 500 Lipper
----------- ------- ------
<S> <C> <C> <C>
2/2/96 10000 10000 10000
Feb-96 10040 10093 10235
Mar-96 10437 10190 10318
Apr-96 11081 10340 10659
May-96 11766 10607 10943
Jun-96 11508 10647 10793
Jul-96 11002 10177 10154
Aug-96 11448 10392 10510
Sep-96 11954 10976 11123
Oct-96 12272 11279 11216
Nov-96 12817 12131 11911
Dec-96 12722 11890 11732
Jan-97 13166 12633 12352
Feb-97 13125 12732 12201
Mar-97 12671 12210 11633
Apr-97 13145 12938 12100
May-97 14229 13729 12973
Jun-97 14807 14339 13475
Jul-97 16354 15480 14619
Aug-97 16179 14613 14120
Sep-97 17066 15413 14907
Oct-97 16458 14899 14340
Nov-97 16499 15588 14588
Dec-97 16357 15856 14736
Jan-98 15956 16031 14822
Feb-98 17495 17187 15952
Mar-98 18416 18066 16657
Apr-98 18622 18251 16860
May-98 17972 17938 16377
Jun-98 17744 18666 16979
Jul-98 16769 18468 16580
Aug-98 13821 15800 13842
Sep-98 14189 16813 14675
Oct-98 15490 18179 15712
Nov-98 16400 19280 16682
Dec-98 16936 20390 18055
Jan-99 17109 21249 18087
Feb-99 16431 20589 18093
Mar-99 17000 21416 18932
Apr-99 18815 22232 19404
May-99 18761 21718 18994
Jun-99 20063 22905 19596
Jul-99 19417 22207 19083
Aug-99 18716 22104 18897
Sep-99 18432 21492 18580
Oct-99 18540 22858 19663
Nov-99 18857 23325 20517
Dec-99 20336 24691 22443
</TABLE>
(1) The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.
(2) The Lipper Growth Funds Average consists of 697 funds.
1
<PAGE> 3
MONTGOMERY
VARIABLE SERIES
GROWTH FUND
PORTFOLIO HIGHLIGHTS
TOP TEN HOLDINGS
(as a percentage of total net assets)
<TABLE>
<S> <C>
Alcoa, Inc. .......................................................... 5.4%
Whirlpool Corporation ................................................ 4.0%
Dow Chemical Company ................................................. 3.8%
First Health Group Corporation ....................................... 3.5%
Sony Corporation, ADR ................................................ 3.2%
Golden West Financial Corporation .................................... 2.9%
Boise Cascade Corporation ............................................ 2.6%
Amerada Hess Corporation ............................................. 2.6%
Weyerhauser Company .................................................. 2.6%
Motorola, Inc. ....................................................... 2.5%
</TABLE>
TOP FIVE INDUSTRIES
(as a percentage of total net assets)
<TABLE>
<S> <C>
Consumer Electronics/Appliances ...................................... 7.2%
Paper ................................................................ 5.5%
Aluminum ............................................................. 5.4%
Telecommunications Equipment ......................................... 4.1%
Major Chemicals ...................................................... 3.8%
</TABLE>
Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.
underlying price of aluminum was down. Higher metal prices would only serve to
leverage the growth prospects of the company.
Q: DID YOU MAKE ANY NOTABLE CHANGES TO THE FUND'S POSITIONING OVER
THE PERIOD?
A: No. As we noted before, we continued to choose investments for the Fund based
on our stock selection process. Specifically, we continued to seek out companies
that are undergoing positive fundamental change that we believe will ensure good
long-term growth prospects and are trading at attractive valuations. Our
bottom-up process has led us to an overweight position in industrial materials
and energy companies. We think this sector will continue to be driven by
increased demand for the building blocks of global infrastructure.
Q: HOW DOES THE FUND'S CURRENT POSITIONING REFLECT YOUR VIEW OF THE MARKET
LOOKING FORWARD?
A: While we view the "new economy"--in which technology, telecommunications and
the Internet are driving productivity higher, which in turn promotes faster
economic growth with modest inflation--as the second Industrial Revolution, the
excitement surrounding technology stocks has created speculative interest in the
sector. With the industry's current strong growth, investors have pushed up the
prices of many technology stocks to levels that we believe to be overvalued and
unsustainable. This belief is enforced by the huge amount of venture capital
being invested in the sector and the seemingly endless flow of competitive new
companies that are going public in this space (more than 700 in 1999 alone).
Through our stock selection process, we have identified interesting
opportunities in sectors outside technology, most notably in
infrastructure-related industries. Accelerating global economic growth is
having a positive effect on world markets. For the past 27 years, the global
economy has grown, on average, 3.7% annually. In 1998 the world economy outside
the U.S. did not grow due to the Asian economic crisis. The global economy
bottomed in early 1999 and has since begun to gather momentum. In addition,
while the industrialized nations are in what we believe to be the second
Industrial Revolution driven by the "new economy," developing countries (which
represent the vast majority of the world's population) are still in their first
Industrial Revolution and may even go through the first and second Industrial
Revolutions at the same time.
A fascinating result of this is the increased flow of capital throughout the
globe, which is funding the construction of factories and infrastructure around
the world. Besides technology and telecommunications, the increasing demand for
energy and materials to build the developing economies' infrastructures offers
tremendous opportunities for companies positioned to take advantage of these
trends. With our well-diversified portfolio, as well as our investments in both
builders and users of technology, we are confident that the Fund's current
positioning is optimal for long-term success. We thank you for your continued
confidence.
2
<PAGE> 4
MONTGOMERY
VARIABLE SERIES
GROWTH FUND
INVESTMENTS
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 - 92.4%
Air Freight/Delivery Services - 2.5%
11,800 FedEx Corporation+ .................... $ 483,063
ALUMINUM - 5.4%
12,900 Alcoa, Inc. ........................... 1,070,700
BOOKS/MAGAZINES - 0.6%
2,850 Harcourt General, Inc. ................ 114,713
CLOTHING/SHOE/ACCESSORY STORES - 2.7%
13,850 Nordstrom, Inc. ....................... 362,697
8,500 TJX Companies, Inc. ................... 173,719
-----------
536,416
COMPUTER SOFTWARE - 1.5%
22,600 Avid Technology, Inc.+ ................ 294,506
CONSTRUCTION/AGRICULTURE EQUIPMENT/TRUCKS - 2.8%
5,800 Manitowoc Company, Inc. ............... 197,200
8,000 PACCAR, Inc. .......................... 354,250
-----------
551,450
CONSUMER ELECTRONICS/APPLIANCES - 7.2%
2,200 Sony Corporation, ADR ................. 626,450
12,200 Whirlpool Corporation ................. 793,762
-----------
1,420,212
CONTRACT DRILLING - 0.2%
1,057 Transocean Sedco Forex, Inc. .......... 35,608
DISCOUNT STORES - 1.8%
34,500 Kmart Corporation+ .................... 347,156
DIVERSIFIED COMMERCIAL SERVICES - 1.3%
8,400 Convergys Corporation+ ................ 258,300
DIVERSIFIED ELECTRONIC PRODUCTS - 3.0%
1,400 Hewlett-Packard Company ............... 159,512
1,550 Matsushita Electric
Industrial Co., Ltd., ADR ............. 432,450
-----------
591,962
DIVERSIFIED FINANCIAL SERVICES - 0.9%
7,300 Stancorp Financial Group, Inc. ........ 183,869
DIVERSIFIED MANUFACTURE - 2.4%
11,700 Thermo Electron Corporation+ .......... 175,500
7,600 Tyco International Ltd. ............... 295,450
-----------
470,950
DRUG STORE CHAINS - 1.1%
7,900 Duane Reade, Inc.+ .................... 217,744
EDP SERVICES - 3.3%
3,050 Computer Sciences Corporation+ ........ 288,606
5,400 Electronic Data Systems Corporation ... 361,463
-----------
650,069
ENVIRONMENTAL SERVICES - 1.6%
22,100 Republic Services, Inc., Class A+ ..... 317,688
</TABLE>
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
FINANCE COMPANIES - 1.7%
6,950 Capital One Financial Corporation .... $ 334,903
FOOD DISTRIBUTORS - 0.7%
13,300 Fleming Companies, Inc. .............. 136,325
FOREST PRODUCTS - 2.6%
7,000 Weyerhauser Company .................. 502,687
INTEGRATED OIL COMPANIES - 2.6%
9,100 Amerada Hess Corporation ............. 516,425
MAJOR BANKS - 1.3%
4,897 Bank of America Corporation .......... 245,768
MAJOR CHEMICALS - 3.8%
5,650 Dow Chemical Company ................. 754,981
MAJOR PHARMACEUTICALS - 1.1%
4,600 Pharmacia & Upjohn, Inc. ............. 207,000
MANAGED HEALTH CARE - 3.5%
25,600 First Health Group Corporation+ ...... 692,800
MEDIA CONGLOMERATES - 1.5%
8,900 News Corporation Ltd., ADR ........... 297,594
MEDICAL SPECIALTIES - 2.4%
6,800 Bausch & Lomb, Inc. .................. 465,375
MILITARY/GOVERNMENT/TECHNICAL - 3.0%
4,150 General Motors Corporation, Class H+ . 398,400
4,500 PerkinElmer, Inc. .................... 187,594
-----------
585,994
MOTOR VEHICLES - 1.3%
3,650 General Motors Corporation ........... 265,309
MOVIES/TELEVISION - 0.9%
7,200 Fox Entertainment Group, Inc., Class A+ 179,550
MULTI-SECTOR COMPANIES - 0.6%
2,100 Loews Corporation .................... 127,444
OFFICE/PLANT AUTOMATION - 0.8%
6,800 Newbridge Networks Corporation+ ...... 153,425
OIL AND GAS PRODUCTION - 2.3%
34,750 Union Pacific Resources Group, Inc. .. 443,063
OILFIELD SERVICES/EQUIPMENT - 1.6%
5,450 Schlumberger Ltd. .................... 306,563
OTHER METALS/MINERALS - 2.5%
5,100 Rio Tinto PLC, ADR ................... 483,225
OTHER TELEPHONE/COMMUNICATION - 1.2%
12,000 COMSAT Corporation ................... 238,500
PACKAGED FOODS - 1.1%
12,700 Dole Food Co., Inc. .................. 206,375
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
MONTGOMERY
VARIABLE SERIES
GROWTH FUND
I N V E S T M E N T S
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
COMMON STOCKS - continued
PAPER - 5.5%
12,800 Boise Cascade Corporation $ 518,400
4,700 Champion International Corporation 291,106
4,800 International Paper Company 270,900
-----------
1,080,406
PRINTING/FORMS - 1.8%
14,100 Donnelley (R.R.) & Sons Company 349,856
RAILROADS - 2.9%
11,400 Canadian National Railway Company 299,962
6,400 Union Pacific Corporation 279,200
-----------
579,162
REAL ESTATE INVESTMENT TRUSTS - 0.4%
10,000 Host Marriott Corporation 82,500
SAVINGS AND LOAN ASSOCIATIONS - 2.9%
16,950 Golden West Financial Corporation 567,825
TELECOMMUNICATIONS EQUIPMENT - 4.1%
2,250 Comverse Technology, Inc.+ 325,617
3,300 Motorola, Inc. 485,925
-----------
811,542
TOTAL COMMON STOCKS
(Cost $15,818,022) 18,159,003
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
MONEY MARKET FUND - 0.0%@
309 Chase Vista Federal Money Market Fund
(Cost $309) $ 309
------------
TOTAL SECURITIES
(Cost $15,818,331) 18,159,312
------------
Principal Amount
REPURCHASE AGREEMENTS - 7.4%
$ 1,448,000 Agreement with Greenwich Capital
Markets, Tri-Party, 5.500% dated 12/31/99,
to be repurchased at $1,448,654 on 01/03/00,
collateralized by $1,476,989 market value
of U.S. government and mortgage-backed
securities, having various maturities and
interest rates
(Cost $1,448,000) 1,448,000
------------
TOTAL INVESTMENTS - 99.8%
(Cost $17,266,331*) 19,607,312
OTHER ASSETS AND LIABILITIES - 0.2%
(Net) 41,209
------------
NET ASSETS - 100.0% $ 19,648,521
=============
</TABLE>
* Aggregate cost for federal tax purposes.
+ Non-income-producing security.
@ Amount represents less than 0.1%.
Abbreviations
ADR American Depositary Receipt
4
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
MONTGOMERY
VARIABLE SERIES
STATEMENT OF
ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
- --------------------------------------------------------------------------------------
<S> <C>
Assets:
Growth Fund
Investments in securities, at value (note 1)
Securities ..................................................... $18,159,312
Repurchase agreements .......................................... 1,448,000
-----------
Total Investments .................................................. 19,607,312
Receivables:
Expenses absorbed by Manager ................................... 150,417
Dividends ...................................................... 36,826
Investment securities sold ..................................... 29,651
Shares of beneficial interest sold ............................. 712
Interest ....................................................... 223
Deferred organization costs (note 1) ............................... 14,818
-----------
Total Assets ....................................................... 19,839,959
-----------
Liabilities:
- --------------------------------------------------------------------------------------
Payables:
Management fees (note 2) ....................................... 137,062
Shares of beneficial interest redeemed ......................... 29,469
Trustees' fees and expenses (note 2) ........................... 4,240
Custodian fees ................................................. 3,124
Accounting fees ................................................ 1,134
Transfer agency and servicing fees ............................. 1,096
Cash overdrafts payable to custodian ........................... 826
Other accrued liabilities and expenses ......................... 14,487
-----------
Total Liabilities .................................................. 191,438
-----------
Net Assets ......................................................... $19,648,521
Investments at identified cost ..................................... $17,266,331
Net Assets Consist of:
- --------------------------------------------------------------------------------------
Undistributed net investment income ................................ $ 71,997
Accumulated net realized gain on securities sold ................... 1,404,669
Net unrealized appreciation of investments ......................... 2,340,981
Shares of beneficial interest ...................................... 10,684
Additional paid-in capital ......................................... 15,820,190
-----------
Net Assets ......................................................... $19,648,521
Net Assets:
- --------------------------------------------------------------------------------------
Net Assets ......................................................... $19,648,521
Number of Fund shares outstanding .................................. 1,068,360
Net asset value, offering and redemption price per share outstanding $ 18.39
</TABLE>
5
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
MONTGOMERY
VARIABLE SERIES
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
NET INVESTMENT INCOME: GROWTH FUND
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $927) .............. $ 188,968
Interest .......................................................... 76,358
-----------
Total Income ...................................................... 265,326
-----------
EXPENSES:
Management fee (note 2) ........................................... 234,533
Legal and audit fees .............................................. 29,413
Transfer agency ................................................... 17,601
Custodian fees .................................................... 16,157
Printing fees ..................................................... 13,484
Amortization of organization expenses (note 1) .................... 12,408
Accounting expenses ............................................... 10,805
Trustees' fees and expenses (note 2) .............................. 3,701
Registration fees ................................................. 2,401
Interest expense .................................................. 905
Other ............................................................. 7,237
-----------
Total Expenses .................................................... 348,645
Fees deferred and/or expenses absorbed by Manager (note 2) ........ (154,417)
-----------
Net Expenses ...................................................... 194,228
-----------
NET INVESTMENT INCOME ............................................. 71,098
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
- --------------------------------------------------------------------------------------
Net realized gain from securities transactions .................... 1,447,036
Net change in unrealized appreciation/(depreciation) of investments 1,464,366
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................... 2,911,402
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $ 2,982,500
-----------
</TABLE>
6
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
MONTGOMERY
VARIABLE SERIES
STATEMENTS OF
CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH FUND
- -----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
Net Increase in Net Assets from Operations: 12/31/99 12/31/98
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income .............................................. $ 71,098 $ 80,695
Net realized gain from securities transactions ..................... 1,447,036 197,527
Net change in unrealized appreciation/(depreciation) of investments 1,464,366 (87,985)
------------ ------------
Net Increase in Net Assets Resulting from Operations ............... 2,982,500 190,237
Distributions to Shareholders:
- -----------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income ........... (11,607) (53,870)
Distributions to shareholders from net realized gains on investments (189,184) (68,399)
------------ ------------
Total Distributions ................................................ (200,791) (122,269)
Beneficial Interest Transactions:
- -----------------------------------------------------------------------------------------------------------
Net increase from beneficial interest transactions (note 4) ........ 3,415,177 786,288
------------ ------------
Net Increase in Net Assets ......................................... 6,196,886 854,256
Net Assets:
- -----------------------------------------------------------------------------------------------------------
Beginning of Period ................................................ 13,451,635 12,597,379
End of Period ...................................................... $ 19,648,521 $ 13,451,635
Undistributed Net Investment Income ................................ $ 71,997 $ 26,825
</TABLE>
7
The accompanying notes are an integral part of these financial statements.
<PAGE> 9
MONTGOMERY
VARIABLE SERIES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GROWTH 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: $ 15.39 $ 15.09 $ 12.33 $10.08
================================================================================================================================
Net investment income 0.06 0.09 0.16 0.15
Net realized and unrealized gain on investments 3.13 0.35 3.35 2.59
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 3.19 0.44 3.51 2.74
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.01) (0.06) (0.16) (0.15)
Distributions from net realized capital gains (0.18) (0.08) (0.59) (0.34)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.19) (0.14) (0.75) (0.49)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD: $ 18.39 $ 15.39 $ 15.09 $12.33
================================================================================================================================
TOTAL RETURN* 20.79% 2.93% 28.57% 27.22%
================================================================================================================================
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in 000s) $19,649 $13,452 $12,597 $2,127
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.46% 0.57% 1.74% 2.55%+
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.07) $ 0.07 $ 0.01 $(0.27)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 77% 57% 53% 78%
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest and tax expense 1.26% 1.25% 0.35% 0.01%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including interest and tax expense 2.25% 1.40% 1.97% 6.98%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest and tax expense 1.25% 1.25% 0.34% --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.
* Total return represents aggregate total return for the periods
indicated.
+ Annualized.
8
The accompanying notes are an integral part of these financial statements.
<PAGE> 10
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: Growth Fund (the "Fund"). The
Montgomery Variable Series: Emerging Markets 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.
Securities traded on the over-the-counter market or on the NASDAQ national
market are valued at the mean between the last available bid and ask prices
prior to the time of valuation.
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision of
the Trust's officers in accordance with methods authorized by the Trust's Board
of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.
b. DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared and paid at least
annually. Distributions of net realized capital gains (including net short-term
capital gains) are distributed 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% 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 book and tax differences incurred during the year ended December 31,
1999, resulting in reclassifications of $14,319 to decrease undistributed net
investment income and $14,319 to increase accumulated net realized gain.
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. 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 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.
d. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are computed on the specific identified cost
basis of the securities sold. Dividend income is recognized on the ex-dividend
date. Interest income, including, accretion/amortization of premium/discount on
short-term investments, is recognized on the accrual basis.
e. FEDERAL INCOME TAXES
The Fund has elected and qualified, and it is the intention of the Fund to
continue to qualify, as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), by complying with the
applicable requirements of the Code and by making distributions of taxable
income to shareholders sufficient to relieve the Fund of all or substantially
all federal income taxes. Accordingly, no provision for federal income taxes is
required.
f. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Fund are amortized
on a straight-line basis over a period of five years from commencement of
operations.
g. EXPENSES
General expenses of the Trust are allocated to the Fund 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.
9
<PAGE> 11
THE MONTGOMERY
FUNDS III
NOTES
TO FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
First Next Over
$500 Million $500 Million $1 Billion
------------ ------------ ----------
<S> <C> <C>
1.00% 0.90% 0.80%
</TABLE>
The effective management fee and management fee including effect of fee reduced
were 1.52% and 0.52%, respectively.
Under an Operating Expense Agreement with the Trust, the Manager has agreed to
reduce some or all of its management fee or absorb Fund expenses if necessary to
keep the Fund's annual operating expenses, exclusive of any Rule 12b-1 fees,
interest, extraordinary expenses or taxes, at or below 1.25% of the average
daily net assets of the Fund. Any reductions or absorptions made to the Fund by
the Manager are subject to recovery within the following three years, provided
the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Operating Expense Agreement has a rolling
10-year term. Management recouped previously deferred fees during the year
ended December 31, 1999, of $80,116. This amount has been included with current
annual management fees in the Statement of Operations and is part of the
effective management fee shown. For the year ended December 31, 1999, the
Manager has deferred fees of $154,417 and deferred management fees and absorbed
expenses subject to recoupment of $217,713.
b. Certain officers and Trustees of the Trust are, with respect to the Trust's
Manager, "affiliated persons" as defined in the 1940 Act. Each Trustee who is
not an affiliated person will receive an annual retainer and quarterly meeting
fee totaling $55,000 per annum, as well as reimbursement for expenses, for
services as a Trustee of all three Trusts advised by the Manager ($5,000 of
which will be allocated to The Montgomery Funds III).
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of investment securities, other
than short-term securities, for the year ended December 31, 1999, were
$13,461,349 and $10,906,235, 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 $3,289,768 and
$948,787, 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>
- $27,717 $1,700,000 5.61% 971,375 $0.03
</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 periods 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 1,155,865 $ 19,719,780 683,115 $ 10,396,707
Issued as reinvestment of dividends 11,549 200,791 8,317 122,269
Redeemed (973,289) (16,505,394) (652,075) (9,732,688)
==============================================================================================================
Net increase 194,125 $ 3,415,177 39,357 $ 786,288
- --------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, shareholders of the Fund with ownership of 10% or greater
included two shareholders, comprising ownership of 69.07% of the total aggregate
shares outstanding.
10
<PAGE> 12
THE MONTGOMERY
FUNDS III
INDEPENDENT
AUDITORS' REPORT
TO THE BOARD OF TRUSTEES AND THE SHAREHOLDERS OF THE MONTGOMERY VARIABLE
SERIES: GROWTH 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:
Growth 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, CA
February 4, 2000
11
<PAGE> 13
MONTGOMERY
VARIABLE SERIES
TAX INFORMATION
(UNAUDITED)
In accordance with the Code, the following Fund is designating the following
amount as long-term capital-gain dividends:
<TABLE>
<S> <C>
Growth Fund ........... $ 189,184
</TABLE>
This figure may differ from those cited elsewhere in this report due to
differences in the calculation of income and capital gains for Securities and
Exchange Commission (book) purposes and Internal Revenue Service (tax) purposes.
12
<PAGE> 14
[OWL GRAPHIC]
INVEST WISELY
THE MONTGOMERY FUNDS(SM)
101 CALIFORNIA STREET
SAN FRANCISCO, CA 94111-9361
800.572.FUND (3863)
www.montgomeryasset.com
