As filed with the Securities and Exchange Commission on June 2, 1999.
1933 Act File No. 333-44423
1940 Act File No. 811-8611
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3 [X]
LM Institutional Fund Advisors II, Inc.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO BRYAN CHEGWIDDEN, ESQ.
100 Light Street Ropes & Gray
Baltimore, Maryland 21202 One International Place
(Name and Address of Boston, Massachusetts 02110
Agent for Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on June 1, 1998 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[x] on August 1, 1999 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)\
[ ] on pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
LM INSTITUTIONAL FUND ADVISORS II, INC.
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Table of Contents
Cross Reference Sheets
Part A
Prospectus for the following Portfolios:
LM Value Institutional Portfolio
LM Mid Cap Institutional Portfolio
Brandywine U.S. Small Cap Portfolio
Batterymarch Emerging Markets Portfolio
Batterymarch International Equity Portfolio
LM Total Return Institutional Portfolio
Part B
Statement of Additional Information for the following Portfolios:
LM Value Institutional Portfolio
LM Mid Cap Institutional Portfolio
Brandywine U.S. Small Cap Portfolio
Batterymarch Emerging Markets Portfolio
Batterymarch International Equity Portfolio
LM Total Return Institutional Portfolio
Part C - Other Information
Signature Page
Exhibit Index
Exhibits
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<PAGE>
LM INSTITUTIONAL FUND ADVISORS II, INC.
LM Value Institutional Portfolio
LM Mid Cap Institutional Portfolio
Brandywine U.S. Small Cap Portfolio
Batterymarch Emerging Markets Portfolio
Batterymarch International Equity Portfolio
LM Total Return Institutional Portfolio
Cross Reference Sheet
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Part A. Item No. Prospectus Caption
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1 Cover Page and Back Cover Page
2 Description of Each Portfolio and Its Investment
Strategy Risk Summary; Performance Data
3 Expense Information
4 Not Applicable
5 Not Applicable
6 Management of the Portfolios
7 Purchase of Shares; Redemption of Shares; Exchange
Privilege; Net Asset Value; Dividends and
Distributions to Shareholders; Tax Information
8 Distribution Plans
9 Financial Highlights
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<PAGE>
LM INSTITUTIONAL FUND ADVISORS II, INC.
LM Value Institutional Portfolio
LM Mid Cap Institutional Portfolio
Brandywine U.S. Small Cap Portfolio
Batterymarch Emerging Markets Portfolio
Batterymarch International Equity Portfolio
LM Total Return Institutional Portfolio
Cross Reference Sheet
Statement of Additional
Part B. Item No. Information Caption
10 Cover Page and Table of Contents
11 Not Applicable
12 Additional Information About
Investment Limitations and Policies
13 Management of the Portfolios
14 Principal Holders of Securities
15 Management of the Portfolios;
Other Information
16 Portfolio Transactions and
Brokerage
17 Other Information
18 Purchases and Redemptions
19 Additional Tax Information
20 Management of the Portfolios
21 Other Information
22 Financial Statements
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<PAGE>
LM INSTITUTIONAL FUND ADVISORS II PROSPECTUS
August 1, 1999
o LM Value Institutional Portfolio
o LM Mid Cap Institutional Portfolio
o Brandywine Small Cap Value Portfolio
o Batterymarch Emerging Markets Portfolio
o Batterymarch International Equity Portfolio
o LM Total Return Institutional Portfolio
These securities have not been approved or disapproved by the securities and
exchange commission nor has the securities and exchange commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
[GRAPHIC APPEARS HERE]
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
PROSPECTUS SUMMARY...............................................................3
DESCRIPTION OF EACH PORTFOLIO AND ITS INVESTMENT STRATEGY..................4
LM Value Institutional Portfolio.........................................4
LM Mid Cap Institutional Portfolio.......................................5
Brandywine Small Cap Value Portfolio.....................................5
Batterymarch Emerging Markets Portfolio..................................6
Batterymarch International Equity Portfolio..............................7
LM Total Return Institutional Portfolio..................................8
RISK SUMMARY......................................................................8
PERFORMANCE DATA................................................................13
EXPENSE INFORMATION.............................................................13
LM Value Institutional Portfolio........................................14
LM Mid Cap Institutional Portfolio......................................14
Brandywine Small Cap Value Portfolio....................................15
Batterymarch Emerging Markets Portfolio.................................15
Batterymarch International Equity Portfolio.............................16
LM Total Return Institutional Portfolio.................................16
MANAGEMENT OF THE PORTFOLIOS..................................................17
Board of Directors......................................................17
Manager, Advisers.......................................................17
The Distributor.........................................................20
Portfolio Transactions..................................................20
Expenses 20
PURCHASE OF SHARES.............................................................20
Initial Investment......................................................21
Additional Investments..................................................22
Other Purchase Information..............................................22
Retirement Plans........................................................23
Account Registration Changes............................................23
DISTRIBUTION PLANS..............................................................23
REDEMPTION OF SHARES...........................................................23
Signature Guarantee.....................................................25
EXCHANGE PRIVILEGE..............................................................25
NET ASSET VALUE................................................................26
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS..................................27
TAX INFORMATION.................................................................28
FINANCIAL HIGHLIGHTS ............................................................29
</TABLE>
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<PAGE>
PROSPECTUS SUMMARY
Comparison of the Portfolios
The following chart provides general information about each Portfolio.
It is qualified in its entirety by the more complete descriptions of the
Portfolios appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------- --------------------------------------------
Equity Portfolios Investment Objectives Primary Investments
<S> <C> <C> <C>
---------------------------------- ----------------------------------- --------------------------------------------
LM Value Institutional Portfolio Long-term growth of capital Large cap equity securities that are
undervalued
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LM Mid Cap Institutional Capital appreciation Mid cap equity securities that are
Portfolio undervalued
---------------------------------- ----------------------------------- --------------------------------------------
Brandywine Small Cap Value Long-term capital appreciation Small cap equity securities that are
Portfolio undervalued
---------------------------------- ----------------------------------- --------------------------------------------
Batterymarch Emerging Markets Long-term capital appreciation Emerging market equity securities
Portfolio
---------------------------------- ----------------------------------- --------------------------------------------
Batterymarch International Long-term total return Foreign equity securities
Equity Portfolio
---------------------------------- ----------------------------------- --------------------------------------------
LM Total Return Institutional Capital appreciation and current Dividend-paying common stocks, debt
Portfolio income in order to achieve an securities and securities convertible into
attractive total investment common stocks which offer potential for
return consistent with reasonable attractive total return
risk
---------------------------------- ----------------------------------- --------------------------------------------
</TABLE>
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<PAGE>
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Manager and Advisers
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LM Institutional Advisors, Inc. (the "Manager") serves as the
investment manager to each Portfolio. Legg Mason Fund Adviser, Inc. ("LMFA") is
the investment adviser to each of the LM Value Institutional Portfolio, the LM
Mid Cap Institutional Portfolio and the LM Total Return Institutional Portfolio.
Brandywine Asset Management, Inc. ("Brandywine") is the investment adviser to
the Brandywine Small Cap Value Portfolio. Batterymarch Financial Management,
Inc. ("Batterymarch") is the investment adviser to the Batterymarch Emerging
Markets Portfolio and the Batterymarch International Equity Portfolio. LMFA,
Brandywine and Batterymarch are referred to as "Advisers."
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DESCRIPTION OF EACH PORTFOLIO AND ITS INVESTMENT STRATEGY
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The investment objective and policies for each Portfolio are stated
below.
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LM Value Institutional Portfolio
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Adviser: LMFA
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Objective: long-term growth of capital
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Principal Investment Strategies: The fund invests primarily in equity securities
that, in the advisor's opinion, offer the potential for capital growth. The
Adviser follows a value discipline in selecting securities. This means the
Adviser seeks to purchase securities at large discounts to the Advisor's
assessment of their intrinsic value. For the Adviser, assessment of intrinsic
value is an ongoing, dynamic process employing both quantitative and qualitative
analysis. The Adviser takes a long-term approach to investing, generally
characterized by long holding periods and low portfolio turnover. The Adviser
typically sells a security when, in the Adviser's assessment, the security no
longer appears to offer long-term above average risk adjusted rates of return,
or when a more compelling investment opportunity is found. The fund generally
invests in companies with market capitalizations greater than $1_billion, but
may invest in companies of any size. The fund may invest in debt securities,
including government, corporate and money market securities for temporary
defensive purposes. The fund may not achieve its investment objective when so
invested. Consistent with the investment objective, the fund may also invest in
such securities when the adviser believes the return on certain debt securities
may equal or exceed the return on equity securities.
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<PAGE>
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LM Mid Cap Institutional Portfolio
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Adviser: LMFA
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Objective: capital appreciation
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Principal Investment Strategies: The fund invests primarily in equity
securities, and securities convertible into equity securities, of companies with
market capitalizations of less than $2.5 billion that, in the Adviser's opinion,
offer the potential for capital appreciation. The fund typically invests in
securities of companies that the Adviser believes have one or more of the
following characteristics: companies that appear to be undervalued in relation
to their long-term earning power or asset values; companies experiencing unusual
and possibly one-time developments which, in the opinion of the adviser, may
cause the market values of the securities to increase. Such developments may
include: a sale or termination of an unprofitable part of the company's
business; a change in the company's management or in management's philosophy; a
basic change in the industry in which the company operates; the introduction of
new products or technologies; or the prospect or effect of acquisition or merger
activities; and/or companies involved in actual or anticipated reorganizations
or restructurings under the Bankruptcy Code. The fund also invests in debt
securities of companies having one or more of the above characteristics. The
fund may invest up to 35% of its net assets in debt securities rated below
investment grade. The Adviser follows a value discipline in selecting
securities. This means the Adviser seeks to purchase securities at large
discounts to the Adviser's assessment of their intrinsic value. For the Adviser,
assessment of intrinsic value is an ongoing, dynamic process employing both
quantitative and qualitative analysis. The Adviser typically sells a security
when, in the Adviser's assessment, the security no longer appears to offer
long-term above average risk adjusted rates of return, or when a more compelling
investment opportunity is found. For temporary defensive purposes, the fund may
invest without limit in short-term debt instruments, including government,
corporate and money market securities. Such short-term investments will be in
issuers whose long-term debt is rated in one of the four highest rating
categories by Standard_& Poor's or Moody's Investors Service, Inc., or, if
unrated, deemed by the adviser to be of comparable quality. The fund may not
achieve its investment objective when so invested.
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Brandywine Small Cap Value Portfolio
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Adviser: Brandywine
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Objective: long-term capital appreciation
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Principal Investment Strategies: Under normal market conditions, the Portfolio
will invest at least 65% of its total assets in equity securities of "small cap"
companies. "Small cap" companies are generally defined as companies at the time
of initial investment with an equity market capitalization not in excess of the
40th percentile of the capitalization of issuers traded on the New York Stock
Exchange. A company that was a "small cap" company at the time of the
Portfolio's initial investment will continue to be treated as such for
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<PAGE>
purposes of the 65% test, even if the equity capitalization exceeds the 40th
percentile at the time of subsequent investment. Equity securities include
common stock, preferred stock, securities convertible into common stock, rights
and warrants to acquire such securities and substantially similar forms of
equity with comparable risk characteristics.
Although the Portfolio expects to remain substantially fully invested in equity
securities, the Portfolio may invest in cash and money market instruments,
including repurchase agreements. For temporary defensive purposes, the Portfolio
may also invest in investment grade debt and fixed income investments. The
Portfolio may also engage in reverse repurchase agreement transactions and other
borrowings, purchase restricted and illiquid securities, loan its portfolio
securities, and invest in securities of other investment companies.
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Batterymarch Emerging Markets Portfolio
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Adviser: Batterymarch
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Objective: long-term capital appreciation
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Principal Investment Strategies: The Adviser intends to invest substantially all
of the Portfolio's assets in equity securities and convertible securities of
emerging market issuers. Emerging market countries are those countries having
less fully developed economic and political systems.
The Portfolio intends to invest in Asia, Latin America, the Indian Subcontinent,
Southern and Eastern Europe, the Middle East and Africa, although it may not
invest in all these markets at all times and may not invest in any particular
market when it deems investment in that country or region to be inadvisable.
More than 25% of the Portfolio's total assets may be invested in securities of
issuers located in a single country.
The Adviser focuses on higher-quality, dominant emerging markets companies which
the adviser believes to have strong growth prospects and reasonable valuations,
selected from an investable universe of approximately 1,000 stocks. The
Adviser's emerging markets investment strategy represents a distinctive
combination of quantitative methodology and traditional fundamental analysis.
Traditional "on-the-ground" fundamental research is combined by the Adviser with
tested quantitative valuation disciplines in those markets where reliable data
is available. In determining country allocation, the Adviser also merges
quantitative and fundamental approaches.
The Portfolio may invest without limit in cash and money market instruments,
including repurchase agreements, in circumstances when cash is temporarily
available, or for temporary defensive purposes when the Adviser believes such
action is warranted by abnormal market or economic situations. Up to 10% of the
Portfolio's total assets may be rated below investment grade or, if unrated,
determined by the Adviser to be below investment grade.
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<PAGE>
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Batterymarch International Equity Portfolio
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Adviser: Batterymarch
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Objective: long-term total return
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Principal Investment Strategies: The Adviser currently intends to invest
substantially all of the Portfolio's assets in non-U.S. equity securities.
The primary focus of the Adviser is stock selection, with a secondary focus on
country allocation. The Adviser uses a bottom-up, quantitative stock selection
process for the developed markets portion of the Portfolio's portfolio. The
cornerstone of this process is a proprietary stock selection model that ranks
the 2,800 stocks in the Portfolio's investable universe by relative
attractiveness on a daily basis. The quantitative factors within this model are
intended to measure growth, value, fundamental expectations and technical
indicators (i.e., supply and demand).
Country allocation for the developed markets portion of the Portfolio is based
on rankings generated by the Adviser's proprietary country model. The Adviser
examines securities from over 20 international stock markets, with emphasis on
several of the largest: Japan, the United Kingdom, France, Canada and Germany.
The Portfolio may invest up to 35% of its total assets in emerging market
securities. The Adviser's investment strategy for the emerging markets portion
of the Portfolio represents a distinctive combination of tested quantitative
methodology and traditional fundamental analysis. The emerging markets
allocation focuses on higher-quality, dominant companies which the Adviser
believes to have strong growth prospects and reasonable valuations. Country
allocation for the emerging markets portion of the Portfolio also combines
quantitative and fundamental approaches.
The Portfolio will normally be diversified across a broad range of industries
and across a number of countries, consistent with the objective of maximum total
return. However, more than 25% of the Portfolio's total assets may be invested
in securities of issuers located in a single country, which is currently
expected to be the case with respect to both Japan and the United Kingdom.
The Portfolio may invest without limit in cash and money market instruments,
including repurchase agreements, in circumstances when cash is temporarily
available, or for temporary defensive purposes when the Adviser believes such
action is warranted by abnormal market or economic situations. Up to 5% of the
Portfolio's total assets may be rated below investment grade or, if unrated,
determined by the Adviser to be below investment grade. The Adviser may also
seek to enhance portfolio returns through active currency hedging strategies.
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<PAGE>
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LM Total Return Institutional Portfolio
- --------------------------------------------------------------------------------
Adviser: LMFA
- --------------------------------------------------------------------------------
Objective: capital appreciation and current income in order to achieve
an attractive total investment return consistent with
reasonable risk
- --------------------------------------------------------------------------------
Principal Investment Strategies: The fund invests primarily in securities that,
in the Adviser's opinion, offer the potential for long-term capital growth and
attractive current income. The Adviser follows a value discipline in selecting
securities. This means the Adviser seeks to purchase securities at large
discounts to the Adviser's assessment of their intrinsic value. For the Adviser,
assessment of intrinsic value is an ongoing, dynamic process employing both
quantitative and qualitative analysis. The Adviser typically sells a security
when, in the Adviser's assessment, the security no longer appears to offer
long-term attractive total returns at reasonable risk, or when a more compelling
investment opportunity is found. The fund invests primarily in common stocks,
debt securities, and securities convertible into common stocks, but is not
limited to these types of securities. The fund may invest in securities that do
not pay current income but do, in the Adviser's opinion, offer prospects for
capital appreciation and future income. The fund may invest in companies of any
size. The fund may invest in debt securities, including government, corporate
and money market securities for temporary defensive purposes. The fund may not
achieve its investment objective when so invested. Consistent with the
investment objective, the fund may also invest in such securities when the
adviser believes the return on certain debt securities may equal or exceed the
return on equity securities.
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RISK SUMMARY
- --------------------------------------------------------------------------------
In General -
At any time, your investment in a mutual fund may be worth more or less than the
price you originally paid for it. You may lose money by investing in any mutual
fund because: (i) the value of the investments it owns changes, sometimes
rapidly and unpredictably; (ii) the mutual fund is not successful in reaching
its goal because of its strategy or because it did not implement its strategy
properly; or (iii) unforeseen occurrences in the securities markets negatively
affect the mutual fund.
Market Risk -
The Portfolios may invest substantially all of their assets in equity
securities. Prices of equity securities generally fluctuate more than those of
other securities. A Portfolio may experience a substantial or complete loss on
an individual stock. Market risk may affect a single issuer, industry or section
of the economy or may affect the market as a whole. The International Equity
Portfolio and Emerging Markets Portfolio invest primarily in foreign equity
securities. Foreign securities have additional risks, see "Foreign Securities
Risk" below.
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<PAGE>
Securities of "small cap" companies entail special risks. Such companies often
have limited operating histories and may have more restricted product lines or
more limited financial resources than larger, more established companies. For
these and other reasons, they may be more severely affected by economic
downturns or other adverse developments than are larger, more established
companies. Securities of "small cap" companies may be traded "over-the-counter"
and often trade less frequently and in more limited volume, may be subject to
greater volatility and may be more difficult to value than securities of larger,
more established companies. "Small cap" companies are often involved in actual
or anticipated reorganizations or restructurings, which involve special risks,
including difficulty in obtaining information as to the financial condition of
such companies and the fact that market prices of such companies' securities are
subject to sudden and erratic price volatility.
Investment Models -
The proprietary models used by the Advisers to evaluate securities or securities
markets are based on the Advisers' understanding of the interplay of market
factors and do not assure successful investment. The markets, or the prices of
individual securities, may be affected by factors not foreseen in developing the
models.
Foreign Securities Risk -
Investments in foreign securities (including those denominated in U.S. dollars)
involve certain risks not typically associated with investments in domestic
issuers. The values of foreign securities are subject to economic and political
developments in the countries and regions where the companies operate, such as
changes in economic or monetary policies, and to changes in exchange rates.
Values may also be affected by restrictions on receiving the investment proceeds
from a foreign country.
In general, less information is publicly available about foreign companies than
about U.S. companies. Foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Some securities issued by foreign governments or their subdivisions, agencies
and instrumentalities may not be backed by the full faith and credit of the
foreign government. Even where a security is backed by the full faith and credit
of a foreign government, it may be difficult for a Portfolio to pursue its
rights against a foreign government in that country's courts. Some foreign
governments have defaulted on principal and interest payments.
In addition, a Portfolio's investments in foreign securities may be subject to
the risk of nationalization or expropriation of assets, imposition of currency
exchange controls or restrictions on the repatriation of foreign currency,
confiscatory taxation, political or financial instability and diplomatic
developments which could effect the value of a Portfolio's investments in
certain foreign countries. Dividends or interest on, or proceeds from the sale
of, foreign securities may be subject to foreign withholding taxes, and special
U.S. tax considerations may apply.
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<PAGE>
Emerging Markets Risk -
The risks of foreign investment are greater for investments in emerging markets.
Emerging market countries typically have economic and political systems that are
less fully developed, and can be expected to be less stable than those of more
advanced countries. Low trading volumes may result in a lack of liquidity and in
price volatility. Emerging market countries may have policies that restrict
investment by foreigners, or that prevent foreign investors from withdrawing
their money at will.
Because some of the Portfolios may invest a significant amount of their total
assets in emerging market securities, investors should be able to tolerate
sudden, sometimes substantial fluctuations in the value of their investments. An
investment in any Portfolio that invests in emerging market securities, which
includes the Emerging Markets Portfolio and the International Equity Portfolio,
should be considered speculative.
Currency Risk -
Because certain Portfolios (such as the Emerging Markets Portfolio and the
International Equity Portfolio) may invest significantly in securities
denominated in foreign currencies, their value can be affected by changes in the
rates of exchange between those currencies and the U.S. dollar. Currency
exchange rates can be volatile and affected by, among other factors, the general
economics of a country, the actions of the U.S. and foreign governments or
central banks, the imposition of currency controls, and speculation. A security
may be denominated in a currency that is different from the currency where the
issuer is domiciled.
The Portfolios from time to time hedge a portion of their currency risk, using a
variety of techniques, including currency futures, forwards, or options.
However, these instruments may not always work as intended, and in specific
cases a Portfolio may be worse off than if had not used a hedging instrument.
For most emerging market currencies, there are not suitable hedging instruments
available.
Interest rate risk -
Each Portfolio is subject to interest rate risk, which is the possibility that
the market prices of the Portfolios' investments may decline due to an increase
in market interest rates. Generally, the longer the maturity of a fixed-income
security, the greater is the effect on its value when rates increase.
Certain securities pay interest at variable or floating rates. Variable rate
securities reset at specified intervals, while floating rate securities reset
whenever there is a change in a specified index rate. In most cases, these reset
provisions reduce the effect of market interest rates on the value of the
security. However, some securities do not track the underlying index directly,
but reset based on formulas that can produce an effect similar to leveraging;
others may provide for interest payments that vary inversely with market rates.
The market prices of these securities may fluctuate significantly when interest
rates change.
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Credit risk -
Each Portfolio is also subject to credit risk, i.e., the risk that an issuer of
securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which each Portfolio invests. However, ratings are only the opinions of the
agencies issuing them and are not absolute guarantees as to quality.
Moody's Investors Service considers debt securities rated Baa to have
speculative characteristics. Debt securities rated below Baa/BBB are deemed by
the ratings agencies to be speculative and may involve major risk of exposure to
adverse conditions. These ratings may indicate that the securities are highly
speculative and may be in default or in danger of default as to principal and
interest.
Not all government securities are backed by the full faith and credit of the
United States. Some are backed only by the credit of the issuing agency or
instrumentality. Accordingly, there is at least a chance of default on these
securities.
Call risk -
Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed-income securities
experience when rates decline. Furthermore, the fund reinvests the proceeds of
the payoff at current yields, which are lower than those paid by the security
that was paid off.
Special risks of high yield securities -
Securities rated below Baa/BBB, commonly known as junk bonds or high yield
securities, reflect a greater possibility that the issuers may be unable to make
timely payments of interest and principal and thus default. If this happens, or
is perceived as likely to happen, the values of those investments will usually
be more volatile. These securities may be less liquid than higher-rated
securities, which means a Portfolio may have difficulty selling them at times,
and may have to apply a greater degree of judgment in establishing a price.
Although the Advisers consider credit ratings in making investment decisions,
they perform their own investment analysis and do not rely on ratings assigned
by the rating agencies. When a Portfolio buys lower rated debt, the achievement
of its goals depends more on the Advisers' ability than would be the case if a
Portfolio were buying investment grade debt.
Year 2000 -
Like other mutual funds (and most organizations around the world), the
Portfolios could be adversely affected by computer problems related to the year
2000. These could interfere with operations of the Portfolios, their Manager,
distributor or Adviser, or could impact companies in which the Portfolios
invest.
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<PAGE>
While no one knows if these problems will have any impact on the Portfolios or
on financial markets in general, the manager and its affiliates are taking steps
to protect fund investors. These include efforts to determine that the problem
will not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
Derivatives -
A Portfolio may engage in a variety of transactions using "derivatives," such as
futures, options, warrants and swaps. Derivatives are financial instruments
whose value depends upon, or is derived from, the value of something else, such
as one or more underlying investments, indexes or currencies. Derivatives may be
traded on organized exchanges, or in individually negotiated transactions with
other parties (these are known as "over the counter"). A Portfolio may use
derivatives both for hedging and non-hedging purposes. Although the Advisers
have the flexibility to use these strategies, they may choose not to for a
variety of reasons, even under very volatile market conditions.
Derivatives involve special risks and costs and may result in losses to a
Portfolio. The successful use of derivatives requires sophisticated management
and a Portfolio will depend on the Advisers' ability to analyze and manage
derivatives transactions. The prices of derivatives may move in unexpected ways,
especially in abnormal market conditions. Some derivatives are "leveraged" and
therefore may magnify or otherwise increase investment losses to a Portfolio. A
Portfolio's use of derivatives may also increase the amount of taxes payable by
shareholders.
Other risks arise from the potential inability to terminate or sell derivatives
positions. A liquid secondary market may not always exist for a Portfolio's
derivatives positions at any time. In fact, many over-the-counter instruments
will not be liquid. Over-the-counter instruments also involve the risk that the
other party will not meet its obligations to a Portfolio.
Hedging -
The decision as to whether and to what extent a Portfolio will engage in hedging
transactions to hedge against such risks as credit risk, currency risk and
market risk will depend on a number of factors, including prevailing market
conditions, the composition of a Portfolio's portfolio and the availability of
suitable transactions. Accordingly, there can be no assurance that a Portfolio
will engage in hedging transactions at any given time or from time to time.
Turnover -
The investment strategies employed by the Portfolios often involve high turnover
rates. This results in higher trading costs and could cause a Portfolio to
realize higher levels of taxable gains.
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<PAGE>
Other Policies -
In addition to the main investment strategies described above, a Portfolio may
also make other types of investments, and therefore may be subject to other
risks. Some of these risks are described in the Portfolios' SAI.
At times the Advisers may judge that market conditions make pursuing a
Portfolio's investment strategies inconsistent with the best interests of its
shareholders. The Advisers then may temporarily use alternative strategies that
are mainly designed to limit a Portfolio's losses. Although the Advisers have
the flexibility to use these strategies, it may choose not to for a variety of
reasons, even in very volatile market conditions. These strategies may cause a
Portfolio to miss out on investment opportunities, and may prevent a Portfolio
from achieving its goal.
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PERFORMANCE DATA
- --------------------------------------------------------------------------------
None of the Portfolios have a full calendar year of performance to report. Since
each Portfolio's performance can be expected to vary from year to year, however,
there are risks of investing in the Portfolios.
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Portfolio.
The examples beside the tables are intended to help you compare the cost of
investing in a Portfolio with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
examples also assume that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Your actual costs may be higher
or lower.
-13-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
LM Value Institutional Portfolio
- --------------------------------------------------------------------------------------------------
Institutional Financial Institutional Class Example
Class Intermediary Class ---------------------------
----- ------------------
<S> <C> <C> <C> <C> <C>
Shareholder Fees
(Fees paid directly 1 year $110
from your investment) None None 3 years $343
5 years $595
10 years $1317
Annual Fund
Operating Expenses
(Expenses that are Financial Intermediary
deducted from fund assets) Class Example
-----------------------
Management Fees .60% .60% 1 year $135
12b-1 Fees None .25% 3 years $421
Other Expenses .48% .48% 5 years $729
Total 10 years $1601
Operating Expenses 1.08% 1.33%
Expense Reimbursement* (.33%) (.33%)
Net Expenses .75% 1.00%
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
LM Mid Cap Institutional Portfolio
- --------------------------------------------------------------------------------------------------------------------
Institutional Financial Institutional Class Example
Class Intermediary Class ----------------------------
----- ------------------
<S> <C> <C> <C> <C> <C>
Shareholder Fees
(Fees paid directly 1 year $87
from your investment) None None 3 years $271
Annual Fund
Operating Expenses
(Expenses that are Financial Intermediary
deducted from fund assets) Class Example
Management Fees .60% .60% 1 year $112
12b-1 Fees None .25% 3 years $350
Other Expenses .25% .25%
Total
Operating Expenses .85% 1.10%
Expense Reimbursement* (.10%) (.10%)
Net Expenses .75% 1.00%
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Brandywine Small Cap Value Portfolio
- -------------------------------------------------------------------------------------------------
Institutional Financial Institutional Class Example
Class Intermediary Class ----------------------------
----- ------------------
<S> <C> <C> <C> <C> <C>
Shareholder Fees
(Fees paid directly 1 year $642
from your investment) None None 3 years $1899
5 years $3118
10 years $6014
Annual Fund
Operating Expenses
(Expenses that are Financial Intermediary
deducted from fund assets) Class Example
-----------------------
Management Fees .65% .65% 1 year $686
12b-1 Fees None .25% 3 years $1964
Other Expenses 5.82% 5.82% 5 years $3218
10 years $6170
Total
Operating Expenses 6.47% 6.72%
Expense Reimbursement* (5.62%) (5.62%)
Net Expenses .85% 1.10%
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Batterymarch Emerging Markets Portfolio
- -------------------------------------------------------------------------------------------------
Institutional Financial Institutional Class Example
Class Intermediary Class ----------------------------
----- ------------------
<S> <C> <C> <C> <C> <C>
Shareholder Fees
(Fees paid directly 1 year $153
from your investment) None None 3 years $474
Annual Fund
Operating Expenses
(Expenses that are Financial Intermediary
deducted from fund assets) Class Example
-----------------------
Management Fees .65% .65% 1 year $178
12b-1 Fees None .25% 3 years $551
Other Expenses .85% .85%
Total
Operating Expenses 1.50% 1.75%
Expense Reimbursement* (.05%) (.05%)
Net Expenses 1.45% 1.70%
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Batterymarch International Equity Portfolio
- --------------------------------------------------------------------------------------------------------------------
Institutional Financial Institutional Class Example
Class Intermediary Class ---------------------------
----- ------------------
<S> <C> <C> <C> <C> <C>
Shareholder Fees
(Fees paid directly 1 year $107
from your investment) None None 3 years $334
Annual Fund
Operating Expenses
(Expenses that are Financial Intermediary
deducted from fund assets) Class Example
-----------------------
Management Fees .65% .65% 1 year $132
12b-1 Fees None .25% 3 years $412
Other Expenses .40% .40%
Total
Operating Expenses 1.05% 1.30%
Expense Reimbursement* (.05%) (.05%)
Net Expenses 1.00% 1.25%
<CAPTION>
- -------------------------------------------------------------------------------------------------
LM Total Return Institutional Portfolio
- -------------------------------------------------------------------------------------------------
Institutional Financial Institutional Class Example
Class Intermediary Class
----- ------------------
<S> <C> <C> <C> <C> <C>
Shareholder Fees
(Fees paid directly 1 year $87
from your investment) None None 3 years $271
Annual Fund
Operating Expenses
(Expenses that are Financial Intermediary
deducted from fund assets) Class Example
-----------------------
Management Fees .60% .60% 1 year $112
12b-1 Fees None .25% 3 years $350
Other Expenses .25% .25%
Total
Operating Expenses .85% 1.10%
Expense Reimbursement* (.10%) (.10%)
Net Expenses .75% 1.00%
</TABLE>
*Reflects the Manager's contractual obligation to limit Portfolio expenses
through [date]. "Other expenses" for the Value Institutional and Small Cap Value
Portfolios are based on actual expenses for the period from each Portfolio's
inception through March 31, 1999 (the fiscal year end). "Other Expenses" for the
other Portfolios are based on estimated amounts for the current
-16-
<PAGE>
fiscal year. The 12b-1 fees shown in the tables reflect the amount to which the
Directors have currently limited payments under the Portfolios' Distribution
Plans. Pursuant to each Portfolio's Distribution Plan, the Directors may
increase the 12b-1 fees to 0.40% of average net assets without shareholder
approval. As a result of the 12b-1 fees, long-term shareholders of the Financial
Intermediary Class may pay more than the economic equivalent of the maximum
sales charge permitted by the National Association of Securities Dealers, Inc.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
LM Institutional Fund Advisors II, Inc. ("LMIFA II") is an open-end
management investment company comprised of a variety of separate investment
portfolios. LMIFA II was organized as a Maryland corporation on January 13,
1998.
- --------------------------------------------------------------------------------
Board of Directors
- --------------------------------------------------------------------------------
The business affairs of LMIFA II are managed under the direction of a
Board of Directors, and the Directors of LMIFA II are responsible for generally
overseeing the conduct of each Portfolio's business. Information about the
Directors and executive officers of LMIFA II may be found in the SAI.
The Board of Directors has retained the Manager and the Advisers to
manage the Portfolios' affairs, furnish a continuing investment program for the
Portfolios and make investment decisions on their behalf, subject to such
policies as the Directors may determine.
- --------------------------------------------------------------------------------
Manager, Advisers and Portfolio Managers
- --------------------------------------------------------------------------------
The Portfolios are managed by the Manager. Each Portfolio pays the
Manager a monthly fee based on the average net assets of the Portfolio at the
following rates:
Annual Percentage of
Portfolio Average Net Assets
---------- ------------------
LM Value Institutional Portfolio 0.60%
LM Mid Cap Institutional Portfolio 0.60%
Brandywine Small Cap Value Portfolio 0.65%
Batterymarch Emerging Markets Portfolio 0.65%
Batterymarch International Equity Portfolio 0.65%
LM Total Return Institutional Portfolio 0.60%
-17-
<PAGE>
The Manager is a Maryland corporation formed on February 20, 1998 and
is a wholly owned subsidiary of Legg Mason, Inc., a financial services holding
company.
In order to assist in carrying out its investment advisory
responsibilities, the Manager has retained the Advisers to render advisory
services to the Portfolios. The Manager pays the fees of the Advisers.
The Manager pays a Portfolio's Adviser a monthly fee based on the
average net assets of the Portfolio at the following rates:
<TABLE>
<CAPTION>
------------------------------------------------------------- -------------------------
PORTFOLIO ADVISER ADVISER FEE
------------------------------------------------------------- -------------------------
<S> <C> <C> <C>
LM Value Institutional LMFA .55%
------------------------------------------------------------- -------------------------
LM Mid Cap Institutional LMFA .55%
------------------------------------------------------------- -------------------------
Brandywine Small Cap Value Brandywine .60%
------------------------------------------------------------- -------------------------
Batterymarch Emerging Markets Batterymarch .60%
------------------------------------------------------------- -------------------------
Batterymarch International Equity Batterymarch .60%
------------------------------------------------------------- -------------------------
LM Total Return Institutional LMFA .55%
------------------------------------------------------------- -------------------------
</TABLE>
LMFA. LMFA acts as adviser or manager to eighteen investment company
portfolios which had aggregate assets under management of approximately $13.947
billion as of March 31, 1999. LMFA's address is 100 Light Street, Baltimore,
Maryland 21202. LMFA is a subsidiary of Legg Mason, Inc.
Brandywine. Brandywine, a wholly owned subsidiary of Legg Mason, Inc.,
acts as investment adviser to institutional accounts, such as corporate pension
plans, mutual funds and endowment funds, as well as to individual investors.
Total assets under management by Brandywine were approximately $6.951 billion as
of March 31, 1999. The address of Brandywine is Three Christina Centre, Suite
1200, 201 N. Walnut Street, Wilmington, Delaware 19801.
Batterymarch. Batterymarch, a wholly owned subsidiary of Legg Mason,
Inc., acts as investment adviser to institutional accounts, such as corporate
pension plans, mutual funds and endowment funds, as well as to individual
investors. Total assets under management by Batterymarch were approximately
$4.473 billion as of March 31, 1999. The address of Batterymarch is 200
Clarendon Street, Boston, Massachusetts 02116.
Expense Limitations. The Manager and the Advisers have until [July 31,
2000] voluntarily agreed to waive their fees and/or reimburse each Portfolio in
any month to the extent a Portfolio's expenses (exclusive of taxes, interest,
deferred organizational expenses, 12b-1 fees, brokerage and extraordinary
expenses) exceed during that month the annual rate of that Portfolio's average
net assets set forth below:
-18-
<PAGE>
LM Value Institutional Portfolio,
LM Mid Cap Institutional Portfolio and
LM Total Return Institutional Portfolio 0.75%
Brandywine Small Cap Value Portfolio 0.85%
Batterymarch International Equity Portfolio 1.00%
Batterymarch Emerging Markets Portfolio 1.45%
Any amounts waived or reimbursed in a particular fiscal year will be
subject to repayment by a Portfolio to the Manager and the Advisers to the
extent that from time to time during the next three fiscal years the repayment
will not cause a Portfolio's expenses to exceed the limit, if any, imposed by
the Manager and the Advisers at that time.
These agreements are voluntary and may be terminated by the Manager and
the Advisers at any time.
Portfolio Managers. The names and business experience for the past five
years for each portfolio manager are set forth in the following chart.
<TABLE>
<CAPTION>
- ----------------------------------------------------------- -------------------------------------------------------------
Portfolio Manager and Business Experience
Portfolio (past five years)
- ----------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C>
LM Value Institutional Portfolio LMFA since 1982. William H. Miller, III is a portfolio manager
- ----------------------------------------------------------- -------------------------------------------------------------
LM Mid Cap Institutional Portfolio William H. Miller, III (see above)
- ----------------------------------------------------------- -------------------------------------------------------------
Brandywine Small Cap Value Portfolio Henry F. Otto is a senior portfolio manager at Brandywine.
Mr. Otto has been employed by Brandywine since 1987.
Steven M. Tonkovich is a portfolio manager and analyst at
Brandywine. Mr. Tonkovich has been employed by Brandywine
since 1989.
- ----------------------------------------------------------- -------------------------------------------------------------
Batterymarch Emerging Markets Portfolio Batterymarch emerging markets team
- ----------------------------------------------------------- -------------------------------------------------------------
Batterymarch International Equity Portfolio Batterymarch developed markets (EAFE) team
- ----------------------------------------------------------- -------------------------------------------------------------
LM Total Return Institutional Portfolio Nancy T. Dennin is a portfolio manager and
Senior Vice President of LMFA. Ms. Dennin has been
employed by LMFA since 1985.
- ----------------------------------------------------------- -------------------------------------------------------------
</TABLE>
-19-
<PAGE>
- --------------------------------------------------------------------------------
The Distributor
- --------------------------------------------------------------------------------
Legg Mason Wood Walker, Incorporated ("LMWW") is the distributor of
each Portfolio's shares. LMWW pays certain expenses in connection with the
offering of shares of each Portfolio, including any compensation to its
financial advisors, the printing and distribution of prospectuses, SAIs and
periodic reports used in connection with the offering to prospective investors,
and expenses relating to any supplementary sales literature or advertising. The
Portfolios bear the expenses of preparing, setting in type and mailing the
prospectuses, SAIs and periodic reports to existing shareholders.
- --------------------------------------------------------------------------------
Portfolio Transactions
- --------------------------------------------------------------------------------
Each Portfolio's Adviser places all orders for the purchase and sale of
portfolio investments with brokers or dealers selected by it in its discretion.
It will seek the best price and execution of each Portfolio's orders. However,
the Adviser may pay higher commission rates than the lowest available when it
believes it is reasonable to do so in light of the value of brokerage and
research services provided by the broker effecting the transaction. The Adviser
may also consider sales of shares of the Portfolio (or other portfolios or other
funds managed by it or its affiliates, to the extent permitted by applicable
law) in selecting broker-dealers to execute Portfolio transactions. The
Portfolios may use LMWW, among others, as broker for agency transactions in
listed and over-the-counter securities at commission rates and under
circumstances consistent with the policy of best execution.
Some securities considered by an Adviser for purchase by a Portfolio
may also be appropriate for other clients served by the Adviser. Transactions in
such securities will be allocated among the Portfolios and such other clients in
a manner considered fair and reasonable by the Adviser.
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Each Portfolio pays its share of all expenses of LMIFA II that are not
assumed by the Manager, the Adviser or other parties, including Directors',
auditing, legal, custodial, transfer agency and distribution fees (which are in
turn allocated to the Financial Intermediary Class of shares).
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
The Portfolios offer two classes of shares: Institutional Class and
Financial Intermediary Class. Shares in the Financial Intermediary Class bear a
12b-1 fee. See "Distribution Plans" below for more information.
-20-
<PAGE>
- --------------------------------------------------------------------------------
Initial Investment
- --------------------------------------------------------------------------------
Prior to or concurrent with the initial purchase of shares in any
Portfolio, each investor must open an account for that Portfolio by completing
and signing an Application and mailing it to Boston Financial Data Services (the
"Transfer Agent" or "BFDS") at the following address: P.O. Box 953, Boston,
Massachusetts 02103. The Portfolios have established minimum investment criteria
that vary depending upon which class of shares you wish to purchase. For
Institutional Class shares, investors must have at least $50 million in assets
and invest in the aggregate at least $1 million in the Portfolios and the
portfolios of LM Institutional Fund Advisors I, Inc. For Financial Intermediary
Class shares, investors must have at least $30 million in assets and invest in
the aggregate at least $1 million in the Portfolios and the portfolios of LM
Institutional Fund Advisors I, Inc. The Portfolios reserve the right to revise
the minimum investment requirement and may waive it in their sole discretion.
A purchase order, together with payment in proper form, received by the
Transfer Agent prior to the close of regular trading on the Exchange (ordinarily
4:00 p.m., Eastern time) ("close of the Exchange") will be effected at that
day's net asset value. An order received after the close of the Exchange will
generally be effected at the net asset value determined on the next business
day. However, orders received by certain retirement plans and other financial
intermediaries by the close of the Exchange and communicated to the Transfer
Agent by 9:00 a.m., Eastern time, on the following business day will be effected
at the net asset value determined on the prior business day.
Purchases of shares can be made by wiring federal funds to State Street
Bank and Trust Company. Before wiring federal funds, the investor must first
telephone the Portfolio at 1-888-42-LMIFA to receive instructions for wire
transfer. On the telephone, the following information will be required:
shareholder name; name of the person authorizing the transaction; shareholder
account number; name of the Portfolio and class of shares to be purchased;
amount being wired; and name of the wiring bank.
Funds should be wired through the Federal Reserve System to:
State Street Bank and Trust Company
ABA # 011-000-028
LM Institutional Fund Advisors [insert name of Portfolio]
[Insert your account name and number]
The wire should state that the funds are for the purchase of shares of
a specific Portfolio and include the account name and number.
Shares may also be purchased and paid for by the contribution of
eligible portfolio securities, subject in each case to approval by the Manager.
Approval will depend on, among other things, the nature and quality of the
securities offered and the current needs of the Portfolio in question.
Securities offered in payment for shares will be valued in the same way and at
the same time the Portfolio values it portfolio securities for purposes of
determining net asset value. See "How Each Portfolio Values Its Shares," below.
Investors who
-21-
<PAGE>
wish to purchase Portfolio shares through the contribution of securities should
contact the Portfolio at 1-888-42-LMIFA for instructions. Investors should also
realize that at the time of contribution they may be required to recognize a
gain or loss for tax purposes on securities contributed. The Portfolio has full
discretion to reject any securities offered as payment for shares. As described
below, each Portfolio may offer Financial Intermediary Class shares that are
offered primarily through financial intermediaries. Each Portfolio may pay
financial intermediaries for their services out of that class's assets pursuant
to the class' distribution plan or otherwise. Legg Mason and its affiliates
(including the Manager and the Advisers) may also from time to time, at their
own expense, make payments to financial intermediaries that sell shares of the
Portfolios or to other parties in connection with the sale of shares. If
investors effect transactions through a broker or agent, investors may be
charged a fee by that broker or agent.
Any shares purchased or received as a distribution will be credited
directly to the investor's account.
- --------------------------------------------------------------------------------
Additional Investments
- --------------------------------------------------------------------------------
Additional investments may be made at any time at the relevant net
asset value for that class by following the procedures outlined above. Investors
should always furnish a shareholder account number when making additional
purchases.
- --------------------------------------------------------------------------------
Other Purchase Information
- --------------------------------------------------------------------------------
Purchases will be made in full and fractional shares. In the interest
of economy and convenience, certificates for shares will not be issued.
Each Portfolio and LMWW reserves the right, in its sole discretion, to
suspend the offering of shares or to reject any purchase order, in whole or in
part, when, in the judgment of management, such suspension or rejection is in
the best interests of the Portfolio; to waive the minimum initial investment for
certain investors; and to redeem shares if information provided in the
Application should prove to be incorrect in any manner judged by a Portfolio to
be material (e.g., in a manner such as to render the shareholder ineligible to
purchase shares of a Portfolio). A Portfolio may suspend the offering of shares
at any time and resume it at any time thereafter.
Shares of the Portfolios may not be qualified or registered for sale in
all States. Prospective investors should inquire as to whether shares of a
particular Portfolio are available for offer and sale in their State of
residence. Shares of the Portfolio may not be offered or sold in any State
unless registered or qualified in that jurisdiction or unless an exemption from
registration or qualification is available.
Purchases and sales of Portfolio shares should be made for long-term
investment purposes only. Each Portfolio reserves the right to restrict
purchases of shares (including exchanges) when a pattern of frequent purchases
and sales made in response to short-term fluctuations in share price appears
evident.
-22-
<PAGE>
- --------------------------------------------------------------------------------
Retirement Plans
- --------------------------------------------------------------------------------
Shares of the Portfolios are available for purchase by retirement
plans, including 401(k) plans, 403(b) plans and Individual Retirement Accounts
("IRAs"). The administrator of a plan or employee benefits office can provide
participants or employees with detailed information on how to participate in the
plan and how to elect a Portfolio as an investment option. Participants in a
retirement or savings plan may be permitted to elect different investment
options, alter the amounts contributed to the plan, or change how contributions
are allocated among investment options in accordance with the plan's specific
provisions. The plan administrator or employee benefits office should be
consulted for details. For questions about participant accounts, participants
should contact their employee benefits office, the plan administrator, or the
organization that provides recordkeeping services for the plan. Investors who
purchase shares through retirement plans should be aware that the plan
administrator may aggregate purchase and redemption orders of participants in
the plan. Therefore, there may be a delay between the time the investor places
an order with the plan administrator and the time the order is forwarded to the
Transfer Agent for execution.
- --------------------------------------------------------------------------------
Account Registration Changes
- --------------------------------------------------------------------------------
Changes in registration or account privileges may be made in writing to
the Transfer Agent. Signature guarantees may be required. See "Signature
Guarantee" below. All correspondence must include the account number and must be
sent to:
Boston Financial Data Services
P.O. Box 953
Boston, Massachusetts, 02103
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Board of Directors has adopted Distribution Plans pursuant to Rule
12b-1 under the 1940 Act with respect to shares of the Financial Intermediary
Class of each Portfolio. Under the terms of each Plan, a Portfolio is permitted
to pay, out of the assets of the Financial Intermediary Class of the Portfolio,
in an amount up to 0.40% on an annual basis of the average daily net assets of
that class, LMWW, financial intermediaries and other parties that provide
services in connection with or are otherwise involved in the distribution of
shares or administration of plans or programs that use Portfolio shares as their
funding medium, and to reimburse certain other expenses and payments. Payments
under the Plans are currently limited to 0.25% of average daily net assets. For
more information regarding the Plans and their terms, see the SAI.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Portfolio shares may be redeemed through three methods: (1) by sending
a written request for redemption to the Transfer Agent at P.O. Box 953, Boston,
Massachusetts 02103; (2) by calling the Portfolio at 1-888-42-LMIFA; or (3) by
wire communication with the Transfer Agent. In each case, the investor should
first notify the Portfolio
-23-
<PAGE>
at 1-888-42-LMIFA of the intention to redeem. No charge is made for redemptions.
Shareholders who wish to be able to redeem by telephone or wire communication
must complete an authorization form in advance. Redemptions over $10,000,000 may
be initiated by telephone, but must be confirmed in writing prior to processing.
With respect to telephone redemptions or transfers, the Transfer Agent will
process orders based on instructions from a shareholder, or any person claiming
to act as his or her representative, who can provide it with his or her account
registration and address as it appears on its records. The Transfer Agent will
employ these and other reasonable procedures to confirm that instructions
communicated by telephone are genuine; if it fails to employ reasonable
procedures, the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent instructions.
Upon receipt of a request for redemption as described below (a request
"in good order") before the close of the Exchange on any day when the Exchange
is open, the Transfer Agent will redeem Portfolio shares at that day's net asset
value per share. Requests for redemption received by the Transfer Agent after
the close of the Exchange will be executed at the net asset value next
determined. However, orders received by certain retirement plans and other
financial intermediaries by the close of the Exchange and communicated to the
Transfer Agent by 9:00 a.m., Eastern time, on the following business day will be
effected at the net asset value determined on the prior business day. The
Portfolios may refuse to effect redemption requests during periods permitted by
federal securities laws.
Requests for redemption should indicate:
1) The number of shares or dollar amount to be redeemed and
the investor's shareholder account number;
2) The investor's name and the names of any co-owner of the
account, using exactly the same name or names used in
establishing the account;
3) Proof of authorization to request redemption on behalf of
any co-owner of the account (please contact the Portfolio
for further details); and
4) The name, address, and account number to which the
redemption payment should be sent.
Payment of the redemption price normally will be made by wire one
business day after receipt of a redemption request in good order. However, each
Portfolio reserves the right to postpone the payment date when the Exchange is
closed, when trading is restricted, or during other periods as permitted by
federal securities laws, or to take up to seven days to make payment upon
redemption if the Portfolio involved could be adversely affected by immediate
payment. Redemption proceeds may also be paid in kind at the discretion of the
Portfolio. Shareholders who receive a redemption in kind may incur costs to
dispose of such securities.
Shareholders of some investment companies have experienced difficulty
contacting their funds by telephone during periods of intense market activity.
Shareholders who are unable to contact a Portfolio by telephone and wish to make
a redemption should follow the instructions for redeeming by mail or by wire.
-24-
<PAGE>
Other supporting legal documents, such as copies of the trust
instrument or power of attorney, may be required from corporations or other
organizations, fiduciaries or persons other than the shareholder of record
making the request for redemption or repurchase. If you have a question
concerning the sale or redemption of shares, please contact the Portfolio or the
Transfer Agent.
Any Portfolio may elect to close any shareholder account when the
current value of the account is less than $1 million due to redemptions or
exchanges by the shareholder by redeeming all of the shares in the account and
mailing the proceeds to the investor. If a Portfolio elects to redeem the shares
in an account, the shareholder will be notified that the account is below $1
million and will be allowed 30 days in which to make an additional investment in
order to avoid having the account closed. Shares will be redeemed at the net
asset value calculated on the day of redemption. Any Portfolio may change the $1
million minimum account balance from time to time without notice to
shareholders.
- --------------------------------------------------------------------------------
Signature Guarantee
- --------------------------------------------------------------------------------
When a signature guarantee is called for, the shareholder should have
"Signature Guaranteed" stamped under his signature and guaranteed by any of the
following entities: U.S. banks, foreign banks having a U.S. correspondent bank,
credit unions, savings associations, U.S. registered dealers and brokers,
municipal securities dealers and brokers, government securities dealers and
brokers, national securities exchanges, registered securities associations and
clearing agencies (each an "Eligible Guarantor Institution"). Each Portfolio and
its agents reserve the right to reject any signature guarantee pursuant to
written signature guarantee standards or procedures, which may be revised in the
future to permit them to reject signature guarantees from Eligible Guarantor
Institutions that do not, based on credit guidelines, satisfy such written
standards or procedures. Any Portfolio may change the signature guarantee
requirements from time to time without prior notice to shareholders.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders in any Portfolio may exchange their shares for shares of
the same class of any of the other Portfolios or of any of the portfolios
offered by LM Institutional Fund Advisors I, Inc., provided that the shares of
that class are being offered at the time of the proposed exchange. Investments
by exchange among any of the Portfolios are made at the per share net asset
values next determined after the order for exchange is received in good order.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management and
have an adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where a Portfolio believes doing so would be
in its best interest, the Portfolio reserves the right to revise or terminate
the exchange privilege, limit the amount or number of exchanges or reject any
exchange. For further information concerning the exchange privilege, or to make
an exchange, please contact the Portfolio at 1-888-42-LMIFA.
-25-
<PAGE>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value per share of each class of shares is determined daily
for each Portfolio as of the close of regular trading on the Exchange (normally
4:00 p.m., Eastern time), on every day that the Exchange is open, by subtracting
the Portfolio's liabilities attributable to a given class of shares from its
total assets attributable to the class and dividing the result by the number of
shares of that class outstanding. Net asset value will not be determined on days
on which the Exchange is closed.
Portfolio securities and other assets for which market quotations are
readily available are valued at current market value. Current market value means
the last sale price of the day for a comparable position, or, in the absence of
any such sales, the mean between representative bid and asked prices obtained
from a quotation reporting system. Securities with remaining maturities of 60
days or less are generally valued at amortized cost. Fixed income securities,
including those to be purchased under firm commitment agreements, are normally
valued on the basis of quotations obtained from brokers and dealers or pricing
services which take into account appropriate factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data. Certain fixed
income securities for which daily market quotations are not readily available
may be valued with reference to fixed income securities whose prices are more
readily available and whose durations are comparable to those of the securities
being valued.
Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Directors
or persons acting at their direction. The values of foreign securities quoted in
foreign currencies are translated into U.S. dollars at current exchange rates or
at such other rates as the Directors or persons acting at their direction may
determine in computing net asset value.
Because of time zone differences, foreign exchanges and securities
markets will usually be closed prior to the time of the closing of the Exchange
and values of foreign investments will be determined as of the earlier closing
of such exchanges and securities markets. However, events affecting the values
of such foreign securities may occasionally occur between the earlier closings
of such exchanges and securities markets and the closing of the Exchange which
will not be reflected in the computation of the net asset value. If an event
materially affecting the value of such foreign securities occurs during such
period, then such securities will be valued at fair value as determined in good
faith by the Directors or persons acting at their direction.
-26-
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The LM Value Institutional Portfolio and the LM Total Return
Institutional Portfolio declare and pay dividends quarterly out of their net
investment income for that quarter. All other Portfolios declare and pay
dividends annually out of their net investment income for that year.
Distributions of net realized capital gains are made annually.
Shareholders may elect to receive dividends and distributions in one of
four ways:
1) Receive both dividends and other distributions in shares
of the same class of the distributing Portfolio;
2) Receive dividends in cash and other distributions in
shares of the same class of the distributing Portfolio;
3) Receive dividends in shares of the same class of the
distributing Portfolio and other distributions in cash; or
4) Receive both dividends and other distributions in cash.
If no election is made, both dividends and other distributions are
credited to a shareholder's Portfolio account in shares (of the same class as
the shares already held) at the net asset value of the shares determined as of
the close of the Exchange on the reinvestment date.
Reinvestment of dividends and other distributions occurs on the
ex-dividend date. An election to receive dividends or other distributions in
cash rather than additional shares may be made by notifying the Transfer Agent
in writing.
If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
The Directors reserve the right to revise the dividend policy or
postpone the payment of dividends if warranted in their judgment due to unusual
circumstances, such as an unexpected large expense, loss or fluctuation in net
asset value.
-27-
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements necessary for
it to be relieved of federal taxes on income and gains it distributes to
shareholders. Each Portfolio will distribute substantially all its net
investment income and net realized capital gains to its shareholders on a
current basis.
Distributions from a Portfolio (whether paid in cash or reinvested in
shares of the Portfolio) will be taxable to shareholders (other than IRAs, other
qualified retirement plans and other tax-exempt investors) as ordinary income to
the extent derived from the Portfolio's investment income and net short-term
gains. Portfolio distributions of net capital gains (that is, the excess of net
gains from capital assets held for more than one year over net losses from
capital assets held for not more than one year) will be taxable as long-term
capital gain.
Special tax rules apply to investments through defined contributions
plans and other tax-qualified plans. Shareholders should consult their tax
adviser to determine the suitability of shares of a Portfolio as an investment
through such plans and the precise effect of an investment on their particular
tax situation.
A Portfolio's investments in foreign securities may be subject to
withholding taxes at the source on dividend or interest payments. In that case,
a Portfolio's yield on those securities would be decreased.
If at the end of a Portfolio's fiscal year more than 50% of the value
of its total assets represents securities of foreign corporations, the Portfolio
may make an election to treat any foreign taxes paid by it as paid by its
shareholders. In this case, shareholders who are U.S. citizens, U.S.
corporations and, in some cases, U.S. residents generally will be required to
include in U.S. taxable income their pro rata share of such taxes, but may then
generally be entitled to claim a foreign tax credit or deduction (but not both)
for their share of such taxes. A shareholder's ability to claim a foreign tax
credit or deduction in respect of foreign taxes paid by a Portfolio may be
subject to certain limitations (including a holding period requirement,
applicable to both a Portfolio and its shareholders, imposed by the Taxpayer
Relief Act of 1997).
A Portfolio's transactions in foreign currencies and hedging activities
may give rise to ordinary income or loss to the extent such income or loss
results from fluctuations in value of the foreign currency concerned. In
addition, such activities will likely produce a difference between book income
and taxable income. This difference may cause a portion of a Portfolio's income
distributions to constitute a return of capital for tax purposes or require a
Portfolio to make distributions exceeding book income to qualify as a regulated
investment company for tax purposes.
Investment in an entity that qualifies as a "passive foreign investment
company" under the Internal Revenue Code of 1986 could subject a Portfolio to a
U.S. federal income tax or other charge on certain "excess distributions" with
respect to the investment, and on the proceeds from disposition of the
investment. A Portfolio may make an election to mark the gains (and to a limited
extent losses) in such investments "to the
-28-
<PAGE>
market" as though it had sold and repurchased its holdings in those passive
foreign investment companies on the last day of the Portfolio's taxable year.
Early each year each Portfolio will notify its shareholders of the
amount and tax status of distributions paid during that year.
The foregoing is a summary of certain federal income tax consequences
of investing in a Portfolio. Shareholders are urged to consult their tax
advisers with respect to the effects of this investment on their particular tax
situation (including possible liability for state and local taxes).
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each
Portfolios' recent financial performance for the past five years of, if shorter,
since the inception of the Portfolio's operations. Certain information reflects
financial results for a single fund share. The total returns represent the rate
that an investor would have earned or lost on an investment in the Portfolios,
assuming reinvestment of all dividends and distributions. This information has
been derived from the fund's financial statements, which have been audited
by_______. Its report and the Portfolios' financial statements are included in
the Portfolios' annual report to shareholders, which is available upon request.
LEGG MASON VALUE INSTITUTIONAL PORTFOLIO, INC.
FINANCIAL HIGHLIGHTS
Contained below is per share operating data for a share of common stock
outstanding, total investment return, ratios to average net assets and other
supplemental data. This information has been derived from information provided
in the financial statements.
<TABLE>
<CAPTION>
<S> <C> <C>
Institutional Class Intermediary Class
-----------------------------------------------------------
1999 * 1999 **
------------------ ---------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00 $10.81
Net investment income (loss) 0.04 A 0.03 B
Net realized and unrealized gain (loss)
on investments 5.83 5.04
------------------ ---------------
Total from investment operations 5.87 5.07
------------------ ---------------
Distributions to shareholders from
net investment income (0.02) (0.02)
------------------ ---------------
Total distributions (0.02) (0.02)
------------------ ---------------
Net asset value, end of period $15.85 $15.86
================== ===============
Total return 58.81% C 46.95% C
RATIOS / SUPPLEMENTAL DATA:
Ratios to average net assets
Expenses 0.75% A, D 1.00% B,D
Net investment income 0.85% A, D 0.44% B,D
Portfolio turnover rate 28.6% D 28.6% D
Net assets, end of period
(in thousands) $115,798 $18,751
</TABLE>
- -------------------------------
* For the period September 22, 1998 (commencement of operations) to March 31,
1999.
** For the period October 22, 1998 (commencement of operations) to March 31,
1999.
A Net of fees waived and reimbursements made by the Advisor in excess of a
voluntary expense limitation of .75% until July 31, 1999. If no fees had not
been waived by LMIA the annualized ratio of expenses to average daily net
assets for the period would have been 1.08%.
B Net of fees waived and reimbursements made by the Advisor in excess of a
voluntary expense limitation of 1.00% until July 31, 1999. If no fees had
not been waived by LMIA the annualized ratio of expenses to average daily
net assets for the period would have been 1.33%.
C Not annualized
D Annualized
BRANDYWINE SMALL CAP VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating data for a share of common stock
outstanding, total investment return, ratios to average net assets and other
supplemental data. This information has been derived from information provided
in the financial statements.
August 17, 1998 A
to
March 31, 1999
-------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00
-------------------------
Net investment income B 0.04
Net realized and unrealized gain
on investments (1.47)
-------------------------
Total from investment operations (1.43)
-------------------------
Distributions to shareholders from
net investment income (0.02)
-------------------------
Total distributions (0.02)
-------------------------
Net asset value, end of period $8.55
=========================
Total Return -14.38% C
RATIOS / SUPPLEMENTAL DATA:
Ratios to average net assets
Expenses B 0.85% D
Net investment income B 0.71% D
Portfolio turnover rate 45.05% D
Net assets, end of period $1,945,597
- ----------------------------------------
A Commencement of operations
B Net of fees waived by LMIA pursuant to a voluntary expense limitation of
0.85% until July 31, 1999. If no fees had been waived and reimbursed by
LMIA, the annualized ratio of expenses to average daily net asset for the
period would have been 6.47%.
C Not annualized
D Annualized
-29-
<PAGE>-
- --------------------------------------------------------------------------------
APPENDIX A -- PRIOR PERFORMANCE OF ADVISERS' OTHER ACCOUNTS
- --------------------------------------------------------------------------------
The LM Value Institutional Portfolio and the Brandywine Small Cap Value
Portfolio have performance results only for the period from September 22, 1998,
and August 17, 1998, respectively, to March 31, 1999. The other four Portfolios
have not yet commenced operations and have no performance record of their own.
However, the Advisers have managed other client accounts that have investment
objectives and policies that are similar, but not necessarily identical to,
those of the Portfolios. Representative investment performance for these
accounts is stated below. The investment performance is shown on an annual total
return basis, with returns for periods of less than one year not annualized, and
on an average annual total return basis. The performance information is provided
through March 31, 1999.
The prior performance information shown is in two forms: (1) composites
of certain of the Adviser's separately managed accounts and (2) SEC-registered,
open-end investment companies. In each case, the account or accounts have
investment objectives and policies substantially similar (although not
necessarily identical) to those of the relevant Portfolio; were managed
throughout the periods shown using investment styles and strategies
substantially similar (although not necessarily identical) to those of the
relevant Portfolio; and, to the extent a composite of accounts is shown, the
composite includes all of the fully-discretionary, fee-paying accounts managed
by such Adviser during the periods shown using investment objectives, policies
and strategies substantially similar (although not necessarily identical) to
those of the relevant Portfolio.
The performance information for composites has been adjusted to give
effect to the Portfolios' estimated fees and expenses, before waivers and
reimbursements, for the Financial Intermediary Class shares as shown in the
table on page _. The performance information for composites assumes reinvestment
of all dividends and proceeds from capital transactions and has been prepared in
accordance with the Performance Presentation Standards established by the
Association for Investment Management and Research ("AIMR standards"), except
for the deduction of estimated fees and expenses as noted above. The performance
results would be more favorable if they had been adjusted for estimated fees and
expenses of the Institutional Class shares of the Portfolios. Accounts included
in composites are generally not subject to the diversification requirements,
specific tax restrictions and investment limitations imposed on each of the
Portfolios by the 1940 Act or the Code. The performance results for these
accounts might have been adversely affected had the accounts been subject to
these requirements, restrictions and limitations.
Performance for SEC-registered, open-end investment companies is
calculated using the SEC's standardized total return formula, which is based
upon the change in value of an assumed initial investment of $1,000 from the
beginning through the end of a period and assumes reinvestment of all dividends
and other distributions. For periods of more than one year, the result is then
annualized and expressed as a percentage of the initial investment, and includes
the effect of operating expenses, including advisory fees. Information about the
investment objectives, policies, expenses and net assets of each of the
investment companies follows the performance information.
The method for calculating performance for the composites produces a
different result than if the performance were calculated using the SEC's method
for calculating the total return of an open-end investment company.
-1-
<PAGE>
A Portfolio's expenses, timing of purchases and sales of portfolio
securities, timing and availability of cash flows, cash positions (which are
typically greater for open-end investment companies than for separate accounts),
and brokerage commissions are some of the reasons that might cause performance
results of the Portfolio to vary from that of the accounts and/or investment
companies shown below. In particular, the large infusions of cash that are
typically associated with the commencement of operations of new mutual funds
such as the Portfolios, as well as differences in the amount of assets, which
can affect the ability and the manner in which security positions are
accumulated or liquidated, may also cause a Portfolio's performance to vary from
that of the accounts and/or investment companies shown below.
As noted above, the investment objective, policies, styles and
strategies of each Portfolio are not necessarily identical to those of the
relevant accounts and/or investment companies shown below. Again, for these and
other reasons, the performance of the Portfolios will vary from that of the
accounts and/or investment companies.
Prior Performance of Accounts Similar to the LM Value Institutional
Portfolio. The investment performance for the period from July 1, 1989 to June
30, 1999 for the Primary class of shares of the Legg Mason Value Trust ("Value
Trust") is shown below. The benchmark index to which Value Trust is compared is
the S&P 500 Index. The S&P 500 Index is an unmanaged index representing the
performance of 500 companies selected by S&P. Although used as a benchmark, the
Index's performance may not be comparable to Value Trust's performance because,
unlike the performance of Value Trust, the Index's performance has not been
adjusted for any fees or expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Yearly Total Return
Year Ended June 30 Account Performance (%) S&P 500 Performance (%)
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
1999
- ---------------------------------------- ------------------------------------- -------------------------------------
1998 38.48 30.16
- ---------------------------------------- ------------------------------------- -------------------------------------
1997 52.16 34.71
- ---------------------------------------- ------------------------------------- -------------------------------------
1996 28.64 26.00
- ---------------------------------------- ------------------------------------- -------------------------------------
1995 27.59 26.07
- ---------------------------------------- ------------------------------------- -------------------------------------
1994 4.86 1.41
- ---------------------------------------- ------------------------------------- -------------------------------------
1993 13.95 13.63
- ---------------------------------------- ------------------------------------- -------------------------------------
1992 18.48 13.41
- ---------------------------------------- ------------------------------------- -------------------------------------
1991 -5.20 7.39
- ---------------------------------------- ------------------------------------- -------------------------------------
1990 4.80 16.49
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------ -------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
Period ended Account S&P 500
June 30 Performance (%) Performance (%)
- ------------------------------------ -------------------------------------------- ----------------------------------
<S> <C> <C>
1 Year
- ------------------------------------ -------------------------------------------- ----------------------------------
3 Year
- ------------------------------------ -------------------------------------------- ----------------------------------
5 Year
- ------------------------------------ -------------------------------------------- ----------------------------------
10 Year
- ------------------------------------ -------------------------------------------- ----------------------------------
</TABLE>
Value Trust, which commenced operations on April 16, 1982, is a
diversified open-end investment company. Value Trust's investment objective is
long-term growth of capital. Value Trust invests primarily in securities that
appear to be undervalued in relation to the long-term earning power or asset
value of their issuers. Value Trust invests primarily in companies with a record
of earnings and dividends, reasonable return on equity, and sound finances.
Value Trust may from time to time invest in securities that pay no dividends or
interest. Current dividend income is not a prerequisite in the selection of
equity securities. Value Trust normally invests primarily in equity securities.
It may invest in debt securities for temporary defensive purposes and,
consistent with its investment objective, during periods when or under
circumstances where LMFA believes the return on certain debt securities may
equal or exceed the return on equity securities. Value Trust may invest in debt
securities of both foreign and domestic issuers of any maturity without regard
to rating, and may invest its assets in such securities without regard to a
percentage limit. LMFA currently anticipates that, under normal market
conditions, Value Trust will invest no more than 25% of its total assets in
long-term debt securities. Up to 10% of Value Trust's total assets may be
invested in debt securities not rated investment grade, i.e., not rated at least
BBB by S&P or Baa by Moody's or, if unrated by those entities, deemed by LMFA to
be of comparable quality. Value Trust may purchase preferred stock, indexed
securities, closed-end investment companies, foreign securities (25% or less of
total assets), illiquid securities (10% or less of net assets) and when-issued
securities; may invest in futures and options transactions, including puts and
calls; and may enter into forward foreign currency contracts. As of June 30,
1999, Value Trust had approximately $___________ in assets. For its fiscal year
ended March 31, 1999, the Primary shares of Value Trust had a total expense
ratio of ____%.
Legg Mason Capital Management, Inc. ("LMCM"), an affiliate of LMFA (the
Adviser to the Portfolio) that shares investment personnel with LMFA, manages
separate accounts in a manner substantially similar (although not necessarily
identical to) that of the Portfolio. The total return for the composite of these
accounts for the year ended June 30, 1999 and the period from January 1, 1999
through June 30, 1999 was _____% and _____%, respectively, and the average
annual total return for the composite for one year (July 1, 1998 to June 30,
1999) was _____% and since inception (January 1, 1997 to June 30, 1999) was
_____%. The number of accounts included in the composite has ranged from 1 to __
over the relevant period and the aggregate assets of the accounts has ranged
from $___ million to $_____ million over the period. All of the fully
discretionary tax-exempt accounts of LMCM with assets greater than $3 million
are included in the composite after a period of three months and after the
account becomes fully invested. Taxable and non-fully discretionary accounts and
accounts that hold large amounts of cash are not managed by LMCM in a manner
that is substantially similar to the Portfolio. The inclusion of taxable
accounts, non-fully discretionary accounts, or accounts that hold large amounts
of cash
-3-
<PAGE>
might have adversely affected the performance of the composite. Accounts
included in the composite are generally not subject to the diversification
requirements, specific tax restrictions and investment limitations imposed on
the Portfolio by the 1940 Act or the Code. The performance results for these
accounts might have been adversely affected had the accounts been subject to
these requirements, restrictions and limitations. These potential differences do
not adversely affect the determination that the accounts included in this
composite are managed in a substantially similar manner to the Portfolio.
The performance information does not represent the performance of the
Portfolio, which has been in operation only since September 22, 1998. The
performance information should not be considered a prediction of future
performance of the Portfolio. The Portfolio's performance may be higher or lower
than that shown.
Prior Performance of an Account Similar to the LM Mid Cap Institutional
Portfolio. The investment performance for the period from July 1, 1989 to June
30, 1999 for the Primary class of shares of the Legg Mason Special Investment
Trust ("Special Investment Trust") is shown below. The benchmark index to which
Special Investment Trust is compared is the Russell 2000 Index. The Russell 2000
Index is an unmanaged index representing the performance of the 2000 smallest of
the 3000 largest U.S.-domiciled corporations, ranked by market capitalization.
Although used as a benchmark, the Index's performance may not be comparable to
Special Investment Trust's performance since, unlike the performance of Special
Investment Trust, the Index's performance has not been adjusted for any fees or
expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Yearly Total Return
- --------------------------------------------------------------------------------------------------------------------
Year Ended June 30 Account Performance (%) Russell 2000 Performance (%)
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
1999
- ---------------------------------------- ------------------------------------- -------------------------------------
1998 22.29 16.51
- ---------------------------------------- ------------------------------------- -------------------------------------
1997 22.52 16.33
- ---------------------------------------- ------------------------------------- -------------------------------------
1996 25.89 23.89
- ---------------------------------------- ------------------------------------- -------------------------------------
1995 8.85 20.11
- ---------------------------------------- ------------------------------------- -------------------------------------
1994 4.97 4.34
- ---------------------------------------- ------------------------------------- -------------------------------------
1993 25.72 26.01
- ---------------------------------------- ------------------------------------- -------------------------------------
1992 12.34 14.54
- ---------------------------------------- ------------------------------------- -------------------------------------
1991 14.37 1.33
- ---------------------------------------- ------------------------------------- -------------------------------------
1990 10.96 2.96
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
- ---------------------------------------- ---------------------------------------------------------------------------
Period ended Account Russell 2000
June 30 Performance (%) Performance (%)
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
1 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
3 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
5 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
10 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
Special Investment Trust, which commenced operations on December 30,
1985, is a diversified open-end investment company. Special Investment Trust's
investment objective is capital appreciation. Current income is not a
consideration. Special Investment Trust invests principally in equity
securities, and securities convertible into equity securities, of companies with
market capitalizations of less than $2.5 billion which LMFA believes have one or
more of the following characteristics: they are not closely followed by, or are
out of favor with, investors, and appear to be undervalued in relation to their
long-term earning power or asset values; unusual developments have occurred
which suggest the possibility that the market value of the securities will
increase; or they are involved in actual or anticipated reorganizations or
restructurings under the Bankruptcy Code (no more than 20% of Special Investment
Trust's total assets may be invested in such securities). Special Investment
Trust also invests in debt securities of companies having one or more of these
characteristics. Special Investment Trust may invest in larger, more
highly-capitalized companies when circumstances warrant such investments.
Special Investment Trust may invest up to 20% of its total assets in securities
of companies involved in actual or anticipated reorganizations or
restructurings, and may purchase debt securities. Up to 35% of its net assets
may be invested in debt securities not rated at least BBB by S&P, or Baa by
Moody's, and securities unrated by those entities, deemed by LMFA to be of
comparable quality. Special Investment Trust may purchase preferred stock,
indexed securities, closed-end investment companies, foreign securities (25% or
less of total assets), illiquid securities (10% or less of net assets) and
when-issued securities; may invest in futures and options transactions,
including puts and calls; and may enter into forward foreign currency contracts.
When conditions warrant, for temporary defensive purposes, Special Investment
Trust also may invest without limit in short-term debt instruments. As of June
30, 1999, Special Investment Trust had approximately $____________ in assets.
For its fiscal year ended March 31, 1999, the Primary shares of Special
Investment Trust had a total expense ratio of ____%.
The performance information does not represent the performance of the
Portfolio, which has not yet commenced operations and has no performance record
of its own. The performance of the Portfolio. The Portfolio's performance may be
higher or lower than that shown.
Prior Performance of Accounts Similar to the Brandywine Small Cap Value
Portfolio. The investment performance for the period from July 1, 1989 to June
30, 1999 of all accounts managed by Brandywine that are substantially similar to
the Portfolio is shown below. The benchmark index to which the accounts are
compared is the Russell 2000 Index. The Russell 2000 Index is an unmanaged index
representing the performance of the 2000 smallest of the 3000 largest
U.S.-domiciled corporations,
-5-
<PAGE>
ranked by market capitalization. Although used as a benchmark, the Index's
performance may not be comparable to the accounts' performance since, unlike the
performance of the accounts, the Index's performance has not been adjusted for
any fees or expenses.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Yearly Total Return
- -----------------------------------------------------------------------------------------------------------------------
Composite
Year Ended June 30 Performance (%) Russell 2000 Performance (%)
- ------------------------------------------- -------------------------------- ------------------------------------------
<S> <C> <C>
1999
- ------------------------------------------- -------------------------------- ------------------------------------------
1998 23.16 16.51
- ------------------------------------------- -------------------------------- ------------------------------------------
1997 32.65 16.33
- ------------------------------------------- -------------------------------- ------------------------------------------
1996 19.21 23.89
- ------------------------------------------- -------------------------------- ------------------------------------------
1995 16.87 20.11
- ------------------------------------------- -------------------------------- ------------------------------------------
1994 6.26 4.34
- ------------------------------------------- -------------------------------- ------------------------------------------
1993 22.53 26.01
- ------------------------------------------- -------------------------------- ------------------------------------------
1992 18.01 14.54
- ------------------------------------------- -------------------------------- ------------------------------------------
1991 13.21 1.33
- ------------------------------------------- -------------------------------- ------------------------------------------
1990 -2.82 2.96
- ------------------------------------------- -------------------------------- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
- ---------------------------------------- ------------------------------------------------------------------------------
Period ended Composite Russell 2000
June 30 Performance (%) Performance (%)
- ---------------------------------------- ------------------------------------- ----------------------------------------
<S> <C> <C>
1 Year
- ---------------------------------------- ------------------------------------- ----------------------------------------
3 Year
- ---------------------------------------- ------------------------------------- ----------------------------------------
5 Year
- ---------------------------------------- ------------------------------------- ----------------------------------------
10 Year
- ---------------------------------------- ------------------------------------- ----------------------------------------
</TABLE>
The number of accounts included in the composite has ranged from __ to
__ over the relevant period and the aggregate assets of the accounts has ranged
from $__ million to $__ billion over the period. One of the accounts included in
the composite is a registered open-end investment company. Accounts included in
the composite are generally not subject to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Portfolio by
the 1940 Act or the Code. The performance results for these accounts might have
been adversely affected had the accounts been subject to these requirements,
restrictions and limitations. In addition, the accounts included in the
composite have invested in so-called "micro" cap stocks to a greater extent than
the Portfolio is likely to. These
-6-
<PAGE>
potential differences do not adversely affect the determination that the
accounts included in this composite are managed in a substantially similar
manner to the Portfolio.
The performance information does not represent the performance of the
Portfolio, which has been in operation only since August 17, 1998. The
performance information should not be considered a prediction of future
performance of the Portfolio. The Portfolio's performance may be higher or lower
than that shown.
Prior Performance of Accounts Similar to the Batterymarch Emerging
Markets Portfolio. The investment performance for the period from January 1,
1994 to June 30, 1999 of all accounts managed by Batterymarch that are
substantially similar to the Portfolio is shown below. The benchmark index to
which the accounts are compared is the MSCI Emerging Markets Free Index with
Gross Dividends ("MSCI EMF"). The MSCI EMF is an unmanaged index representing
the performance of a market weighted aggregate of 26 individual emerging country
indices and takes into account local and market restrictions on share ownership
by foreigners. Although used as a benchmark, the Index's performance may not be
comparable to the accounts' performance since, unlike the performance of the
accounts, the Index's performance has not been adjusted for any fees or
expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Yearly Total Return
- --------------------------------------------------------------------------------------------------------------------
Year Ended June 30 Composite Performance (%) MSCI EMF Performance (%)
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
1999
- ---------------------------------------- ------------------------------------- -------------------------------------
1998 -34.01 -39.08
- ---------------------------------------- ------------------------------------- -------------------------------------
1997 19.99 12.82
- ---------------------------------------- ------------------------------------- -------------------------------------
1996 10.61 8.47
- ---------------------------------------- ------------------------------------- -------------------------------------
1995 -7.51 0.01
- ---------------------------------------- ------------------------------------- -------------------------------------
1994 (beginning January 1, 1994) -10.82 -9.04
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
- ---------------------------------------- ------------------------------------- ----------------------------------------
Period ended Composite MSCI EMF
June 30 Performance (%) Performance (%)
- ---------------------------------------- ------------------------------------- ----------------------------------------
<S> <C> <C>
1 Year
- ---------------------------------------- ------------------------------------- ----------------------------------------
3 Year
- ---------------------------------------- ------------------------------------- ----------------------------------------
5 Year
- ---------------------------------------- ------------------------------------- ----------------------------------------
Since Inception
(January 1, 1994)
- ---------------------------------------- ------------------------------------- ----------------------------------------
</TABLE>
The number of accounts included in the composite has ranged from __ to
__ over the relevant period and the aggregate assets of the accounts has ranged
from $__ million to $__ billion over the period. One of the accounts included in
the composite is the mutual fund described below. Accounts included in the
composite are generally not subject to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Portfolio by
the 1940 Act or the Code. The performance results for these accounts might have
been adversely affected had the accounts been subject to these requirements,
restrictions and limitations. These potential differences do not adversely
affect the determination that the accounts included in this composite are
managed in a substantially similar manner to the Portfolio. The performance of
the composite is calculated based on AIMR standards, including the performance
of the "mutual fund account" included in the composite, while the separate
performance of the mutual fund shown below is calculated according to the SEC's
method for calculating performance.
The investment performance for the period from May 28, 1996 to June 30,
1999 for the Primary shares of the Legg Mason Emerging Markets Trust ("Emerging
Markets Trust"), which has been advised by Batterymarch since its inception, is
shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Yearly Total Return
- -----------------------------------------------------------------------------------------------------------------------
MSCI EMF
Year Ended June 30 Account Performance (%) Performance (%)
- ------------------------------------------------- --------------------------------------- -----------------------------
<S> <C> <C>
1999
- ------------------------------------------------- --------------------------------------- -----------------------------
1998 -34.42 -39.08
- ------------------------------------------------- --------------------------------------- -----------------------------
1997 27.41 12.82
- ------------------------------------------------- --------------------------------------- -----------------------------
1996 (Inception of May 28, 1996) 0.20 -0.45
- ------------------------------------------------- --------------------------------------- -----------------------------
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
- ------------------------------------------------- --------------------------------------- -----------------------------
Period ended MSCI EMF
June 30 Account Performance (%) Performance (%)
- ------------------------------------------------- --------------------------------------- -----------------------------
<S> <C> <C>
1 Year
- ------------------------------------------------- --------------------------------------- -----------------------------
Since Inception
(May 28, 1996)
- ------------------------------------------------- --------------------------------------- -----------------------------
</TABLE>
Emerging Markets Trust, which commenced operations on May 28, 1996, is
a diversified open-end investment company. Emerging Markets Trust's investment
objective is long-term capital appreciation. Emerging Markets Trust normally
invests at least 65% of its total assets in emerging market equity securities.
Assets not invested in emerging market equity securities may be invested in any
combination of debt securities of the U.S. Government, equity securities of
issuers in developed countries, cash and money market instruments, including
repurchase agreements. Batterymarch intends Emerging Markets Trust to be
substantially fully invested in equity securities and convertible securities of
emerging market issuers. Emerging Markets Trust may use options and stock index
futures and may also enter into forward foreign currency exchange contracts in
order to protect against fluctuations in exchange rates. More than 25% of
Emerging Markets Trust's total assets may be denominated in a single currency.
When abnormal market or economic situations warrant in the opinion of
Batterymarch, Emerging Markets Trust may invest without limit for temporary
defensive purposes in short-term debt instruments, including government,
corporate and money market securities of domestic issuers, as well as repurchase
agreements. Emerging Markets Trust also may purchase preferred stock,
convertible securities, open- and closed-end investment companies, illiquid
securities (15% or less of net assets) and when-issued securities; may invest in
futures and options transactions, including puts and calls; and may borrow
money, lend securities and enter into repurchase and reverse repurchase
agreements. As of June 30, 1999, Emerging Markets Trust had approximately
$___________ in assets. For its fiscal year ended December 31, 1998, the Primary
shares of Emerging Markets Trust had a total expense ratio of ____% (after fee
waivers; ____% in the absence of such waivers).
THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE
PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD
OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF
FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S PERFORMANCE MAY BE HIGHER
OR LOWER THAN THAT SHOWN.
Prior Performance of Accounts Similar to the Batterymarch International
Equity Portfolio. The investment performance for the period from July 1, 1989 to
June 30, 1999 of all accounts managed by Batterymarch that are substantially
similar to the Portfolio is shown below. The benchmark index to which the
accounts are compared is the MSCI Europe Australia & Far East Index ("MSCI
EAFE"). The MSCI EAFE is an unmanaged index representing the performance of
share prices of approximately 1100 companies listed on stock exchanges around
the world. Twenty countries are included in the Index. Although used as a
benchmark, the Index's performance may not be comparable to the accounts'
performance since, unlike the performance of the accounts, the Index's
performance has not been adjusted for any fees or expenses.
-9-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Yearly Total Return
- ---------------------------------------- ------------------------------------- -------------------------------------
Year Ended June 30 Composite Performance (%) MSCI EAFE Performance (%)
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
1999
- ---------------------------------------- ------------------------------------- -------------------------------------
1998 11.72 6.38
- ---------------------------------------- ------------------------------------- -------------------------------------
1997 18.51 13.16
- ---------------------------------------- ------------------------------------- -------------------------------------
1996 14.24 13.62
- ---------------------------------------- ------------------------------------- -------------------------------------
1995 1.20 1.95
- ---------------------------------------- ------------------------------------- -------------------------------------
1994 17.32 17.30
- ---------------------------------------- ------------------------------------- -------------------------------------
1993 6.60 20.70
- ---------------------------------------- ------------------------------------- -------------------------------------
1992 8.26 -0.31
- ---------------------------------------- ------------------------------------- -------------------------------------
1991 -15.96 -11.23
- ---------------------------------------- ------------------------------------- -------------------------------------
1990 25.04 3.53
- ---------------------------------------- ------------------------------------- -------------------------------------
<CAPTION>
- ---------------------------------------- ---------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
- ---------------------------------------- ------------------------------------- -------------------------------------
Period ended Composite MSCI EAFE
June 30 Performance (%) Performance (%)
- ---------------------------------------- ------------------------------------- -------------------------------------
<C> <C> <C>
1 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
3 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
5 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
10 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
The number of accounts included in the composite has ranged from __ to
__ over the relevant period and the aggregate assets of the accounts has ranged
from $___ million to $___ billion over the period. One of the accounts included
in the composite is the mutual fund described below. Accounts included in the
composite are generally not subject to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Portfolio by
the 1940 Act or the Code. The performance results for these accounts might have
been adversely affected had the accounts been subject to these requirements,
restrictions and limitations. These potential differences do not adversely
affect the determination that the accounts included in this composite are
managed in a substantially similar manner to the Portfolio. The performance of
the composite is calculated based on AIMR standards, including the performance
of the "mutual fund account" included in the composite, while the separate
performance of the mutual fund shown below is calculated according to the SEC's
method for calculating performance.
-10-
<PAGE>
The investment performance for the period from February 17, 1995 to
March 31, 1999 for the Primary shares of the Legg Mason International Equity
Trust ("International Equity Trust"), which has been advised by Batterymarch
since its inception, is shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Yearly Total Return
- -----------------------------------------------------------------------------------------------------------------------
MSCI EAFE
Year Ended June 30 Account Performance (%) Performance (%)
- ------------------------------------------------- --------------------------------------- -----------------------------
<S> <C> <C>
1999
- ------------------------------------------------- --------------------------------------- -----------------------------
1998 5.73 6.38
- ------------------------------------------------- --------------------------------------- -----------------------------
1997 18.74 13.16
- ------------------------------------------------- --------------------------------------- -----------------------------
1996 15.90 13.62
- ------------------------------------------------- --------------------------------------- -----------------------------
1995 (Inception February 17, 1995) 4.00 6.08
- ------------------------------------------------- --------------------------------------- -----------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
- -----------------------------------------------------------------------------------------------------------------------
Period ended
June 30 Account Performance (%) MSCI EAFE Performance (%)
- ------------------------------------------------- --------------------------------------- -----------------------------
<C> <C> <C>
1 Year
- ------------------------------------------------- --------------------------------------- -----------------------------
3 Years
- ------------------------------------------------- --------------------------------------- -----------------------------
Since Inception
(February 17, 1995)
- ------------------------------------------------- --------------------------------------- -----------------------------
</TABLE>
International Equity Trust, which commenced operations on February 17,
1995, is a diversified open-end investment company. International Equity Trust's
investment objective is maximum long-term total return. International Equity
Trust normally invests at least 65% of its assets in equity securities of
companies located outside the United States, and Batterymarch currently intends
to invest substantially all of International Equity Trust's assets in non-U.S.
equity securities. International Equity Trust may invest up to 35% of its total
assets in emerging market securities. When cash is temporarily available, or for
temporary defensive purposes, when Batterymarch believes such action is
warranted by abnormal market or economic situations, International Equity Trust
may invest without limit in cash and U.S. dollar-denominated money market
instruments, including repurchase agreements of domestic issuers. When
Batterymarch believes such action is warranted by abnormal market or economic
situations, for temporary defensive purposes, International Equity Trust also
may invest without limit in short-term debt instruments, including government,
corporate and money market securities of domestic issuers. International Equity
Trust is authorized to invest in stock index futures and options. International
Equity Trust may also enter into forward foreign currency exchange contracts in
order to protect against fluctuations in exchange rates. International Equity
Trust also may purchase securities other than common stock, such as debentures
or preferred stock that may or may not be convertible into common
-11-
<PAGE>
stock. Some of these instruments may be rated below investment grade.
International Equity Trust will not purchase securities rated below investment
grade (or comparable unrated securities) if, as a result, more than 5% of its
assets would be so invested. International Equity Trust may also invest in open-
and closed-end investment companies, illiquid securities (15% or less of net
assets) and when-issued securities; may invest in futures and options
transactions, including puts and calls; and may borrow money, lend securities
and enter into repurchase and reverse repurchase agreements. As of June 30,
1999, International Equity Trust had approximately $___________ in assets. For
its fiscal year ended December 31, 1998, the Primary shares of International
Equity Trust had a total expense ratio of ____%.
THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE
PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD
OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF
FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S PERFORMANCE MAY BE HIGHER
OR LOWER THAN THAT SHOWN.
Prior Performance of an Account Similar to the LM Total Return
Institutional Portfolio. The investment performance for the period from July 1,
1989 to June 30, 1999 for the Primary class of shares of the Legg Mason Total
Return Trust, Inc. ("Total Return Trust") is shown below. The benchmark index to
which Total Return Trust is compared is the S&P 500 Index. The S&P 500 Index is
an unmanaged index representing the performance of 500 companies selected by
S&P. Although used as a benchmark, the Index's performance may not be comparable
to Total Return Trust's performance since, unlike the performance of Total
Return Trust, the Index's performance has not been adjusted for any fees or
expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Yearly Total Return
- --------------------------------------------------------------------------------------------------------------------
Year Ended June 30 Account Performance (%) S&P 500 Index Performance (%)
- ------------------------------------- ------------------------------------- ----------------------------------------
<S> <C> <C>
1999
- ------------------------------------- ------------------------------------- ----------------------------------------
1998 23.31 30.16
- ------------------------------------- ------------------------------------- ----------------------------------------
1997 38.14 34.71
- ------------------------------------- ------------------------------------- ----------------------------------------
1996 23.28 26.00
- ------------------------------------- ------------------------------------- ----------------------------------------
1995 11.83 26.07
- ------------------------------------- ------------------------------------- ----------------------------------------
1994 4.69 1.41
- ------------------------------------- ------------------------------------- ----------------------------------------
1993 14.66 13.63
- ------------------------------------- ------------------------------------- ----------------------------------------
1992 25.09 13.41
- ------------------------------------- ------------------------------------- ----------------------------------------
1991 2.45 7.39
- ------------------------------------- ------------------------------------- ----------------------------------------
1990 -0.84 16.49
- ------------------------------------- ------------------------------------- ----------------------------------------
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
- ---------------------------------------- ------------------------------------- -------------------------------------
Period ended Account S&P 500 Index
June 30 Performance (%) Performance (%)
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
1 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
3 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
5 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
10 Year
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
Total Return Trust, which commenced operations on November 21, 1985, is
a diversified open-end investment company. Total Return Trust's investment
objective is to obtain capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk.
Total Return Trust invests in dividend-paying common stocks, debt securities and
securities convertible into common stocks which, in the opinion of LMFA, offer
potential for attractive total return. Total Return Trust also invests in common
stocks and securities convertible into common stocks which do not pay current
dividends but which, in LMFA's opinion, offer prospects for capital appreciation
and future income. Total Return Trust may invest in debt securities, including
government, corporate and money market securities, consistent with its
investment objective, during periods when or under circumstances where LMFA
believes the return on certain debt securities may equal or exceed the return on
equity securities. Total Return Trust may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and may
invest its assets in such securities without regard to a percentage limit. LMFA
currently anticipates that, under normal market conditions, Total Return Trust
will invest no more than 50% of its total assets in intermediate-term and
long-term debt securities, and no more than 5% of its total assets in debt
securities not rated investment grade, i.e., not rated at least BBB by S&P or
Baa by Moody's or, if unrated by those entities, deemed by LMFA to be of
comparable quality. Total Return Trust also may purchase preferred stock,
indexed securities, closed-end investment companies, foreign securities (25% or
less of total assets), illiquid securities (10% or less of net assets) and
when-issued securities; may invest in futures and options transactions,
including puts and calls; and may enter into forward foreign currency contracts.
As of June 30, 1999, Total Return Trust had approximately $__________ in assets.
For its fiscal year ended June 30, 1999, the Primary shares of Total Return
Trust had a total expense ratio of ____%.
THE PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE OF THE
PORTFOLIO, WHICH HAS NOT YET COMMENCED OPERATIONS AND HAS NO PERFORMANCE RECORD
OF ITS OWN. THE PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF
FUTURE PERFORMANCE OF THE PORTFOLIO. THE PORTFOLIO'S PERFORMANCE MAY BE HIGHER
OR LOWER THAN THAT SHOWN.
-13-
<PAGE>
LM INSTITUTIONAL FUND ADVISORS II, INC.
- --------------------------------------------------------------------------------
CUSTODIAN: TRANSFER AND SHAREHOLDER
STATE STREET BANK SERVICING AGENT:
AND TRUST CO. BOSTON FINANCIAL DATA
P.O. Box 1713 SERVICES
Boston, Massachusetts 02105 P.O. Box 953
Boston, Massachusetts, 02103
- --------------------------------------------------------------------------------
(LOGO)
COUNSEL: INDEPENDENT ACCOUNTANT:
ROPES & GRAY ERNST & YOUNG LLP
One International Place 2001 Market Street
Boston, MA 02110 Philadelphia, PA 19103
(617) 951-7000
- --------------------------------------------------------------------------------
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
100 Light Street
P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000
800-822-5544
For investors who want more information about LMIFA II, the following documents
are available upon request.
Annual Reports
The annual and semi-annual reports of LMIFA II provides additional information
about their investments. In the annual report, you will also find a discussion
of the market conditions and investment strategies that significantly affected
the performance of LMIFA II during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains additional detailed information about LMIFA II and is
incorporated by reference into (legally part of) this prospectus.
Investors can receive free copies of these materials, request other information
about the Funds and make shareholder inquiries by calling Legg Mason Wood
Walker, Incorporated ("LMWW") at 1-800-822-5544.
You can review, for a fee, the reports of the Portfolios and SAI by writing to
the SEC's Public Reference Section, Washington, D.C. 20459-6009, or by calling
the SEC at 1-800-SEC-0330. You can get copies of this information for free on
the SEC's Internet site at http://www.sec.gov. LMIFA II's Investment Company Act
of 1940 file number is 811-8611.
-14-
<PAGE>
- --------------------------------------------------------------------------------
LM INSTITUTIONAL FUND ADVISORS II, INC. August 1, 1999
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
LM Institutional Fund Advisors II, Inc. (the "Fund") is a no-load,
open-end diversified management investment company. LM Institutional Fund
Advisors II, Inc. currently consists of six separate professionally managed
investment portfolios which are described in this Statement of Additional
Information ("SAI"). Each of these portfolios is referred to herein as a
"Portfolio".
This SAI is not a prospectus and should be read in conjunction with the
Prospectus for the Portfolios, dated August 1, 1999, which has been filed with
the Securities and Exchange Commission ("SEC"). Copies of the Portfolios'
Prospectus are available without charge from Legg Mason Wood Walker,
Incorporated at 1-888-42-LMIFA.
<PAGE>
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
<S> <C> <C>
DEFINITIONS.......................................................................................................1
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES..................................................2
ADDITIONAL INFORMATION ABOUT SECURITIES, INVESTMENT TECHNIQUES AND RELATED RISKS..................................4
FOREIGN SECURITIES.......................................................................................4
OPTIONS ON SECURITIES....................................................................................7
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS................................................................8
RISKS ASSOCIATED WITH FUTURES AND OPTIONS...............................................................11
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS TRADED ON FOREIGN
EXCHANGES...............................................................................................14
COVER FOR HEDGING STRATEGIES............................................................................14
FOREIGN CURRENCY EXCHANGE TRANSACTIONS..................................................................15
PREFERRED STOCKS AND CONVERTIBLE SECURITIES.............................................................16
DEBT AND FIXED INCOME SECURITIES........................................................................16
COMMERCIAL PAPER AND OTHER SHORT-TERM INVESTMENTS.......................................................26
LOAN PARTICIPATIONS AND ASSIGNMENTS.....................................................................26
INDEXED SECURITIES AND STRUCTURED NOTES.................................................................27
FORWARD COMMITMENTS.....................................................................................28
RESTRICTED AND ILLIQUID SECURITIES......................................................................28
SECURITIES OF OTHER INVESTMENT COMPANIES................................................................29
REPURCHASE AGREEMENTS...................................................................................29
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING.......................................................30
LOANS OF PORTFOLIO SECURITIES...........................................................................31
DURATION................................................................................................31
PORTFOLIO TURNOVER......................................................................................32
ALTERNATIVE INVESTMENT STRATEGIES.......................................................................32
NEW INVESTMENT PRODUCTS.................................................................................33
INVESTMENT POLICIES.....................................................................................33
RATINGS OF DEBT OBLIGATIONS.............................................................................33
REITs...................................................................................................33
VALUATION OF PORTFOLIO SHARES....................................................................................34
MANAGEMENT OF THE PORTFOLIOS.....................................................................................35
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Directors and Officers..................................................................................35
Manager and Advisers....................................................................................37
PURCHASES AND REDEMPTIONS........................................................................................42
EXCHANGE PRIVILEGE...............................................................................................42
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................................43
ADDITIONAL TAX INFORMATION.......................................................................................44
OTHER INFORMATION................................................................................................45
PERFORMANCE INFORMATION..........................................................................................48
</TABLE>
-ii-
<PAGE>
DEFINITIONS
"Adviser" means the investment advisory firm that manages a Portfolio's
assets. LMFA, Brandywine and Batterymarch are each Advisers.
"Batterymarch" means Batterymarch Financial Management, Inc., 200
Clarendon Street, Boston, Massachusetts 02116. Batterymarch is the Adviser to
the Batterymarch Emerging Markets Portfolio and the Batterymarch International
Equity Portfolio.
"Brandywine" means Brandywine Asset Management, Inc., Three Christina
Centre, Suite 1200, 201 N. Walnut Street, Wilmington, Delaware 19801. Brandywine
is the Adviser to the Brandywine Small Cap Value Portfolio.
"Code" means the Internal Revenue Code of 1986, as amended.
"Distributor" means the party that is responsible for the distribution
or sale of the Fund's shares. Legg Mason is the Fund's Distributor.
"Exchange" means the New York Stock Exchange.
"Fundamental Investment Limitation" means an investment limitation of a
Portfolio that may be changed only with the affirmative vote of the lesser of
(a) more than 50% of the outstanding shares of the relevant Portfolio or (b) 67%
or more of the shares of the relevant Portfolio present at a shareholders'
meeting if more than 50% of the outstanding shares of that Portfolio are
represented at the meeting in person or by proxy. Only those policies or
limitations expressly designated as such are fundamental investment limitations.
All other policies and restrictions may be changed without shareholder approval.
"Independent Director" means a Director of the Fund who is not an
"interested person" (as defined in the 1940 Act) of the Fund.
"Legg Mason" means Legg Mason Wood Walker, Incorporated.
"LMFA" means Legg Mason Fund Adviser, Inc., 100 Light Street,
Baltimore, MD 21202. LMFA is the Adviser to the LM Value Institutional
Portfolio, the LM Mid Cap Institutional Portfolio and the LM Total Return
Institutional Portfolio.
"Manager" means LM Institutional Advisors, Inc., 100 Light Street,
Baltimore, MD 21202.
"1940 Act" means the Investment Company Act of 1940, as amended.
<PAGE>
"NRSROs" means nationally recognized (or foreign) statistical rating
organizations, including Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P").
"Plan" means the Fund's Distribution and Shareholder Services Plans.
"SEC" means the Securities and Exchange Commission.
"12b-1 Director" means a Director of the Fund who is an Independent
Director and who has no direct or indirect financial interest in the operation
of the Fund's Plans or the Fund's Underwriting Agreement.
ADDITIONAL INFORMATION ABOUT
INVESTMENT LIMITATIONS AND POLICIES
Each Portfolio has adopted certain fundamental investment limitations
that are set forth below.
Each Portfolio may:
(1) make loans, borrow money or issue senior securities to the fullest extent
permitted by the 1940 Act, the rules or regulations thereunder or applicable
orders of the SEC, as such statute, rules, regulations or orders may be amended
from time to time.
(2) not concentrate investments in a particular industry or group of industries
as concentration is defined under the 1940 Act, the rules or regulations
thereunder or applicable orders of the SEC, as such statute, rules, regulations
or orders may be amended from time to time. Securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agreements
thereon will not be considered to represent an industry.
(3) underwrite securities to the fullest extent permitted by the 1940 Act, the
rules or regulations thereunder or applicable orders of the SEC, as such
statute, rules, regulations or orders may be amended from time to time.
(4) purchase or sell commodities, commodities contracts, futures contracts,
options, forward contracts or real estate to the fullest extent permitted by the
1940 Act, the rules or regulations thereunder or applicable orders of the SEC,
as such statute, rules, regulations or orders may be amended from time to time.
Additional Information
- -----------------------
The fundamental investment limitations set forth above limit a
Portfolio's ability to engage in certain investment practices and purchase
securities to the extent permitted by, or consistent with, the 1940 Act.
Relevant limitations of the 1940 Act are described below, which
-2-
<PAGE>
are based either on the 1940 Act itself, the rules or regulations thereunder, or
interpretations promulgated by the SEC. As such, these limitations of the 1940
Act are not "fundamental," that is, the limitations will change as the statute,
rules, regulations or interpretations change, and no shareholder vote will be
required or sought.
Fundamental investment restriction (1). The 1940 Act presently limits a
Portfolio's ability to borrow up to one-third of the value of its total assets.
Borrowing by a Portfolio allows it to leverage its portfolio, which exposes it
to certain risks. Leveraging increases the effect of any increase or decrease in
the value of portfolio securities on a Portfolio's net asset value, and money
borrowed will be subject to interest costs (which may include commitment fees
and/or the cost of maintaining minimum average balances) which may or may not
exceed the return from the securities purchased with borrowed funds.
The 1940 Act also restricts the ability of any mutual fund to lend.
Under the 1940 Act, a Portfolio may only make loans if expressly permitted to do
so by the Portfolio's investment policies, and a Portfolio may not make loans to
persons who control or are under common control with the Portfolio. Thus, the
1940 Act effectively prohibits a Portfolio from making loans to certain persons
when conflicts of interest or undue influence are most likely present. The
Portfolios may, however, make other loans which if made would expose
shareholders to additional risks, such as the failure of the other party to
repay the loan.
The ability of a mutual fund to issue senior securities is severely
circumscribed by complex regulatory constraints under the 1940 Act that
restrict, for instance, the amount, timing, and form of senior securities that
may be issued. Certain portfolio management techniques such as the purchase of
securities on margin, short sales, or the writing of puts on portfolio
securities, may be considered senior securities unless appropriate steps are
taken to segregate a Portfolio's assets or otherwise cover its obligations.
Fundamental investment restriction (2). "Concentration" is interpreted
under the 1940 Act to mean investment of 25% or more of a Portfolio's total
assets in a single industry. If a Portfolio were to "concentrate" its
investments in a particular industry, investors would be exposed to greater
risks because the Portfolio's performance would be largely dependent on that
industry's performance.
Fundamental investment restriction (3). The 1940 Act prohibits a
diversified mutual fund from underwriting securities in excess of 25% of its
total assets.
Fundamental investment restriction (4). This restriction would permit
investment in commodities, commodities contracts (e.g., futures contracts or
options), forward contracts or real estate to the extent permitted under the
1940 Act. However, it is unlikely that the Portfolios would make such
investments, other than the use of futures contracts, options, forward contracts
and certain real estate-related securities as explained in the Prospectus and
this Statement of Additional Information. Each Portfolio, however, would like
the ability to consider using these
-3-
<PAGE>
investment techniques in the future. Commodities, as opposed to commodity
futures, represent the actual underlying bulk goods, such as grains, metals and
food stuffs. Real estate-related securities include real estate investment
trusts, commercial and residential mortgage-backed securities, and real estate
financings, and such instruments are generally sensitive to factors such as
changes in real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer.
ADDITIONAL INFORMATION ABOUT SECURITIES,
INVESTMENT TECHNIQUES AND RELATED RISKS
FOREIGN SECURITIES
Investing in the securities of issuers in any foreign country, or in
securities denominated in a foreign currency, involves special risks and
considerations not typically associated with investing in U.S. issuers or U.S.
dollar-denominated securities. These include risks resulting from differences in
accounting, auditing and financial reporting standards; lower liquidity than
U.S. securities; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer currency
out of a country); and political instability. In many cases, there is less
publicly available information concerning foreign issuers than is available
concerning U.S. issuers. Additionally, purchases and sales of foreign securities
and dividends and interest payable on those securities may be subject to foreign
taxes and tax withholding. Foreign securities generally exhibit greater price
volatility and a greater risk of illiquidity.
To the extent a Portfolio purchases securities denominated in a foreign
currency, a change in the value of any such currency against the U.S. dollar
will result in a change in the U.S. dollar value of the Portfolio's assets and
the Portfolio's income available for distribution. In addition, a Portfolio is
required to compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for a foreign currency declines after a Portfolio's income has
been earned and translated into U.S. dollars (but before payment), the Portfolio
could be required to liquidate portfolio securities to make such distributions.
Similarly, if an exchange rate declines between the time a Portfolio incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred.
The relative performance of various countries' securities markets
historically has reflected wide variations relating to the unique
characteristics of each country's economy. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Bank deposit insurance, if
any, may be subject to widely varying regulations and limits in foreign
countries.
-4-
<PAGE>
Foreign securities purchased by a Portfolio may be listed on foreign
exchanges, traded over-the-counter or purchased in private transactions.
Transactions on foreign exchanges are usually subject to mark-ups or commissions
higher than negotiated commissions on U.S. transactions. There is less
government supervision and regulation of exchanges and brokers in many foreign
countries than in the United States. Additional costs associated with an
investment in foreign securities may include higher custodial fees than apply to
domestic custodial arrangements and transaction costs of foreign currency
conversions.
Certain of the foregoing risks may also apply to some extent to
securities of U.S. issuers that are denominated in foreign currencies or that
are traded in foreign markets, or to securities of U.S. issuers having
significant foreign operations.
EMERGING MARKET ISSUERS. The risks of foreign investment, described
above, are greater for investments in emerging market issuers, and such
investments should therefore be considered speculative. Debt securities of
governmental and other issuers in emerging market countries will typically be
rated below investment grade or be of comparable quality. For more information
about lower-rated securities, see "Debt and Fixed Income Securities --
Lower-Rated Securities" below.
Investors are strongly advised to consider carefully the special risks
involved in emerging markets, which are in addition to the usual risks of
investing in developed markets around the world. Emerging market countries may
experience substantial rates of inflation or deflation. Inflation, deflation and
rapid fluctuations in such rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
market countries. While some emerging market countries have sought to develop a
number of corrective mechanisms to reduce inflation or deflation or mitigate
their effects, inflation and deflation may continue to have significant effects
both on emerging market countries and their securities markets. In addition,
many of the currencies of emerging market countries have experienced steady
devaluations relative to the U.S. dollar, and major devaluations have occurred
in certain countries.
Economies in emerging market countries generally are dependent heavily
upon international trade and, accordingly, have been and may continue to be
affected adversely by economic conditions, trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade.
Because of the high levels of foreign-denominated debt owed by many
emerging market countries, fluctuating exchange rates can significantly affect
the debt service obligations of those countries. This could, in turn, affect
local interest rates, profit margins and exports, which are a major source of
foreign exchange earnings. Hedging instruments are not typically available with
respect to investments in emerging market countries and, to the extent they are
available, the
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ongoing and indeterminate nature of the foregoing risks (and the costs
associated with hedging transactions) would make it virtually impossible to
hedge effectively against such risks.
To the extent an emerging market country faces a liquidity crisis with
respect to its foreign exchange reserves, it may increase restrictions on the
outflow of any foreign exchange. Repatriation is ultimately dependent on the
ability of a Portfolio to liquidate its investments and convert the local
currency proceeds obtained from such liquidation into U.S. dollars. Where this
conversion must be done through official channels (usually the central bank or
certain authorized commercial banks), the ability to obtain U.S. dollars is
dependent on the supply of such U.S. dollars through those channels and, if
available, upon the willingness of those channels to allocate those U.S. dollars
to the Portfolio. In such a case, a Portfolio's ability to obtain U.S. dollars
may be adversely affected by any increased restrictions imposed on the outflow
of foreign exchange. If the Portfolio is unable to repatriate any amounts due to
exchange controls, it may be required to accept an obligation payable at some
future date by the central bank or other governmental entity of the jurisdiction
involved. If such conversion can legally be done outside official channels,
either directly or indirectly, a Portfolio's ability to obtain U.S. dollars may
not be affected as much by any increased restrictions except to the extent of
the price which may be required to be paid for the U.S. dollars.
Many emerging market countries have little experience with the
corporate form of business organization, and may not have well developed
corporation and business laws or concepts of fiduciary duty in the business
context. The securities markets of emerging market countries are substantially
smaller, less developed, less liquid and more volatile than the securities
markets of the U.S. and other more developed countries. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
other major markets. There also may be a lower level of monitoring and
regulation of an emerging market country's securities markets and the activities
of investors in such markets; enforcement of existing regulations has been
extremely limited.
Some emerging markets have different settlement and clearance
procedures, which, for example, may not call for delivery of a security to a
Portfolio until well after the Portfolio has paid for such security. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. The inability of a Portfolio to make intended securities purchases
due to settlement problems could cause that Portfolio to miss attractive
investment opportunities. Inability to dispose of a portfolio security caused by
settlement problems could result either in losses to the Portfolio due to
subsequent declines in value of the portfolio security or, if the Portfolio has
entered into a contract to sell the security, in possible liability to the
purchaser.
The risk also exists that an emergency situation may arise in one or
more emerging market countries as a result of which trading of securities may
cease or may be substantially curtailed and prices for a Portfolio's portfolio
securities in such markets may not be readily available.
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SOVEREIGN DEBT SECURITIES. Sovereign debt is subject to risks in
addition to those relating to foreign investments generally. As a sovereign
entity, the issuing government may be immune from lawsuits in the event of its
failure or refusal to pay the obligations when due. The debtor's willingness or
ability to repay in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which
the sovereign debtor may be subject. Sovereign debtors also may be dependent on
expected disbursements from foreign governments or multinational agencies, the
country's access to trade and other international credits, and the country's
balance of trade. Some emerging market sovereign debtors have in the past
rescheduled their debt payments or declared moratoria on payments, and similar
occurrences may happen in the future.
DEPOSITARY RECEIPTS. American Depositary Receipts, or "ADRs," are
securities issued by a U.S. depositary (usually a bank) and represent a
specified quantity of underlying non-U.S. securities on deposit with a custodian
bank as collateral. A foreign issuer of the security underlying an ADR is
generally not subject to the same reporting requirements in the United States as
a domestic issuer. Accordingly, the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer or the underlying security. ADRs may
also be subject to exchange rate risks if the underlying securities are
denominated in foreign currency. The Portfolios may also invest in similar
non-U.S. instruments issued by foreign banks or trust companies such as "GDRs"
and "EDRs." For purposes of its investment policies, each Portfolio will treat
ADRs and similar instruments as equivalent to investment in the underlying
securities.
OPTIONS ON SECURITIES
Under an option contract, one party generally has the right to require
the other to buy or sell a specified amount of securities, units of an index,
currencies or futures contracts, and may exercise that right if the market price
of the underlying instrument moves in a direction advantageous to the holder of
the option. Options with respect to securities indices typically call for cash
settlement instead of delivery of the securities that comprise the index.
A Portfolio may purchase call options on securities for any purpose.
For example, a call option may be purchased by a Portfolio on a security that
its Adviser intends to include in the Portfolio's investment portfolio in order
to fix the cost of a future purchase. Call options also may be used as a means
of participating in an anticipated price increase of a security on a more
limited risk basis than would be possible if the security itself were purchased.
In the event of a decline in the price of the underlying security, use of this
strategy would serve to limit the Portfolio's potential loss to the option
premium paid; conversely, if the market price of the
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underlying security increases above the exercise price and the Portfolio either
sells or exercises the option, any profit realized would be reduced by the
premium.
A Portfolio may purchase put options on securities for any purpose. For
example, a put option may be purchased by a Portfolio in order to hedge against
a decline in the market value of securities held in its portfolio. The put
option enables a Portfolio to sell the underlying security at the predetermined
exercise price; thus the potential for loss to the Portfolio below the exercise
price is limited to the option premium paid. If the market price of the
underlying security is higher than the exercise price of the put option, any
profit the Portfolio realizes on the sale of the security would be reduced by
the premium paid for the put option less any amount for which the put option may
be sold.
A Portfolio may also write call and put options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A futures contract on a security or foreign currency is a bilateral
agreement pursuant to which one party agrees to make, and the other party agrees
to accept, delivery of the specified type of security or foreign currency called
for in the contract at a specified future time and at a specified price. A
Portfolio may, for example, purchase a futures contract on a security or foreign
currency when it intends to purchase securities or foreign currency but has not
yet done so. This strategy may minimize the effect of all or part of an increase
in the market price of the security or the relative value of the foreign
currency that a Portfolio intends to purchase in the future. A rise in the price
of the security or foreign currency prior to its purchase may either be offset
by an increase in the value of the futures contract purchased by a Portfolio or
avoided by taking delivery of the security or foreign currency under the futures
contract. Conversely, a fall in the market price of the underlying security or
foreign currency may result in a corresponding decrease in the value of the
futures position. A Portfolio may sell a futures contract on a security or
foreign currency, for example, in order to continue to receive the income from a
security or foreign currency, while endeavoring to avoid part or all of the
decline in the market value of that security that would accompany an increase in
interest rates.
Each Portfolio will limit its use of futures contracts and futures
options to hedging transactions or other circumstances permitted to registered
investment companies by regulatory authorities. For example, a Portfolio might
use futures contracts to attempt to hedge against anticipated changes in
interest rates that might adversely affect either the value of the Portfolio's
securities or the price of the securities which the Portfolio intends to
purchase. A Portfolio's hedging may include sales of futures contracts as an
offset against the effect of expected increases in interest rates, and purchases
of futures contracts as an offset against the effect of expected declines in
interest rates. Although other techniques could be used to reduce exposure to
interest rate fluctuations, a Portfolio may be able to hedge its exposure more
effectively and perhaps at a lower cost by using futures contracts and options
on futures contracts.
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Futures contracts may also be used for non-hedging purposes, such as to
simulate full investment in underlying securities while retaining a cash balance
for Portfolio management purposes, as a substitute for direct investment in a
security, to facilitate trading, to reduce transaction costs, or to seek higher
investment returns when a futures contract or option is priced more attractively
than the underlying security or index.
A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the futures
contract sale or purchase was made. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
When a purchase or sale of a futures contract is made by a Portfolio,
the Portfolio is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Under certain circumstances, such as during periods of high
volatility, a Portfolio may be required by an exchange to increase the level of
its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. Each Portfolio expects
to earn interest income on its initial margin deposits. A futures contract held
by a Portfolio is valued daily at the official settlement price of the exchange
on which it is traded. Each day the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Portfolio but is instead settlement between
the Portfolio and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, each Portfolio
will mark to market its open futures positions.
A Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements) and the current market value of
the option and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities or currencies, generally those contracts are closed
out prior to delivery by offsetting
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purchases or sales of matching futures contracts (involving the same currency or
underlying security and delivery month). If an offsetting purchase price is less
than the original sale price, the Portfolio realizes a gain, or if it is more,
the Portfolio realizes a loss. If an offsetting sale price is more than the
original purchase price, the Portfolio realizes a gain, or if it is less, the
Portfolio realizes a loss. If the Portfolio is unable to enter into a closing
transaction, the amount of the Portfolio's potential loss is unlimited. In
general, 40% of the gain or loss arising from the closing out of a futures
contract traded on an exchange approved by the CFTC is treated as short-term
gain or loss, and 60% is treated as long-term gain or loss. The Portfolio will
also bear transaction costs for each contract which will be included in these
calculations.
A Portfolio will not enter into futures contracts or option positions
if, immediately thereafter, the initial margin deposits plus premiums paid by
it, less the amount by which any such options positions are "in-the-money" at
the time of purchase, would exceed 5% of the fair market value of the
Portfolio's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
A Portfolio may purchase and write call and put options on futures
contracts it may buy or sell and enter into closing transactions with respect to
such options to terminate existing positions. In return for the premium paid,
options on futures contracts give the purchaser the right to assume a position
in a futures contract at the specified option exercise price at any time during
the period of the option. The Portfolio may use options on futures contracts in
lieu of writing or buying options directly on the underlying securities or
purchasing and selling the underlying futures contracts. For example, to hedge
against a possible decrease in the value of its portfolio securities, a
Portfolio may purchase put options or write call options on futures contracts
rather than selling futures contracts. Similarly, a Portfolio may purchase call
options or write put options on futures contracts as a substitute for the
purchase of futures contracts to hedge against a possible increase in the price
of securities which the Portfolio expects to purchase. Such options generally
operate in the same manner as options purchased or written directly on the
underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
An index futures contract is a contract to buy or sell units of an
index at a specified future date at a price agreed upon when the contract is
made. Entering into a contract to buy units of an index is commonly referred to
as buying or purchasing a contract or holding a long position in the index.
Entering into a contract to sell units of an index is commonly referred to as
selling a contract or holding a short position. A unit is the current value of
the index. A Portfolio may enter into stock index futures contracts, debt index
futures
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contracts, or other index futures contracts appropriate to its objective. A
Portfolio may also purchase and sell options on index futures contracts.
For example, the Standard & Poor's 500 Composite Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if a Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).
The requirements for qualification as a regulated investment company
also may limit the extent to which a Portfolio may enter into futures or options
on futures. See "Additional Tax Information."
RISKS ASSOCIATED WITH FUTURES AND OPTIONS
In considering the Portfolios' use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts and options may be closed out only on an
exchange or board of trade which provides a secondary market for such futures
contracts or options. Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract and option prices during a single trading
day. The daily limit establishes the maximum amount that the price of a futures
contract or option may vary either up or down from the previous day's settlement
price at the end of the current trading session. Once the daily limit has been
reached in a futures contract or option subject to the limit, no more trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movements during a particular trading day and therefore does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
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(2) The ability to establish and close out positions in either futures contracts
or exchange-listed options is also subject to the maintenance of a liquid
secondary market. Consequently, it may not be possible for a Portfolio to close
a position and, in the event of adverse price movements, the Portfolio would
have to make daily cash payments of variation margin (except in the case of
purchased options). However, in the event futures contracts or options have been
used to hedge portfolio securities, such securities generally will not be sold
until the contracts can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, there is no guarantee that the price of the
securities will, in fact, correlate with the price movements in the contracts
and thus provide an offset to losses on the contracts. The inability to close
out a futures or option position may also restrict the Portfolio's ability to
sell the underlying security or currency at a time when the Adviser might
otherwise do so.
(3) Successful use by a Portfolio of futures contracts and options will depend
upon its Adviser's ability to predict market movements, which may require
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
level of the underlying instrument but to anticipated levels at some point in
the future. There is, in addition, the risk that movements in the price of the
futures contract or option will not correlate with movements in the prices of
the securities or currencies being hedged. If the price of the securities or
currencies being hedged has moved in a favorable direction, this advantage may
be partially offset by losses in the futures or option position. In addition, if
the Portfolio has insufficient cash, it may have to sell assets from its
investment portfolio to meet daily variation margin requirements. Any such sale
of assets may or may not be made at prices that reflect the rising market;
consequently, a Portfolio may need to sell assets at a time when such sales are
disadvantageous to the Portfolio. If the price of the futures or option contract
moves more than the price of the underlying securities or currencies, the
Portfolio will experience either a loss or a gain on the futures contract or
option that may or may not be completely offset by movements in the price of the
securities or currencies that are the subject of the hedge.
(4) The value of an option position will reflect, among other things, the
current market price of the underlying security, currency or futures contract,
the time remaining until expiration, the relationship of the exercise price to
the market price, the historical price volatility of the underlying security,
currency or futures contract and general market conditions. For this reason, the
successful use of options as a hedging strategy depends upon the Adviser's
ability to forecast the direction of price fluctuations in the underlying
market.
(5) In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between price movements in the futures and options
position and the securities or currencies being hedged, movements in the prices
of futures and options contracts may not correlate perfectly with movements in
the prices of the hedged securities or currencies due to price distortions in
the futures and options markets. There may be several reasons unrelated to the
value of the underlying securities or currencies which cause this situation to
occur. First, as
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noted above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of the
underlying securities or currencies instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures or options contracts over the short term. In
addition, activities of large traders involving arbitrage and other investment
strategies may result in temporary price distortions.
(6) Options normally have expiration dates of up to nine months. The exercise
price of the options may be below, equal to or above the current market value of
the underlying security, currency or futures contract. Options that expire
unexercised have no value, and the Portfolio will realize a loss in the amount
paid and any transaction costs.
(7) Like options on securities, options on futures contracts have a limited
life. The ability to establish and close out options on futures will be subject
to the development and maintenance of liquid secondary markets on the relevant
exchanges or boards of trade. There can be no certainty that liquid secondary
markets for all options on futures contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash at the
time of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on futures contracts, however, must post an initial margin
and are subject to additional margin calls which could be substantial in the
event of adverse price movements. In addition, although the maximum amount at
risk when the Portfolio purchases an option is the premium paid for the option
and the transaction costs, there may be circumstances when the purchase of an
option on a futures contract would result in a loss to the Portfolio when the
use of a futures contract would not, such as when there is no movement in the
value of the securities or currencies being hedged.
(9) A Portfolio's activities in the futures and options markets may result in a
higher portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions; however, a Portfolio also may save on commissions
by using such contracts as a hedge rather than buying or selling individual
securities in anticipation or as a result of market movements.
(10) A Portfolio may purchase and write both exchange-traded options and options
traded on the OTC market. Exchange markets for options on debt securities exist
but are relatively new, and the ability to establish and close out positions on
the exchanges is subject to the maintenance of a liquid secondary market.
Although the Portfolios intend to purchase or write only those exchange-traded
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any specific time.
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Closing transactions may be effected with respect to options traded in the OTC
markets only by negotiating directly with the other party to the option
contract, or in a secondary market for the option if such market exists.
Although the Portfolios will enter into OTC options only with dealers which
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Portfolios, there can be no assurance that a
Portfolio will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. In the event of insolvency of the contra-party, a
Portfolio may be unable to liquidate an OTC option. Accordingly, it may not be
possible to effect closing transactions with respect to certain options, with
the result that the Portfolio would have to exercise those options which it has
purchased in order to realize any profit. With respect to options written by a
Portfolio, the inability to enter into a closing transaction may result in
material losses to the Portfolio. For example, because a Portfolio must maintain
a covered position with respect to any call option it writes on a security or
futures contract the Portfolio may not sell the underlying security or futures
contract or invest any cash, U.S. Government securities or short-term debt
securities used as cover during the period it is obligated under such option.
This requirement may impair a Portfolio's ability to sell a portfolio security
or make an investment at a time when such a sale or investment might be
advantageous.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS TRADED ON FOREIGN EXCHANGES
Options on securities, options on currencies, futures contracts and
options on futures contracts may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States, may not involve a clearing mechanism and related guarantees and
are subject to the risk of governmental actions affecting trading in, or the
price of, foreign securities. The value of such positions also could be
adversely affected by (1) other complex foreign political, legal and economic
factors, (2) lesser availability than in the United States of data on which to
make trading decisions, (3) delays in the Portfolios' ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lesser
trading volume.
COVER FOR HEDGING STRATEGIES
Each Portfolio will comply with guidelines established by the SEC with
respect to coverage of hedging strategies by mutual funds, and, if the
guidelines so require, will set aside cash or liquid securities in a segregated
account with its custodian in the amount prescribed, as marked to market daily.
Securities, options or futures positions used for cover and securities held in a
segregated account cannot be sold or closed out while the hedging strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of a Portfolio's assets could impede portfolio management or a Portfolio's
ability to meet redemption requests or other current obligations.
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FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Each Portfolio that may invest in securities that are denominated in
foreign currencies may engage in a variety of foreign currency exchange
transactions to protect against uncertainty in the level of future exchange
rates. These transactions may be engaged in connection with the purchase and
sale of portfolio securities ("transaction hedging") and to protect the value of
specific portfolio positions ("position hedging").
A Portfolio may engage in transaction hedging to protect against a
change in the foreign currency exchange rates between the date on which the
Portfolio contracts to purchase or sell the security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. A Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate. If conditions warrant, for
transaction hedging purposes, a Portfolio may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
may purchase and sell foreign currency futures contracts. A foreign currency
forward contract is a negotiated agreement to exchange currency at a future time
at a rate or rates that may be higher or lower than the spot rate. Foreign
currency futures contracts are standardized exchange-traded contracts and have
margin requirements. Each Portfolio may also purchase, sell and write
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
A Portfolio may engage in "position hedging" to protect against a
decline in the value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the value of
the currency in which securities the Portfolio intends to buy are denominated).
For position hedging purposes, each Portfolio may purchase, sell or
write foreign currency futures contracts, foreign currency forward contracts,
and options on exchanges or over-the-counter markets. In connection with
position hedging, a Portfolio may also purchase or sell foreign currency on a
spot basis.
A Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times involve currencies other than those in which its portfolio securities are
then denominated. "Cross hedging" activities will be used when a Portfolio's
Adviser believes that such transactions provide significant hedging
opportunities for the Portfolio. Cross hedging transactions by a Portfolio
involve the further risk of imperfect correlation between changes in the values
of the currencies to which such transactions relate and changes in the values of
such currencies and of the currency or other asset or liability which is the
subject of the hedge.
The decision as to whether and to what extent a Portfolio will engage
in foreign currency exchange transactions will depend on a number of factors,
including prevailing market conditions, the composition of a Portfolio's
investments and the availability of suitable
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transactions. Accordingly, there can be no assurance that a Portfolio will
engage in foreign currency exchange transactions at any given time or from time
to time.
For a further discussion of the risks associated with purchasing and
selling futures contracts and options, see "Risks Associated with Futures and
Options" above. A Portfolio may also use other foreign currency exchange
instruments and techniques when available and deemed appropriate by its Adviser.
PREFERRED STOCKS AND CONVERTIBLE SECURITIES
A preferred stock pays dividends at a specified rate and has preference
over common stock in the payment of dividends and the liquidation of an issuer's
assets but is junior to the debt securities of the issuer in those same
respects. The market prices of preferred stocks are subject to changes in
interest rates and are more sensitive to changes in an issuer's creditworthiness
than are the prices of debt securities. Shareholders of preferred stock may
suffer a loss of value if dividends are not paid. Under ordinary circumstances,
preferred stock does not carry voting rights.
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock (or another equity security) of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stream of income with generally higher yields
than those of common stocks of the same or similar issuers. Convertible
securities are usually subordinated to comparable-tier nonconvertible securities
but rank senior to common stock in a corporation's capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. A convertible security may
be subject to redemption at the option of the issuer at a price established in
the convertible security's governing instrument. If a convertible security held
by a Portfolio is called for redemption, the Portfolio will be required to (1)
permit the issuer to redeem the security, (2) convert it into the underlying
common stock or (3) sell it to a third party. Any of these actions could have an
adverse effect on a Portfolio's ability to achieve its investment objective.
DEBT AND FIXED INCOME SECURITIES
The Portfolios may invest in a variety of debt and fixed income
securities. These securities share one principal risk: their values fluctuate
with changes in interest rates. Thus, a
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decrease in interest rates will generally result in an increase in the value of
a Portfolio's fixed income investments. Conversely, during periods of rising
interest rates, the value of a Portfolio's fixed income investments will
generally decline. The magnitude of these fluctuations will generally be greater
when a Portfolio's duration or average maturity is longer. Changes in the value
of portfolio securities will not affect interest income from those securities,
but will be reflected in a Portfolio's net asset value. The most common types of
these instruments, and the associated risks, are described below. Subject to its
investment policies and applicable law, each of the Portfolios may invest in
these and other instruments.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government securities include (1)
U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes
(maturity of one to ten years) and U.S. Treasury bonds (maturities generally
greater than ten years) and (2) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S. Government (such as GNMA
certificates); (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Government (such as obligations of the
Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government
to purchase certain obligations of agencies or instrumentalities (such as
securities issued by Fannie Mae); or (d) only the credit of the instrumentality
(such as securities issued by Freddie Mac). In the case of obligations not
backed by the full faith and credit of the United States, a Portfolio must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitments. Neither the U.S. Government nor any of its agencies or
instrumentalities guarantees the market value of the securities they issue.
Therefore, the market value of such securities will fluctuate in response to
changes in interest rates.
INFLATION-INDEXED SECURITIES. The Portfolios may also invest in
inflation-indexed U.S. Treasury securities (also known as "Treasury
Inflation-Protection Securities"). The principal value of Treasury
Inflation-Protection Securities is adjusted daily in accordance with changes in
the Consumer Price Index, while interest is calculated on the basis of the
adjusted principal value on the payment date. The principal value of these
securities declines in periods of deflation, but holders at maturity receive no
less than par. If inflation is lower than expected during the period a Portfolio
holds the security, the Portfolio may earn less on the security than on a
conventional bond. Any increase in principal value is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase at that time. Changes in market interest rates from causes other than
inflation will likely affect the price of these securities in the same manner as
more traditional obligations.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent an
interest in a pool of mortgages made by lenders such as commercial banks,
savings and loan institutions, mortgage bankers and others. Mortgage-related
securities may be issued by governmental, government-related or non-governmental
entities, and provide regular payments which consist of interest and, in most
cases, principal. In contrast, other forms of debt securities
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normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. In effect, payments on
mortgage-related securities are a "pass-through" of the payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the issuer
or guarantor of such securities. Additional payments to holders of
mortgage-related securities are caused by repayments resulting from the sale of
the underlying property, refinancing or foreclosure, net of fees or costs which
may be incurred.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
security. Although mortgage-related securities are issued with stated maturities
of up to forty years, unscheduled or early payments of principal and interest on
the underlying mortgages may shorten considerably the securities' effective
maturities. The volume of prepayments of principal on a pool of mortgages
underlying a particular mortgage-related security will influence the yield of
that security, and the principal returned to a Portfolio may be reinvested in
instruments whose yield may be higher or lower than that which might have been
obtained had such prepayments not occurred. When interest rates are declining,
such prepayments usually increase, and reinvestments of such principal
prepayments will be at a lower rate than that on the original mortgage-related
security. An increase in mortgage prepayments could cause the Portfolio to incur
a loss on a mortgage-related security that was purchased at a premium. On the
other hand, a decrease in the rate of prepayments, resulting from an increase in
market interest rates or other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in market
interest rates and potentially increasing the volatility of a Portfolio's
shares. The rate of prepayment may also be affected by general economic
conditions, the location and age of the mortgages, and other social and
demographic conditions. In determining the average maturity or duration of a
mortgage-related security, a Portfolio's Adviser must apply certain assumptions
and projections about the maturity and prepayment of such security; actual
prepayment rates may differ. Because of prepayments, mortgage-related securities
may have less potential for capital appreciation during periods of declining
interest rates than other securities of comparable maturities, although they may
have a similar risk of decline in market value during periods of rising interest
rates.
Most issuers or poolers provide guarantees of payments, regardless of
whether the mortgagor actually makes the payment. The guarantees made by issuers
or poolers are often backed by various forms of credit, insurance and
collateral, although these may be in amounts less than the full obligation of
the pool to its shareholders.
Pools often consist of whole mortgage loans or participations in loans.
The majority of these loans are made to purchasers of one- to four-family homes.
The terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Portfolios may purchase pools of variable-rate
mortgages, growing-equity mortgages, graduated-payment mortgages and other
types.
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All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For example,
securities issued by the Government National Mortgage Association ("GNMA") tend
to have a longer average life than participation certificates ("PCs") issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency
for the conventional and privately-insured mortgages underlying FHLMC PCs to
repay at faster rates than the Federal Housing Administration and Veterans
Administration loans underlying GNMAs. In addition, the term of a security may
be shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
In determining the dollar-weighted average maturity of a Portfolio, the
Portfolio's Adviser will follow industry practice in assigning an average life
to the mortgage-related securities held by each Portfolio unless the interest
rate on the mortgages underlying the securities is such that a different
prepayment rate is likely. For example, if a GNMA has a high interest rate
relative to the market, that GNMA is likely to have a shorter overall maturity
than a GNMA with a market rate coupon. Moreover, Western Asset may deem it
appropriate to change the projected average life for a Portfolio's
mortgage-related securities as a result of fluctuations in market interest rates
and other factors.
Yields on mortgage-related securities are typically quoted based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
yield expected on the basis of average life. Reinvestment of the prepayments may
occur at higher or lower interest rates than the original investment, thus
affecting the yield of the Portfolio. The compounding effect from reinvestments
of monthly payments received by each Portfolio will increase the yield to
shareholders compared to bonds that pay interest semi-annually.
GOVERNMENT MORTGAGE-RELATED SECURITIES. GNMA is the principal federal
government guarantor of mortgage-related securities. GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA pass-through securities are considered to have a relatively low risk of
default in that (1) the underlying mortgage loan portfolio is comprised entirely
of government-backed loans and (2) the timely payment of both principal and
interest on the securities is guaranteed by the full faith and credit of the
U.S. Government, regardless of whether they have been collected. GNMA
pass-through securities are, however, subject to the same market risk as
comparable debt securities.
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Therefore, the effective maturity and market value of a Portfolio's GNMA
securities can be expected to fluctuate in response to changes in interest rate
levels.
Residential mortgage loans are also pooled by Freddie Mac, a corporate
instrumentality of the U.S. Government. The mortgage loans in Freddie Mac's
portfolio are not government backed; Freddie Mac, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of principal
on Freddie Mac securities. Freddie Mac also issues guaranteed mortgage
certificates, on which it guarantees semiannual interest payments and a
specified minimum annual payment of principal.
Fannie Mae is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. Fannie Mae purchases residential mortgages from a
list of approved seller/servicers, which include savings and loan associations,
savings banks, commercial banks, credit unions and mortgage bankers.
Pass-through securities issued by Fannie Mae are guaranteed as to timely payment
of principal and interest only by Fannie Mae, not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related
securities offered by private issuers include pass-through securities comprised
of pools of residential mortgage loans; mortgage-backed bonds which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs") which are collateralized by mortgage-related securities
issued by Freddie Mac, Fannie Mae or GNMA or by pools of mortgages.
CMOs are typically structured with classes or series which have
different maturities and are generally retired in sequence. Each class of
obligations receives periodic interest payments according to the coupon rate on
the obligations. However, all monthly principal payments and any prepayments
from the collateral pool are generally paid first to the "Class 1" holders.
Thereafter, all payments of principal are generally allocated to the next most
senior class of obligations until that class of obligations has been fully
repaid. Although full payoff of each class of obligations is contractually
required by a certain date, any or all classes of obligations may be paid off
sooner than expected because of an increase in the payoff speed of the pool.
Other allocation methods may be used. Payment of interest or principal on some
classes or series of a CMO may be subject to contingencies or some classes or
series may bear some or all of the risk of default on the underlying mortgages.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-related
securities because there are no direct or indirect government guarantees of
payment in the former securities, resulting in higher risks. Where privately
issued securities are collateralized by securities issued by Freddie Mac, Fannie
Mae or GNMA, the timely payment of interest and principal is supported by the
government-
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related securities collateralizing such obligations. The market for conventional
pools is smaller and less liquid than the market for the government and
government- related mortgage pools.
Certain private mortgage pools are organized in such a way that the SEC
staff considers them to be closed-end investment companies. Each Portfolio's
investment in such pools is constrained by federal statute, which restricts
investments in the shares of other investment companies.
The private mortgage-related securities in which the Portfolios may
invest include foreign mortgage pass-through securities ("Foreign
Pass-Throughs"), which are structurally similar to the pass-through instruments
described above. Such securities are issued by originators of and investors in
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment bankers, specialized financial institutions and
special purpose subsidiaries of the foregoing. Foreign Pass-Throughs usually are
backed by a pool of fixed rate or adjustable-rate mortgage loans. Certain
Foreign Pass-Throughs in which the Portfolios invest typically are not
guaranteed by an entity having the credit status of GNMA, but generally utilize
various types of credit enhancement.
ASSET-BACKED SECURITIES. Asset-backed securities refer to securities
that directly or indirectly represent a participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements.
Such assets are securitized through the use of trusts or special
purpose corporations. Asset-backed securities are backed by a pool of assets
representing the obligations often of a number of different parties. Certain of
such securities may be illiquid.
The principal on asset-backed securities, like that on mortgage-backed
securities, may be prepaid at any time. As a result, if such securities are
purchased at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect. Conversely, if the securities are purchased at a
discount, prepayments faster than expected will increase yield to maturity and
prepayments slower than expected will decrease it. Accelerated prepayments also
reduce the certainty of the yield because the Portfolio must reinvest the assets
at the then-current rates. Accelerated prepayments on securities purchased at a
premium also impose a risk of loss of principal. On the other hand, a decrease
in the rate of prepayments may extend the effective maturities of the
securities, increasing their sensitivity to changes in market interest rates and
potentially increasing the volatility of a Portfolio's shares. The rate of
prepayment may also be affected by general economic conditions and other social
and demographic conditions.
Each type of asset-backed security also entails unique risks depending
on the type of assets involved and the legal structure used. For example, credit
card receivables are generally unsecured obligations of the credit card holder
and the debtors are entitled to the protection of a
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number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There have also been proposals to cap the interest
rate that a credit card issuer may charge. In some transactions, the value of
the asset-backed security is dependent on the performance of a third party
acting as credit enhancer or servicer. Furthermore, in some transactions (such
as those involving the securitization of vehicle loans or leases) it may be
administratively burdensome to perfect the interest in the underlying
collateral, and the underlying collateral may become damaged or stolen. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities. Because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of the market cycle is
not certain.
MUNICIPAL OBLIGATIONS. Municipal obligations include obligations issued
to obtain funds for various public purposes, including constructing a wide range
of public facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which municipal
obligations may be issued include the refunding of outstanding obligations, the
obtaining of funds for general operating expenses and the making of loans to
other public institutions and facilities. In addition, certain types of
industrial development bonds ("IDBs") and private activity bonds ("PABs") are
issued by or on behalf of public authorities to finance various privately
operated facilities, including certain pollution control facilities, convention
or trade show facilities, and airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term maturity
in anticipation of the receipt of tax payments, the proceeds of bond placements
or other revenues. Municipal obligations also include municipal lease
obligations and certificates of participation. Municipal lease obligations,
which are issued by state and local governments to acquire land, equipment and
facilities, typically are not fully backed by the municipality's credit, and, if
funds are not appropriated for the following year's lease payments, a lease may
terminate, with the possibility of default on the lease obligation and
significant loss to the Portfolio. Certificates of participation are
participations in municipal lease obligations or installment sales contracts.
Each certificate represents a proportionate interest in or right to the payments
made.
The two principal classifications of municipal obligations are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by the
issuer's pledge of its faith, credit
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and taxing power. "Revenue" bonds are payable only from the revenues derived
from a particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate user
of the facility being financed. IDBs and PABs are usually revenue bonds and are
not payable from the unrestricted revenues of the issuer. The credit quality of
IDBs and PABs is usually directly related to the credit standing of the
corporate user of the facilities.
The ability of state, county or local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their fiscal conditions generally. The amounts of
tax and other revenues available to governmental issuers may be affected from
time to time by economic, political and demographic conditions within or outside
of the particular state. In addition, constitutional or statutory restrictions
may limit a government's power to raise revenues or increase taxes. The
availability of federal, state and local aid to issuers of municipal securities
may also affect their ability to meet their obligations. Payments of principal
and interest on revenue bonds will depend on the economic condition of the
facility or specific revenue source from whose revenues the payments will be
made. The facility's economic status, in turn, could be affected by economic,
political and demographic conditions affecting the particular state.
CORPORATE DEBT SECURITIES. A Portfolio may invest in debt securities
(i.e., bonds, debentures, notes and other similar debt instruments) of domestic
or foreign non-governmental issuers which meet the minimum credit quality
criteria, if any, set forth for the Portfolio. Corporate debt securities may pay
fixed or variable rates of interest, or interest at a rate contingent upon some
other factor, such as the price of some commodity. These securities may include
warrants, may be convertible into preferred or common equity, or may be bought
as part of a unit containing common stock.
LOWER-RATED SECURITIES. Non-investment grade securities, i.e.,
securities rated below Baa by Moody's or BBB by S&P or comparable ratings of
other NRSROs or unrated securities of comparable quality, are described as
"speculative" by Moody's and S&P and may be subject to greater market
fluctuations and greater risk of loss of income or principal, including a
greater possibility of default or bankruptcy of the issuer of such securities,
than are more highly rated debt securities. Such securities are commonly
referred to as "junk bonds." A Portfolio's Adviser seeks to minimize the risks
of investing in all securities through diversification, in-depth credit analysis
and attention to current developments in interest rates and market conditions
and will monitor the ratings of securities held by the Portfolios and the
creditworthiness of their issuers. If the rating of a security in which a
Portfolio has invested falls below the minimum rating in which the Portfolio is
permitted to invest, the Portfolio will either dispose of that security within a
reasonable time or hold the security for so long as the Portfolio's Adviser
determines appropriate for that Portfolio, having due regard for market
conditions, tax implications and other applicable factors. See the Appendix to
the Prospectus for a description of the ratings assigned to fixed income
securities by the rating agencies.
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A debt security may be callable, i.e., subject to redemption at the
option of the issuer at a price established in the security's governing
instrument. If a debt security held by a Portfolio is called for redemption, the
Portfolio will be required to permit the issuer to redeem the security or sell
it to a third party. Either of these actions could have an adverse effect on a
Portfolio's ability to achieve its investment objective because, for example,
the Portfolio may be able to reinvest the proceeds only in securities with lower
yields or may receive a price upon sale that is lower than it would have
received in the absence of the redemption.
The market for lower-rated securities has expanded rapidly in recent
years. This growth has paralleled a long economic expansion. At certain times in
the past, the prices of many lower-rated securities declined, indicating
concerns that issuers of such securities might experience financial
difficulties. At those times, the yields on lower-rated securities rose
dramatically, reflecting the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuers' financial
restructuring or default. There can be no assurance that such declines will not
recur.
The ratings of Moody's and S&P represent the opinions of those agencies
as to the quality of the debt securities which they rate. Such ratings are
relative and subjective, and are not absolute standards of quality. Unrated debt
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers. If securities are rated investment
grade by one rating organization and below investment grade by the other, a
Portfolio's investment adviser may rely on the rating that it believes is more
accurate. Each Portfolio's Adviser will consider a security's quality and credit
rating when determining whether such security is an appropriate investment.
Subject to its investment objective, policies and applicable law, a Portfolio
may purchase a security with the lowest rating.
Where one of the NRSROs has assigned an investment grade rating to an
instrument and others have given it a lower rating, the Portfolios may consider
the instrument to be investment grade. The market for lower-rated securities may
be thinner and less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be sold, and may make
it difficult for a Portfolio to obtain market quotations daily. If market
quotations are not available, these securities will be valued by a method that
the Portfolios' Boards of Directors believe accurately reflects fair market
value. Judgment may play a greater role in valuing lower-rated debt securities
than is the case with respect to securities for which a broader range of dealer
quotations and last-sale information is available. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower-rated securities, especially in a
thinly traded market.
Although the prices of lower-rated bonds are generally less sensitive
to interest rate changes than are higher-rated bonds, the prices of lower-rated
bonds may be more sensitive to adverse economic changes and developments
regarding the individual issuer. Although the market for lower-rated debt
securities is not new, and the market has previously weathered economic
downturns, there has been in recent years a substantial increase in the use of
such
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securities to fund corporate acquisitions and restructurings. Accordingly, the
past performance of the market for such securities may not be an accurate
indication of its performance during future economic downturns or periods of
rising interest rates. When economic conditions appear to be deteriorating,
medium- to lower-rated securities may decline in value due to heightened concern
over credit quality, regardless of the prevailing interest rates. Investors
should carefully consider the relative risks of investing in high yield
securities and understand that such securities are not generally meant for
short-term investing.
Adverse economic developments can disrupt the market for lower-rated
securities, and severely affect the ability of issuers, especially highly
leveraged issuers, to service their debt obligations or to repay their
obligations upon maturity which may lead to a higher incidence of default on
such securities. Lower-rated securities are especially affected by adverse
changes in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also experience
financial stress during periods of rising interest rates. In addition, the
secondary market for lower-rated securities, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, a Portfolio could find it more difficult to sell
these securities or may be able to sell the securities only at prices lower than
if such securities were widely traded. Therefore, prices realized upon the sale
of such lower rated or unrated securities, under these circumstances, may be
less than the prices used in calculating a Portfolio's net asset value.
Lower-rated or unrated debt obligations also present risks based on
payment expectations. If an issuer calls an obligation for redemption, the
Portfolio may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. If a Portfolio experiences
unexpected net redemptions, it may be forced to sell its higher-rated
securities, resulting in a decline in the overall credit quality of the
Portfolio's investment portfolio and increasing the exposure of the Portfolio to
the risks of lower-rated securities.
STRIPPED SECURITIES. Stripped securities are created by separating
bonds into their principal and interest components and selling each piece
separately (commonly referred to as IOs and POs). The yield to maturity on an IO
or PO class of stripped mortgage-backed securities is extremely sensitive not
only to changes in prevailing interest rates but also to the rate of principal
payments (including prepayments) on the underlying assets. A rapid rate of
principal prepayments may have a measurably adverse effect on a Portfolio's
yield to maturity to the extent it invests in IOs. If the assets underlying the
IOs experience greater than anticipated prepayments of principal, the Portfolio
may fail to recoup fully its initial investment in these securities. Conversely,
POs tend to increase in value if prepayments are greater than anticipated and
decline if prepayments are slower than anticipated. The secondary market for
stripped mortgage-backed securities may be more volatile and less liquid than
that for other mortgage-backed securities, potentially limiting a Portfolio's
ability to buy or sell those securities at any particular time.
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ZERO COUPON AND PAY-IN-KIND SECURITIES. A zero coupon bond is a
security that makes no fixed interest payments but instead is sold at a discount
from its face value. The bond is redeemed at its face value on the specified
maturity date. Zero coupon bonds may be issued as such, or they may be created
by a broker who strips the coupons from a bond and separately sells the rights
to receive principal and interest. The prices of zero coupon bonds tend to
fluctuate more in response to changes in market interest rates than do the
prices of interest-paying debt securities with similar maturities. A Portfolio
investing in zero coupon bonds generally accrues income on such securities prior
to the receipt of cash payments. Since each Portfolio must distribute
substantially all of its income to shareholders to qualify as a regulated
investment company under federal income tax law, a Portfolio investing in zero
coupon bonds may have to dispose of other securities to generate the cash
necessary for the distribution of income attributable to its zero coupon bonds.
Pay-in-kind securities have characteristics similar to those of zero coupon
securities, but interest on such securities may be paid in the form of
obligations of the same type rather than cash.
COMMERCIAL PAPER AND OTHER SHORT-TERM INVESTMENTS
Each of the Portfolios may invest or hold cash or other short-term
investments, including commercial paper. Commercial paper represents short-term
unsecured promissory notes issued in bearer form by banks or bank holding
companies, corporations and finance companies. The Portfolios may purchase
commercial paper issued pursuant to the private placement exemption in Section
4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to
disposition under federal securities laws in that any resale must similarly be
made in an exempt transaction. The Portfolios may or may not regard such
securities as illiquid, depending on the circumstances of each case.
Any Portfolio may also invest in obligations (including certificates of
deposit, demand and time deposits and bankers' acceptances) of U.S. banks and
savings and loan institutions. While domestic bank deposits are insured by an
agency of the U.S. Government, the Portfolios will generally assume positions
considerably in excess of the insurance limits.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The purchase of loan participations and assignments entails special
risks. A Portfolio's ability to receive payments of principal and interest and
other amounts in connection with loan participations and assignments will depend
primarily on the financial condition of the borrower. The failure by the
Portfolio to receive scheduled interest or principal payments on a loan
participation or assignment would adversely affect the income of the Portfolio
and would likely reduce the value of its assets. Because loan participations are
not generally rated by independent credit rating agencies, a decision by a
Portfolio to invest in a particular loan participation will depend almost
exclusively on its Adviser's credit analysis of the borrower. In addition to the
other risks associated with investments in debt securities, participations and
assignments involve the additional risk that the insolvency of any financial
institution interposed between the
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Portfolio and the borrower could delay or prevent the flow of payments from the
borrower on the underlying loan. A Portfolio may have limited rights to enforce
the terms of the underlying loan, and the liquidity of loan participations and
assignments may be limited.
The borrower of a loan in which a Portfolio holds a participation
interest may, either at its own election or pursuant to terms of the loan
documentation, prepay amounts of the loan from time to time. There is no
assurance that the Portfolio will be able to reinvest the proceeds of any loan
prepayment at the same interest rate or on the same terms as those of the
original loan participation.
Corporate loans in which a Portfolio may purchase a loan participation
or assignment are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs, and other corporate
activities. The highly leveraged capital structure of the borrowers in certain
of these transactions may make such loans especially vulnerable to adverse
changes in economic or market conditions.
Certain of the loan participations or assignments acquired by a
Portfolio may involve unfunded commitments of the lenders or revolving credit
facilities under which a borrower may from time to time borrow and repay amounts
up to the maximum amount of the facility. In such cases, the Portfolio would
have an obligation to advance its portion of such additional borrowings upon the
terms specified in the loan documentation.
INDEXED SECURITIES AND STRUCTURED NOTES
The values of indexed securities and structured notes are linked to
currencies, other securities, interest rates, commodities, indices or other
financial indicators ("reference instruments"). These instruments differ from
other types of debt securities in several respects. The interest rate or
principal amount payable at maturity may vary based on changes in one or more
specified reference instruments, such as a floating interest rate compared with
a fixed interest rate or the currency exchange rates between two currencies
(neither of which need be the currency in which the instrument is denominated).
An indexed security or structured note may be positively or negatively indexed;
that is, its value or interest rate may increase or decrease if the value of the
reference instrument increases. Further, the change in the principal amount
payable with respect to, or the interest rate of, an indexed security or
structured note may be a multiple of the percentage change (positive or
negative) in the value of the underlying reference instrument(s).
Investment in indexed securities and structured notes involves certain
risks, including the credit risk of the issuer and the normal risks of price
changes in response to changes in interest rates. Further, in the case of
certain indexed securities or structured notes, a decline in the reference
instrument may cause the interest rate to be reduced to zero, and any further
declines in the reference instrument may then reduce the principal amount
payable on maturity. Finally,
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<PAGE>
these securities may be less liquid than other types of securities, and may be
more volatile than their underlying reference instruments.
FORWARD COMMITMENTS
Each Portfolio may enter into commitments to purchase securities on a
"forward commitment" basis, including purchases on a "when-issued" basis or a
"to be announced" basis. When such transactions are negotiated, certain terms
may be fixed at the time the commitment is made, but delivery and payment for
the securities takes place at a later date. Such securities are often the most
efficiently priced and have the best liquidity in the bond market. During the
period between a commitment and settlement, no payment is made by the purchaser
for the securities purchased and, thus, no interest accrues to the purchaser
from the transaction. In a "to be announced" transaction, a Portfolio commits to
purchase securities for which all specific information is not yet known at the
time of the trade, particularly the exact face amount in forward commitment
mortgage-backed securities transactions.
A Portfolio may sell the securities subject to a forward commitment
purchase, which may result in a gain or loss. When a Portfolio purchases
securities on a forward commitment basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at the
time of receipt. Purchases of forward commitment securities also involve a risk
of loss if the seller fails to deliver after the value of the securities has
risen. Depending on market conditions, a Portfolio's forward commitment
purchases could cause its net asset value to be more volatile.
Each Portfolio may also enter into a forward commitment to sell
securities it owns and will generally do so only with the intention of actually
delivering the securities. The use of forward commitments enables a Portfolio to
hedge against anticipated changes in interest rates and prices. In a forward
sale, a Portfolio does not participate in gains or losses on the security
occurring after the commitment date. Forward commitments to sell securities also
involve a risk of loss if the seller fails to take delivery after the value of
the securities has declined.
Forward commitment transactions involve additional risks similar to
those associated with investments in options and futures contracts. See "Options
and Futures Contracts." It is not expected that any Portfolio's purchases of
forward commitments will at any time exceed, in the aggregate, 20% of that
Portfolio's total assets.
RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when the sale would
otherwise be desirable. No securities for which there is not a readily available
market ("illiquid securities") will be acquired by any Portfolio if such
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<PAGE>
acquisition would cause the aggregate value of illiquid securities to exceed 15%
of the Portfolio's net assets.
Under SEC regulations, certain securities acquired through private
placements can be traded freely among qualified purchasers. The SEC has stated
that an investment company's board of directors, or its investment adviser
acting under authority delegated by the board, may determine that a security
eligible for trading under this rule is "liquid." The Portfolios intend to rely
on this rule, to the extent appropriate, to deem specific securities acquired
through private placement as "liquid." The Boards have delegated to a
Portfolio's Adviser the responsibility for determining whether a particular
security eligible for trading under this rule is "liquid." Investing in these
restricted securities could have the effect of increasing a Portfolio's
illiquidity if qualified purchasers become, for a time, uninterested in buying
these securities.
Restricted securities may be sold only (1) pursuant to SEC Rule 144A or
other exemption, (2) in privately negotiated transactions or (3) in public
offerings with respect to which a registration statement is in effect under the
Securities Act of 1933, as amended. Rule 144A securities, although not
registered in the U.S., may be sold to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933, as amended. Each
Portfolio's Adviser, acting pursuant to guidelines established by its Board of
Directors, may determine that some Rule 144A securities are liquid for purposes
of limitations on the amount of illiquid investments a Portfolio may own. Where
registration is required, a Portfolio may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
Illiquid securities may be difficult to value, and a Portfolio may have
difficulty disposing of such securities promptly. The Portfolios do not consider
foreign securities to be restricted if they can be freely sold in the principal
markets in which they are traded, even if they are not registered for sale in
the U.S.
SECURITIES OF OTHER INVESTMENT COMPANIES
Investments in other investment companies may involve the payment of
substantial premiums above the net asset value of such issuers' portfolio
securities, and the total return on such investments will be reduced by the
operating expenses and fees of such investment companies, including advisory
fees. The Portfolios may invest in both closed-end and open-end investment
companies.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which securities are
acquired from a securities dealer or bank subject to resale at an agreed upon
price and date. The securities are
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<PAGE>
held by a Portfolio as collateral until retransferred and will be supplemented
by additional collateral if necessary to maintain a total market value equal to
or in excess of the value of the repurchase agreement. The Portfolio bears a
risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the collateral securities. A Portfolio also
bears the risk that the proceeds from any sale of collateral will be less than
the repurchase price.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING
A reverse repurchase agreement is a portfolio management technique in
which a Portfolio temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, the Portfolio agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment. While engaging in reverse repurchase agreements, each Portfolio will
maintain cash or securities in a segregated account at its custodian bank with a
value at least equal to the Portfolio's obligation under the agreements,
adjusted daily. Reverse repurchase agreements may expose a Portfolio to greater
fluctuations in the value of its assets and renders the segregated assets
unavailable for sale or other disposition.
The Portfolios may also enter into dollar roll transactions in which a
Portfolio sells a fixed income security for delivery in the current month and
simultaneously contracts to purchase substantially similar (same type, coupon
and maturity) securities at an agreed upon future time. By engaging in the
dollar roll transaction the Portfolio foregoes principal and interest paid on
the security that is sold, but receives the difference between the current sales
price and the forward price for the future purchase. The Portfolio would also be
able to earn interest on the income that is received from the initial sale.
The obligation to purchase securities on a specified future date
involves the risk that the market value of the securities that a Portfolio is
obligated to purchase may decline below the purchase price. In addition, in the
event the other party to the transaction files for bankruptcy, becomes insolvent
or defaults on its obligation, a Portfolio may be adversely affected.
Each Portfolio will limit its investments in reverse repurchase
agreements and other borrowing (including dollar roll transactions) to no more
than one-third of its total assets. To avoid potential leveraging effects of
such borrowing, a Portfolio will not make investments while its borrowing
(including reverse repurchase agreements but excluding dollar rolls) is in
excess of 5% of its total assets. To avoid potential leveraging effects of
dollar rolls, each Portfolio will segregate assets as required by the Investment
Company Act of 1940.
The 1940 Act requires a Portfolio to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of at least 300% of the amount borrowed. If the asset coverage
should decline below 300% as a result of market fluctuations or for other
reasons, a Portfolio may be required to sell some of its holdings within
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<PAGE>
three days to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. Borrowing may increase the effect on net asset value of any increase
or decrease in the market value of the Portfolio.
Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. A Portfolio also may
be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate. The Portfolios may enter into reverse repurchase
agreements and dollar roll transactions as a method of borrowing.
LOANS OF PORTFOLIO SECURITIES
A Portfolio may lend its portfolio securities, provided that cash or
equivalent collateral, equal to at least 100% of the market value of the
securities loaned, is continuously maintained by the borrower with the
Portfolio. During the time securities are on loan, the borrower will pay the
Portfolio an amount equivalent to any dividends or interest paid on such
securities, and the Portfolio may invest the cash collateral and earn additional
income, or it may receive an agreed upon amount of interest income from the
borrower who has delivered equivalent collateral. These loans are subject to
termination at the option of the Portfolio or the borrower. A Portfolio may pay
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent collateral
to the borrower or placing broker. No Portfolio presently expects to have on
loan at any given time securities totaling more than one-third of its net
assets. A Portfolio runs the risk that the counterparty to a loan transaction
will default on its obligation and that the value of the collateral received may
decline before the Portfolio can dispose of it.
DURATION
Duration is a measure of the expected life of a fixed income security
on a cash flow basis. Duration takes the time intervals over which the interest
and principal payments are scheduled and weights each by the present values of
the cash to be received at the corresponding future point in time. For any fixed
income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, a current coupon
bond with a maturity of 3.5 years will have a duration of approximately three
years. In general, the lower the stated or coupon rate of interest of a fixed
income security, the longer its duration; conversely, the higher the stated or
coupon rate of interest of a fixed income security, the shorter its duration.
There may be circumstances under which even duration calculations do
not properly reflect the interest rate exposure of a security. For example,
floating variable rate securities may have final maturities of ten or more
years; however, their interest exposure corresponds to the
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<PAGE>
frequency of the coupon reset. Similarly, many mortgage pass-through securities
may have stated final maturities of 30 years, but current prepayment rates are
more critical in determining the security's interest rate exposure. In these
situations, the Adviser may consider other analytical techniques that
incorporate the economic life of a security into its determination of interest
rate exposure.
PORTFOLIO TURNOVER
While it is impossible to predict portfolio turnover rates, the
turnover rates of the LM Value Institutional Portfolio and the Brandywine Small
Cap Value Portfolio, for the period ended March 31, 1999 on an annualized basis
were 28.6% and 45.1% respectively. The LM Mid Cap Institutional Portfolio, the
Batterymarch Emerging Markets Portfolio, the Batterymarch International Equity
Portfolio and the LM Total Return Institutional Portfolio currently expect that
their average turnover rate will not exceed 100%, 50%, 75% and 100%
respectively.
The length of time a Portfolio has held a particular security is not
generally a consideration in investment decisions. A change in the securities
held by a Portfolio is known as "portfolio turnover." As a result of a
Portfolio's investment policies, under certain market conditions a Portfolio's
portfolio turnover rate may be higher than that of other mutual funds. Portfolio
turnover generally involves some expense to a Portfolio, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. These transactions may result
in realization of taxable capital gains. Higher portfolio turnover rates, such
as those above 100%, are likely to result in higher brokerage commissions or
other transactions costs and could give rise to a greater amount of taxable
capital gains.
ALTERNATIVE INVESTMENT STRATEGIES
At times a Portfolio's Adviser may judge that conditions in the
securities markets make pursuing the Portfolio's typical investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Adviser may temporarily use alternative strategies, primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
defensive strategies, a Portfolio may invest without limit in securities that
the Adviser believes present less risk to a Portfolio, including equity
securities, debt and fixed income securities, preferred stocks, U.S. Government
and agency obligations, cash or money market instruments, or in other securities
the Adviser considers consistent with such defensive strategies. As a result of
these strategies, the Batterymarch Emerging Markets Portfolio and the
Batterymarch International Equity Portfolio may invest up to 100% of their
assets in securities of U.S. issuers. It is impossible to predict when, or for
how long, a Portfolio will use these alternative strategies.
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<PAGE>
NEW INVESTMENT PRODUCTS
New types of mortgage-backed and asset-backed securities, derivative
instruments and hedging instruments are developed and marketed from time to
time. Consistent with its investment limitations, each Portfolio expects to
invest in those new types of securities and instruments that its Adviser
believes may assist the Portfolio in achieving its investment objective.
INVESTMENT POLICIES
The investment objective of each of the Western Asset Core, the Western
Asset Limited Duration, the Western Asset Intermediate and the Western Asset
Money Market Portfolio are "fundamental." Except for investment policies
designated as fundamental in this Prospectus or the SAI, the investment policies
described in this Prospectus and in the SAI are not fundamental policies.
Changes to fundamental investment policies require shareholder approval; the
Directors may change any non-fundamental investment policy without shareholder
approval.
RATINGS OF DEBT OBLIGATIONS
Moody's, S&P and NRSROs are private organizations that provide ratings
of the credit quality of debt obligations. A description of the ratings assigned
to corporate debt obligations by Moody's and S&P is included as Appendix A to
the Prospectus. A Portfolio may consider these ratings in determining whether to
purchase, sell or hold a security. Ratings are not absolute assurances of
quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. Credit rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than the rating
indicates.
REITs
REITs pool investors' funds for investment primarily in income
producing real estate or real estate related loans or interests. Under the
Internal Revenue Code of 1986 (the "Code"), a REIT is not taxed on income it
distributes to its shareholders if it complies with several requirements
relating to its organization, ownership, assets, and income and a requirement
that it generally distribute to its shareholders at least 95% of its taxable
income (other than net capital gains) for each taxable year. REITs can generally
be classified as Equity REITs, Mortgage REITs, and Hybrid REITs. Equity REITs,
which invest the majority of their assets directly in
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<PAGE>
real property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITS
combine the characteristics of both Equity REITs and Mortgage REITs.
While a Portfolio will not generally invest in real estate directly, it
may be subject to risks similar to those associated with the direct ownership of
real estate. These risks include declines in the value of real estate, risks
related to general and local economic conditions, dependency on management
skill, heavy cash flow dependency, possible lack of availability of mortgage
funds, overbuilding, extended vacancies of properties, increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
losses due to costs resulting from the clean-up of environmental problems,
liability to third parties for damages resulting from environmental problems,
casualty or condemnation losses, limitations on rents, changes in neighborhood
values and in the appeal of properties to tenants and changes in interest rates.
In addition to these risks, REITs may be affected by changes in the
value of the underlying property owned by the trusts, or by the quality of any
credit they extend. Further, REITs are dependent upon management skills and
generally may not be diversified. REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, REITs could
possibly fail to qualify for tax-free pass-through of income under the Code or
to maintain their exemptions from registration under the 1940 Act. The above
factors may also adversely affect a borrower's or a lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments. In
addition to the foregoing risks, certain "special purpose" REITs in which a
Portfolio invests may invest their assets in specific real estate sectors, such
as hotel REITs, nursing home REITs or warehouse REITs, and are therefore subject
to the risks associated with adverse developments in any such sectors.
VALUATION OF PORTFOLIO SHARES
As described in the Prospectus, securities owned by any of the
Portfolios for which market quotations are readily available are valued at
current market value. Securities are valued at the last sale price for a
comparable position on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one market, the securities are generally valued on the
market considered by the Adviser as the primary market.
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<PAGE>
Occasionally, events affecting the value of foreign investments occur
between the time at which they are determined and the close of trading on the
Exchange, which events will not be reflected in a computation of a Portfolio's
net asset value on that day. If events materially affecting the value of such
investments occur during such time period, the investments will be valued at
their fair value as determined in good faith by, or under the direction of, the
Board of Directors.
MANAGEMENT OF THE PORTFOLIOS
Directors and Officers
The Fund's officers are responsible for the operation of the Fund under
the direction of its Board of Directors. The officers and Directors of the Fund
and their principal occupations during the past five years are set forth below.
An asterisk (*) indicates Interested Directors.
The business address of Mr. Livingston is 117 Colorado Boulevard,
Pasadena, California 91105. The business address of each officer and Director is
100 Light Street, Baltimore, Maryland 21202, unless otherwise indicated.
Catherine H. Bray, 41, Director; Portfolio Manager, T. Rowe Price, June
1989-May 1996.
*Edmund J. Cashman, 61, Director; Senior Executive Vice President and
Director of Legg Mason, Inc.; Officer and/or Director of various other
affiliates of Legg Mason, Inc.; President or Vice Chairman of the Board and
Director/Trustee of four Legg Mason funds.
*W. Curtis Livingston, III, 53, Director and Vice Chairman; Director of
Western Asset Management Company (investment management firm) ("Western Asset"),
March 1999-present; President, Director and Chief Executive Officer of Western
Asset, December 1980-March 1999; President, Pacific American Income Shares,
Inc.; Director, Legg Mason, Inc.; Director and President, LM Institutional Fund
Advisors I, Inc.; Director and Vice Chairman of LM Institutional Advisors, Inc.
Emmett J. Rice, 78, Director; Governor, Federal Reserve Central Bank,
June 1979-February 1987; Director, Jardine-Fleming China Region Fund, July
1992-present; Director, Albermarle Corporation and Tredegar Industries, Inc.
*Edward A. Taber, 54, Chairman, Director and President; Senior
Executive Vice President of Legg Mason, Inc.; Director of the Legg Mason Value
Trust, Inc., the Legg Mason Total Return Trust, Inc. and the Legg Mason Special
Investment Trust, Inc.; Trustee of the Legg Mason Tax-Free Income Fund and the
Legg Mason Cash Reserve Trust; President of the Legg Mason Income Trust, Inc.,
the Legg Mason Global Trust, Inc., LM Institutional Fund Advisors II, Inc. and
the Legg Mason Investors Trust, Inc.; Director of Western Asset, Western Asset
Global Management, Limited, Bartlett & Co., Batterymarch Financial Management,
Inc., Gray,
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Seifert & Co., Inc. (investment adviser), GSH & Co. Inc. (investment adviser
holding company), Fairfield Group, Inc. (investment adviser), LM Institutional
Advisors, Inc., and Legg Mason Fund Adviser, Inc.; formerly director of Taxable
Fixed Income Division of T. Rowe Price Associates, Inc.
Robert M. Tarola, 48, Director; Senior Vice President and Chief
Financial Officer, Helix Health, Inc., July 1996-present; Partner, Price
Waterhouse LLP, May 1974-June 1996.
Linda R. Taylor, 52, Director.
Marie K. Karpinski, 49, Vice President and Treasurer; Vice President
and Treasurer of twenty-one Legg Mason/Bartlett funds (open-end investment
companies), 1986-present; Vice President and Treasurer of LM Institutional Fund
Advisors I, Inc.; Assistant Treasurer of Pacific American Income Shares, Inc.
(closed-end investment company), 1988-present; Treasurer of Legg Mason Fund
Adviser, Inc., March 1986-present; Vice-President of Legg Mason Wood Walker,
Incorporated., 1992-present; Assistant Vice-President of Legg Mason Wood Walker,
Incorporated, 1989-1992.
Officers and Directors of the Fund who are affiliated persons of the
Manager, the Advisers, LMFA or Legg Mason receive no salary or fees from the
Fund. Each Independent Director receives an annual retainer of $500 per
Portfolio and a per meeting fee of $500 per Portfolio.
The following table provides certain information relating to the
compensation of the Fund's Directors and senior executive officers.
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------- --------------------------------------
Aggregate Compensation From the Fund
Name of Person and Position Total Compensation From the Fund* and Complex Paid to Directors**
- ------------------------------------------ ---------------------------------- --------------------------------------
<S> <C> <C>
Catherine H. Bray
Director $13,125 $13,125
- ------------------------------------------ ---------------------------------- --------------------------------------
Edmund J. Cashman
Director 0 0
- ------------------------------------------ ---------------------------------- --------------------------------------
W. Curtis Livingston, III Director 0 0
- ------------------------------------------ ---------------------------------- --------------------------------------
Emmett J. Rice
Director $13,125 $13,125
- ------------------------------------------ ---------------------------------- --------------------------------------
Edward A. Taber III
Director and President 0 0
- ------------------------------------------ ---------------------------------- --------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------- --------------------------------------
<S> <C> <C>
Robert M. Tarola
Director $ 6,125 $ 6,125
- ------------------------------------------ ---------------------------------- --------------------------------------
Linda R. Taylor
Director $13,125 $13,125
- ------------------------------------------ ---------------------------------- --------------------------------------
</TABLE>
*Represents fees paid to each person during the fiscal period ended March 31,
1999.
**Represents aggregate compensation paid to each person during the fiscal period
ended March 31, 1999.
- --------------------------------------------------------------------------------
Manager and Advisers
The Manager. The Manager, a wholly owned subsidiary of Legg Mason,
Inc., a financial services holding company, serves as investment manager to the
Portfolios of the Fund under separate Investment Management Agreements dated
June 3, 1998 between the Manager and the Fund (the "Management Agreements"). The
Management Agreements were most recently approved by the Board of Directors,
including a majority of Independent Directors, on March 27, 1998, other than the
LM Total Return Institutional Portfolio, which was most recently approved by the
Board of Directors, including a majority of Independent Directors, on May 29,
1998.
Under the Management Agreement, the Manager is responsible, subject to
the general supervision of the Fund's Board of Directors, for the actual
management of the Fund's assets, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security,
consistent with the investment objectives and policies described in the
Prospectus and this Statement of Additional Information. The Manager also is
responsible for the compensation of Directors and officers of the Fund who are
employees of the Manager or its affiliates. The Manager receives for its
services a fee as described in the Prospectus. As noted below, the Manager has
delegated responsibility for the selection of the Fund's investments to the
Advisers.
Each Portfolio pays all of its other expenses which are not assumed by
the Manager. These expenses include, among others, expenses of preparing and
printing prospectuses, statements of additional information, proxy statements
and reports and of distributing them to existing shareholders, custodian
charges, transfer agency fees, organizational expenses, compensation of the
Directors who are not "interested persons" of the Manager, or its affiliates, as
that term is defined in the 1940 Act, legal and audit expenses, insurance
expenses, expenses of registering and qualifying shares of the Portfolios for
sale under federal and state law, Rule 12b-1 fees, governmental fees, expenses
incurred in connection with membership in investment company organizations,
interest expense, taxes and brokerage fees and commissions. The Portfolios also
are liable for such nonrecurring expenses as may arise, including litigation to
which a Portfolio or the Fund may be a party. The Fund may also have an
obligation to indemnify its Directors and officers with respect to litigation.
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<PAGE>
Under the Management Agreement, the Manager will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Portfolios
in connection with the performance of the Management Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
The Management Agreement terminates automatically upon assignment and
is terminable with respect to any Portfolio at any time without penalty by vote
of the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by the Manager, on not less than 60 days'
notice to the Fund, and may be terminated immediately upon the mutual written
consent of the Manager and the Fund.
For the period ended March 31, 1999, the Manager has received $62,027
(and had fees waived of $78,094) and $0 (and had fees waived of $7,607 and
additional reimbursements of $58,187)for the LM Value Institutional Portfolio
and the Brandywine Small Cap Value Portfolio, respectively.
Advisers
LMFA. LMFA, a wholly owned subsidiary of Legg Mason, Inc., serves as
Adviser to the LM Value Institutional Portfolio, the LM Mid Cap Institutional
Portfolio and the LM Total Return Institutional Portfolio under separate
Investment Advisory Agreements dated June 3, 1998 between LMFA and the Manager
(the "LMFA Advisory Agreements"). The LMFA Advisory Agreements were most
recently approved by the Board of Directors, including a majority of the
Independent Directors, on March 27, 1998, other than for the LM Total Return
Institutional Portfolio, which was most recently approved by the Board of
Directors, including a majority of Independent Directors, on May 29, 1998.
Under the LMFA Advisory Agreement, LMFA is responsible, subject to the
general supervision of the Fund's Board of Directors and the Manager, for the
actual management of the Portfolios' assets, including the responsibility for
making decisions and placing orders to buy, sell or hold a particular security,
consistent with the investment objectives and policies described in the
Prospectus and this Statement of Additional Information. LMFA receives from the
Manager for its services an advisory fee as described in the Prospectus.
Under the LMFA Advisory Agreement, LMFA will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Portfolios
in connection with the performance of the LMFA Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
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<PAGE>
The LMFA Advisory Agreement terminates automatically upon assignment
and is terminable with respect to any Portfolio at any time without penalty by
vote of the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by LMFA, on not less than 60 days' notice, and
may be terminated immediately upon the mutual written consent of the parties.
Brandywine. Brandywine, a wholly owned subsidiary of Legg Mason, Inc.,
serves as the Adviser to the Brandywine Small Cap Value Portfolio under an
Investment Advisory Agreement dated June 3, 1998 between Brandywine and the
Manager (the "Brandywine Advisory Agreement"). The Brandywine Advisory Agreement
was most recently approved by the Board of Directors, including a majority of
the Independent Directors, on March 27, 1998.
Under the Brandywine Advisory Agreement, Brandywine is responsible,
subject to the general supervision of the Fund's Board of Directors and the
Manager, for the actual management of the Portfolios' assets, including the
responsibility for making decisions and placing orders to buy, sell or hold a
particular security, consistent with the investment objectives and policies
described in the Prospectus and this Statement of Additional Information.
Brandywine also is responsible for the compensation of Directors and officers of
the Fund who are employees of Brandywine or its affiliates. Brandywine receives
from the Manager for its services to the Portfolios' an advisory fee as
described in the Prospectus.
Under the Brandywine Advisory Agreement, Brandywine will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Portfolios in connection with the performance of the Brandywine Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations or duties thereunder.
The Brandywine Advisory Agreement terminates automatically upon
assignment and is terminable with respect to the Portfolio at any time without
penalty by vote of the Fund's Board of Directors, by vote of a majority of the
Portfolio's outstanding voting securities, or by Brandywine, on not less than 60
days' notice, and may be terminated immediately upon the mutual written consent
of the parties.
Batterymarch. Batterymarch, a wholly owned subsidiary of Legg Mason,
Inc., serves as the Adviser to the Batterymarch Emerging Markets Portfolio and
the Batterymarch International Equity Portfolio under separate Investment
Advisory Agreements dated June 3, 1998 between Batterymarch and the Manager (the
"Batterymarch Advisory Agreements"). The Batterymarch Advisory Agreements were
most recently approved by the Board of Directors, including a majority of the
Independent Directors, on March 27, 1998.
Under the Batterymarch Advisory Agreement, Batterymarch is responsible,
subject to the general supervision of the Fund's Board of Directors and the
Manager, for the actual
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management of the Portfolios' assets, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security,
consistent with the investment objectives and policies described in the
Prospectus and this Statement of Additional Information. Batterymarch also is
responsible for the compensation of Directors and officers of the Fund who are
employees of Batterymarch or its affiliates. Batterymarch receives from the
Manager for its services to the Portfolios' an advisory fee as described in the
Prospectus.
Under the Batterymarch Advisory Agreement, Batterymarch will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolios in connection with the performance of the Batterymarch Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations or duties thereunder.
The Batterymarch Advisory Agreement terminates automatically upon
assignment and is terminable with respect to any Portfolio at any time without
penalty by vote of the Fund's Board of Directors, by vote of a majority of that
Portfolio's outstanding voting securities, or by Batterymarch, on not less than
60 days' notice, and may be terminated immediately upon the mutual written
consent of the parties.
Distributor
Legg Mason, 100 Light Street, P.O. Box 1476, Baltimore, MD 21203-1476,
acts as distributor of the Fund's shares pursuant to an Underwriting Agreement
with the Fund dated June 3, 1998 (the "Underwriting Agreement").
Legg Mason is not obligated to sell any specific amount of Fund shares
and receives no compensation pursuant to the Underwriting Agreement. The
Underwriting Agreement is terminable with respect to any Portfolio without
penalty, at any time, by vote of a majority of the Fund's Independent Directors,
or by vote of the holders of a majority of the shares of that Portfolio, or by
Legg Mason upon 60 days' notice to the Fund.
The Fund has adopted a Plan for each Portfolio which, among other
things, permits the Fund to pay Legg Mason fees for its services related to
sales and distribution of Financial Intermediary Class shares and the provision
of ongoing services to Financial Intermediary Class shareholders. Payments are
made only from assets attributable to Financial Intermediary Class shares. Under
the Plan, the aggregate fees may not exceed an annual rate of 0.40% of each
Portfolio's average daily net assets attributable to Financial Intermediary
Class shares. Payments under the Plan are currently limited to 0.25% of average
daily net assets. The Board of Directors may increase the limit up to 0.40% of
average daily net assets as provided by the Plan without obtaining shareholder
approval. Distribution activities for which such payments may be made include,
but are not limited to, compensation to persons who engage in or support
distribution and redemption of Shares, printing of prospectuses and reports for
persons other than existing
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<PAGE>
shareholders, advertising, preparation and distribution of sales literature,
overhead, travel and telephone expenses, all with respect to Financial
Intermediary Class shares only.
The Plan was approved by the sole shareholder of the Financial
Intermediary Class of each Portfolio on June 3, 1998. Legg Mason may pay all or
a portion of the fee to its investment executives.
The Plan will continue in effect only so long as it is approved at
least annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting securities of the Financial Intermediary Class shares. Any change in the
Plan that would materially increase the distribution cost to a Portfolio
requires shareholder approval; otherwise the Plan may be amended by the
Directors, including a majority of the 12b-1 Directors, as previously described.
The Plan was most recently approved on June 3, 1998.
In accordance with Rule 12b-1, the Plan provides that Legg Mason will
submit to the Fund's Board of Directors, and the Directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.
For the fiscal period ended March 31, 1999, the LM Value Institutional
Portfolio and the Brandywine Small Cap Value Portfolio paid Legg Mason $15,579
and $0, respectively in distribution and service fees under the Plan from assets
attributable to Financial Intermediate Class shares. During the period ended
March 31, 1999 Legg Mason incurred the following expenses with respect to
Financial Intermediate Class shares:
<TABLE>
<CAPTION>
- ------------------------------------ --------------------------------------- ---------------------------------------
LM Value Institutional Brandywine Small Cap Value
- ------------------------------------ --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
Advertising, printing and mailing
prospectuses to prospective
shareholders $0 $0
- ------------------------------------ --------------------------------------- ---------------------------------------
Compensation to underwriters $0 $0
- ------------------------------------ --------------------------------------- ---------------------------------------
Compensation to broker-dealers $15,679 $0
- ------------------------------------ --------------------------------------- ---------------------------------------
Compensation to sales personnel $0 $0
- ------------------------------------ --------------------------------------- ---------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------ ---------------------------------- --------------------------------------
Interest, carrying or other
financial charges $0 $0
- ------------------------------------ --------------------------------------- ---------------------------------------
Other $0 $0
- ------------------------------------ --------------------------------------- ---------------------------------------
Total Expenses $15,679 $0
- ------------------------------------ --------------------------------------- ---------------------------------------
</TABLE>
PURCHASES AND REDEMPTIONS
The Fund reserves the right to modify the mail, telephone or wire
redemption services or to terminate the telephone or wire redemption services
described in the Prospectus at any time without prior notice to shareholders.
The Fund also reserves the right to suspend or postpone redemptions (1) for any
period during which the Exchange is closed (other than for customary weekend and
holiday closings), (2) when trading in markets the Fund normally utilizes is
restricted or an emergency, as defined by rules and regulations of the SEC,
exists, making disposal of the Fund's investments or determination of its net
asset value not reasonably practicable, or (3) for such other periods as the SEC
by regulation or order may permit for the protection of the Fund's shareholders.
The Fund agrees to redeem shares of each Portfolio solely in cash up to
the lesser of $250,000 or 1% of the relevant Portfolio's net assets during any
90-day period for any one shareholder. In consideration of the best interests of
the remaining shareholders, the Fund reserves the right to pay any redemption
price exceeding this amount in whole or in part by a distribution in kind of
readily marketable securities held by a Portfolio in lieu of cash. It is highly
unlikely that shares would ever be redeemed in kind. If shares are redeemed in
kind, however, the redeeming shareholder should expect to incur transaction
costs upon the disposition of the securities received in the distribution.
EXCHANGE PRIVILEGE
Shareholders in any of the Portfolios are entitled to exchange their
shares for shares of the other Portfolios or of the portfolios of LM
Institutional Fund Advisors I, Inc., provided that such shares are eligible for
sale in the shareholder's state of residence, and are being offered at the time.
When a shareholder decides to exchange shares of a Portfolio, the
Fund's transfer agent will redeem shares of the Portfolio and invest the
proceeds in shares of the Portfolio selected. Redemptions of shares of the
Portfolio will be made at their net asset value determined on the same day that
the request is received in proper order, if received before the close of regular
trading on the Exchange. If the request is received by the transfer agent after
such close of regular trading, shares will be redeemed at their net asset value
determined as of the close of the Exchange on the next day the Exchange is open.
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<PAGE>
There is no charge for the exchange privilege and no sales charge
imposed on an exchange, but the Portfolios reserve the right to modify or
terminate the exchange privilege at any time. For more information concerning
the exchange privilege, or to make an exchange, please contact the Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the various Management Agreements and Advisory Agreements, the
Manager and the Advisers are responsible for the execution of the Portfolios'
transactions. In selecting brokers or dealers, the Advisers must seek the most
favorable price (including the applicable dealer spread) and execution for such
transactions, subject to the possible payment as described below of higher
brokerage commissions or spreads to brokers or dealers who provide research and
analysis. The Portfolios may not always pay the lowest commission or spread
available. Rather, in placing orders on behalf of the Portfolios, the Advisers
will also take into account such factors as size of the order, difficulty of
execution, efficiency of the executing broker's or dealer's facilities
(including the services described below) and any risk assumed by the executing
broker or dealer.
Consistent with the policy of obtaining most favorable price and
execution, an Adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to the Adviser for its use, may place
orders with brokers or dealers who provide supplemental investment and market
research and securities and economic analysis, and may pay to those brokers or
dealers a higher brokerage commission or spread than may be charged by other
brokers or dealers. Such research, analysis and other services may be useful to
an Adviser in connection with services to clients other than the Portfolios. An
Adviser's fee is not reduced by reason of its receiving such brokerage and
research services.
The Portfolios may not buy securities from, or sell securities to, an
Adviser or its affiliated persons as principal, except as permitted by the rules
and regulations of the SEC. Subject to certain conditions, the Portfolios may
purchase securities that are offered in underwritings in which an affiliate of
an Adviser is a participant, although the Portfolios may not make such purchases
directly from such affiliate.
The Advisers will select brokers to execute portfolio transactions. In
the over-the-counter market, the Portfolios generally will deal with responsible
primary market-makers unless a more favorable execution can otherwise be
obtained.
Investment decisions for the Portfolios are made independently from
those of other funds and accounts advised by the Advisers. However, the same
security may be held in the portfolios of more than one fund or account. When
two or more accounts simultaneously engage in the purchase or sale of the same
security, the prices and amounts will be equitably allocated to each account. In
some cases, this procedure may adversely affect the price or quantity of the
security available to a particular account. In other cases, however, an
account's ability to participate in
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larger volume transactions may produce better executions and prices. During the
fiscal period ended March 31, 1999 the LM Value Institutional Portfolio and the
Brandywine Small Cap Value Portfolio paid $122,652 and $9,266, respectively, in
brokerage commissions on transactions. No brokerage commissions were paid by any
Portfolio to affiliated persons.
ADDITIONAL TAX INFORMATION
General Requirements for "Pass-Through" Treatment
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, each Portfolio must distribute annually to its
shareholders at least 90% of its investment company taxable income (consisting
generally of net investment income and net short-term capital gain, if any) and
must meet several additional requirements. With respect to each Portfolio, these
requirements include the following: (1) the Portfolio must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or other income (including but not limited to gains from options or
futures ) derived with respect to its business of investing in securities
("Income Requirement"); (2) at the close of each quarter of the Portfolio's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. Government securities, securities of other
regulated investment companies and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Portfolio's total assets and not 10% of the outstanding voting
securities of such issuer; and (3) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of its total assets may be invested
in securities (other than U.S. Government securities and securities of other
regulated investment companies) of any one issuer and two or more issuers which
the Portfolio controls and which are engaged in the same, similar, or related
trades or businesses.
If a Portfolio fails to distribute in a calendar year substantially all
of its ordinary income for such year and substantially all of its capital gain
net income for the one-year period ending October 31 (or later if the Portfolio
is permitted and so elects), plus any retained amount from the prior year, the
Portfolio will be subject to a 4% excise tax on the undistributed amounts. A
distribution declared by a Portfolio in October, November or December of any
year and payable to shareholders of record on a date in such months will be
deemed to have been paid by the Portfolio and received by the shareholders on
December 31 if the distribution is paid by the Portfolio during the following
January. Such a distribution, therefore, will be taxable to shareholders for the
year in which that December 31 falls. Each Portfolio intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax.
Original Issue Discount
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A Portfolio may purchase debt securities issued with original issue
discount. Original issue discount that accrues in a taxable year will be treated
as income earned by the Portfolio and therefore an equivalent amount must be
distributed to satisfy the distribution requirement and avoid imposition of the
4% excise tax. Because the original issue discount earned by a Portfolio in a
taxable year may not be represented by cash income, the Portfolio may have to
dispose of other securities and use the proceeds thereof to make distributions
in amounts necessary to satisfy those distribution requirements. A Portfolio may
realize capital gains or losses from such dispositions, which would increase or
decrease the Portfolio's investment company taxable income and/or net capital
gain.
Miscellaneous
If a Portfolio invests in shares of preferred stock or otherwise holds
dividend-paying securities as a result of exercising a conversion privilege, a
portion of the dividends from the Portfolio's investment company taxable income
(whether paid in cash or reinvested in additional shares) may be eligible for
the dividends-received deduction allowed to corporations that meet certain
holding period requirements. The eligible portion may not exceed the aggregate
dividends received by the Portfolio from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax.
Dividends and interest received by a Portfolio, and gains realized by a
Portfolio on foreign securities, may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions that would reduce the
yield on the Portfolio's securities. Tax conventions between certain countries
and the United States may reduce or eliminate these foreign taxes, however, and
foreign countries generally do not impose taxes on capital gains in respect of
investments by foreign investors.
OTHER INFORMATION
LMIFA II was incorporated in Maryland on January 13, 1998. Each
Portfolio is an open-end, diversified management company. The Directors of LMIFA
II may, without shareholder approval, create, in addition to the Portfolios,
other series of shares representing separate investment portfolios. Any such
series may be divided without shareholder approval into two or more classes of
shares having such terms as the Directors may determine. Establishment and
offering of additional portfolios or classes of shares of a portfolio will not
alter the rights of the Fund's shareholders.
LMIFA II has a total of [7] billion shares of common stock at par value
$0.001. Each share has one vote, with fractional shares voting proportionally.
Voting on matters pertinent only to a particular Portfolio, such as the adoption
of an investment advisory contract for that Portfolio, is limited to that
Portfolio's shareholders. Shares of all classes of a Portfolio will vote
together as a single class except when otherwise required by law or as
determined by the
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Directors. Shares are freely transferable, are entitled to dividends as declared
by the Directors, and, if a Portfolio were liquidated, would receive the net
assets of that Portfolio. Voting rights are not cumulative, and all shares of
the Portfolios are fully paid and nonassessable and have no preemptive or
conversion rights.
Although no Portfolio intends to hold annual shareholder meetings, it
will hold a special meeting of shareholders when the Investment Company Act of
1940 (the "1940 Act") requires a shareholder vote on certain matters (including
the election of Directors in certain cases or approval of an advisory contract).
When issued, shares are fully paid, non-assessable, redeemable and
freely transferable. Shares do not have preemptive rights or subscription
rights. In liquidation of a Portfolio, each shareholder is entitled to receive
his or her pro rata share of the net assets of that Portfolio.
PRINCIPAL HOLDERS OF SECURITIES
[Information to be provided by Legg Mason]
Set forth below is a table which contains the name, address and
percentage of ownership of each person who is known by the Fund to own
beneficially five percent or more of the outstanding shares of any class of
Portfolio as of May 27, 1999:
% of Ownership
Name and Address May 27, 1999
- ---------------- -------------
LM Value Institutional Portfolio
Financial Intermediary Class
Bank One 30.22%
LSU Foundation
451 Florida Street
Baton Rouge, LA 70801-1775
National Automatic Sprinkler 10.98%
Metal Trades Pension Fund
8000 Corporate Drive
Landover, MD 20785-2239
IBEW Local 728 Pension Fund 9.45%
c/o Administrative Services Inc.
7990 SW 117th Avenue
Miami, FL 33183-3845
Trans National Group Services L 8.07%
2 Charlesgate West
Boston, MA 02113-3340
James W. Moore Trust 7.93%
1617 Hendry Street, Suite 306
Fort Myers, FL 33901-2970
City of Pottsville 5.92%
Police Pension Plan
401 North Centre Street
Post Office Box 30
Pottsville, PA 17901-0050
Penn Prime Trust 5.43%
530 Walnut Street, PA 4944
Philadelphia, PA 19106-3620
Institutional Class
Charles Schwab & Co. Inc. 45.84%
Special Custody Account
Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104-4122
Firstar Trust Company Trust 11.43%
United Communications Corp. Ret.
515 East Wisconsin Avenue
Milwaukee, WI 53202-4604
Schneider National Inc. 6.87%
401 K Savings and Retirement Pla
510 Marquette, Suite 500
Minneapolis, MN 55401-1118
Houston Muni Employees Pension 5.21%
1111 Bagby Street, Suite 1450
Houston, TX 77002-2546
LM Mid-Cap Institutional Portfolio
Financial Intermediary Class
LM Institutional Advisers, Inc. 100%
100 Light St.
Baltimore, MD 21202
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Institutional Class
LM Institutional Advisers, Inc. 100%
Brandywine Small Cap Value Portfolio
Financial Intermediary Class
LM Institutional Advisors, Inc. 100%
Institutional Class
The Hilda E. Bretzlaff Foundation 88.08%
Village Center Mall
400 North Main Street, Suite 303
Milford, MI 48381-1928
Metro Suburbia Inc. 6.26%
4 New York Plaza, 2nd Floor
New York, NY 10004-2413
Paul Scherer & Co. 5.00%
4 New York Plaza, 2nd Floor
New York, NY 10004-2413
Batterymarch Emerging Markets Portfolio
Financial Intermediary Class
LM Institutional Advisers, Inc. 100%
Institutional Class
LM Institutional Advisers, Inc. 100%
Batterymarch International Equity Portfolio
Financial Intermediary Class
LM Institutional Advisers, Inc. 100%
Institutional Class
LM Institutional Advisers, Inc. 100%
LM Total Return Portfolio
Financial Intermediary Class
LM Institutional Advisers, Inc. 100%
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Institutional Class
LM Institutional Advisers, Inc. 100%
Because they hold more than 25% of the outstanding voting securities of
a Fund, LM Institutional Advisers, Inc. may be deemed to control the LM Mid Cap
Institutional, Batterymarch Emerging Markets, Batterymarch International Equity
and LM Total Return Portfolios and LSU Foundation and the Hilda E. Bretzloff
Foundation may be deemed to control the LM Value Institutional and Brandwine
Small Cap Portfolios. The Officers and Directors of the Funds own in the
aggregate less than 1% of the outstanding shares of each Portfolio.
PERFORMANCE INFORMATION
Each Portfolio may, from time to time, include its total return in
marketing materials or reports to shareholders or prospective investors.
Quotations of average annual total return for a class of shares of a Portfolio
will be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in that class of shares over periods of one, five and
ten years (up to the life of the class), calculated pursuant to the following
formula: P (1 + T)n = ERV (where P = a hypothetical initial payment of $1,000, T
= the average annual total return, n = number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures reflect the deduction of a proportional share
of Portfolio expenses on an annual basis and assume that all dividends and other
distributions are reinvested when paid. The performance of each class of a
Portfolio will differ because each class is subject to different expenses.
The LM Value Institutional Portfolio's total returns as of March 31,
1999 were as follows:
Average
Cumulative Annual
Total Return Total Return
Life of Portfolio(A) 58.81%(Institutional Class) ____%
46.95%(Financial Intermediory Class)
(A) Portfolio's inception - September 22, 1998.
The Brandywine Small Cap Value Portfolio's total returns as of March
31, 1999 were as follows:
Average
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Cumulative Annual
Total Return Total Return
Life of Portfolio(A) -14.38% ____%
(A) Portfolio's inception - August 17, 1998.
Each Portfolio's performance may fluctuate daily depending upon such
factors as the average maturity of its securities, changes in investments,
changes in interest rates and variations in operating expenses. Therefore,
current performance does not provide a basis for determining future performance.
The fact that a Portfolio's performance will fluctuate and that shareholders'
principal is not guaranteed or insured should be considered in comparing the
Portfolio's performance with the performance of other investments.
From time to time each Portfolio may compare the performance of a class
of shares in advertising and sales literature to the performance of other
investment companies, groups of investment companies or various market indices.
One such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of the
largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of
all dividends. It takes no account of the costs of investing or the tax
consequences of distributions. The Portfolios invest in many securities that are
not included in the S&P 500.
Each Portfolio may also cite rankings and ratings, and compare the
return of a class of shares with data published by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc., Wiesenberger Investment Company
Services, Value Line, Morningstar, and other services or publications that
monitor, compare and/or rank the performance of investment companies. Each
Portfolio may also refer in such materials to mutual fund performance rankings,
ratings, comparisons with funds having similar investment objectives, and other
mutual funds reported in independent periodicals, including, but not limited to,
Financial World, Money Magazine, Forbes, Business Week, Barron's, Fortune, the
Kiplinger Letters, the Wall Street Journal, and the New York Times.
Each Portfolio may compare the investment return of a class of shares
to the return on certificates of deposit and other forms of bank deposits, and
may quote from organizations that track the rates offered on such deposits. Bank
deposits are insured by an agency of the federal government up to specified
limits. In contrast, Portfolio shares are not insured, the value of Portfolio
shares may fluctuate, and an investor's shares, when redeemed, may be worth more
or less than the investor originally paid for them. Unlike the interest paid on
many certificates of deposit, which remains at a specified rate for a specified
period of time, the return of each class of shares will vary.
Portfolio advertisements may reference the history of Legg Mason and
its affiliates, the education and experience of the portfolio manager, and the
fact that the portfolio manager engages in a particular style of investing
(e.g., growth or value).
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In advertising, each Portfolio may illustrate hypothetical investment
plans designed to help investors meet long-term financial goals, such as saving
for a child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. Each Portfolio may use other
recognized sources as they become available.
Each Portfolio may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
Each Portfolio may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500, and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
Each Portfolio may also include in advertising biographical information
on key investment and managerial personnel.
Each Portfolio may advertise examples of the potential benefits of
periodic investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through low price levels.
Each Portfolio may discuss Legg Mason's tradition of service. Since
1899, Legg Mason and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $88 billion as of March 31,
1999.
In advertising, each Portfolio may discuss the advantages of saving
through tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
Custodian, Transfer Agent and Dividend-Disbursing Agent
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State Street Bank and Trust Company, P.O. Box 1790, Boston,
Massachusetts 02105, serves as custodian of the Fund's assets. Boston Financial
Data Services, Inc., P.O. Box 953, Boston, Massachusetts 02103, serves as
transfer and dividend-disbursing agent and administrator of various shareholder
services. Shareholders who request an historical transcript of their account
will be charged a fee based upon the number of years researched. The Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
Independent Accountants
_________ have been selected to serve as the Fund's independent
accountants. The statements of assets and liabilities of the Portfolios and
related notes thereto included in this Statement of Additional Information have
been so included in reliance upon the report of ________ given on their
authority as experts in auditing and accounting.
Legal Counsel
Ropes & Gray, Boston, MA, serves as legal counsel to the Fund.
LM INSTITUTIONAL FUND ADVISORS II, INC.
STATEMENT OF ASSETS AND LIABILITIES
_________ __, 1999
[To be provided]
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Report of Independent Auditors
[To be provided]
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PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Amendment and Restatement -- previously filed (1)
(i) Articles Supplementary -- previously filed (1)
(b) Bylaws -- previously filed (1)
(c) Instruments Defining Rights of Security Holders -- none
(d) (1) Investment advisory agreements --
(i) LM Value Institutional -- previously filed (1)
(ii) LM Mid Cap Institutional -- previously filed (1)
(iii) LM Total Return Institutional -- previously
filed (1) (iv) Brandywine Small Cap Value --
previously filed (1) (v) Batterymarch Emerging
Markets -- previously filed (1) (vi) Batterymarch
International Equity -- previously filed (1)
(2) Investment management agreements
(i) LM Value Institutional -- previously filed (1)
(ii) LM Mid Cap Institutional -- previously filed (1)
(iii) LM Total Return Institutional-- previously
filed (1) (iv) Brandywine Small Cap Value --
previously filed (1) (v) Batterymarch Emerging
Markets -- previously filed (1) (vi) Batterymarch
International Equity -- previously filed (1)
(e) Underwriting Agreement -- previously filed (1)
(f) Bonus or profit sharing contracts -- none
(g) Custodian agreement -- filed herewith
(h) (i) Transfer Agent agreement -- filed herewith
(ii)Administration agreements -- none
(i) Opinion of counsel -- previously filed (1)
(j) Other opinions, appraisals, rulings and consents Accountants'
consent -- filed herewith
(k) Financial statements omitted from Item 22 -- not applicable
(l) Agreement for providing initial capital -- none
(m) Plan pursuant to Rule 12b-1
(i) LM Value Institutional -- previously filed (1) (ii) LM Mid
Cap Institutional -- previously filed (1) (iii) LM Total
Return Institutional -- previously filed (1) (iv) Brandywine
Small Cap Value -- previously filed (1) (v) Batterymarch
Emerging Markets -- previously filed (1) (vi) Batterymarch
International Equity -- previously filed (1)
(n) Financial Data Schedules -- not applicable
(o) Multiple Class (Rule 18F-3) Plan -- previously filed (1)
-5-
<PAGE>
(1) Incorporated herein by reference to corresponding Exhibit of
Pre-Effective Amendment No. 1 to the Registration Statement,
SEC File No. 333-44423, filed June 4, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
LM Institutional Advisors, Inc. may be deemed to control the
LM Mid-Cap Institutional Portfolio, Batterymarch Emerging
Markets Portfolio, Batterymarch International Equity Portfolio
and LM Total Return Institutional Portfolio as a result of its
ownership of 100% of the outstanding shares of each such Fund.
Item 25. Indemnification
---------------
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is prohibited as against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------
I. Legg Mason Fund Adviser, Inc. ("Fund Adviser"), adviser for the LM
Value Institutional Portfolio, LM Mid Cap Institutional Portfolio, and LM Total
Return Institutional Portfolio is a registered investment adviser incorporated
on January 20, 1982. Fund Adviser is engaged primarily in the investment
advisory business. Fund Adviser also serves as investment adviser or manager to
seventeen open-end registered investment companies. Information as to the
officers and directors of Fund Adviser is included in its Form ADV filed with
the Securities and Exchange Commission as in effect on the date hereof
(Registration Number 801-16958) and is incorporated herein by reference.
II. Batterymarch Financial Management, Inc. ("Batterymarch"), adviser
to the Batterymarch Emerging Markets Portfolio and Batterymarch International
Equity Portfolio, is
-6-
<PAGE>
a registered investment adviser incorporated on September 19, 1994. Batterymarch
is engaged primarily in the investment advisory business. Information as to the
officers and directors of Batterymarch is included in its Form ADV filed with
the Securities and Exchange Commission as in effect on the date hereof
(registration number 801-48035) and is incorporated herein by reference.
III. Brandywine Asset Management, Inc. ("Brandywine"), adviser to the
Brandywine Small Cap Value Portfolio, is a registered investment adviser
incorporated on [ ]. Brandywine is engaged primarily in the investment advisory
business. Information as to the officers and directors of Brandywine is included
in its Form ADV filed with the Securities and Exchange Commission as in effect
on the date hereof (registration number 801- ) and is incorporated herein by
reference.
Item 27. Principal Underwriters
----------------------
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
Legg Mason Value Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
Legg Mason Focus Trust, Inc.
(b) The following table sets forth information concerning each director
and officer of the Registrant's principal underwriter, Legg Mason Wood Walker,
Incorporated ("LMWW").
<TABLE>
<CAPTION>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ------------------ --------------------------- -------------------
<S> <C> <C> <C>
Raymond A. Mason Chairman of the Board None
John F. Curley, Jr. the Retired Vice Chairman of the Board None
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
James W. Brinkley President and Director None
Edmund J. Cashman, Jr. Director None
Senior Executive Vice President
Richard J. Himelfarb Director None
Senior Executive Vice President
Edward A. Taber III Director None
Senior Executive Vice President
Robert A. Frank Director None
Executive Vice President
Robert G. Sabelhaus Director None
Executive Vice President
Charles A. Bacigalupo Senior Vice President, Secretary None
and Director
F. Barry Bilson Senior Vice President and Director None
Thomas M. Daly, Jr. Senior Vice President and Director None
Jerome M. Dattel Senior Vice President and Director None
Robert G. Donovan Senior Vice President and Director None
Thomas E. Hill Senior Vice President and Director None
One Mill Place
Easton, MD 21601
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Arnold S. Hoffman Senior Vice President and Director None
1735 Market Street
Philadelphia, PA 19103
Carl Hohnbaum Senior Vice President and None
24th Floor Director
Two Oliver Plaza
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice President and Director None
1747 Pennsylvania
Avenue, N.W.
Washington, D.C. 20006
Laura L. Lange Senior Vice President and Director None
Marvin H. McIntyre Senior Vice President and Director None
1747 Pennsylvania
Avenue, N.W.
Washington, D.C. 20006
Mark I. Preston Senior Vice President and Director None
Joseph Sullivan Senior Vice President and Director None
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice President None
Deepak Chowdhury Senior Vice President None
255 Alhambra Circle
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice President None
Dennis A. Green Senior Vice President None
William F. Haneman, Jr. Senior Vice President None
One Battery Park Plaza
New York, New York 10005
Theodore S. Kaplan Senior Vice President and None
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
General Counsel
Seth J. Lehr Senior Vice President None
1735 Market St
Philadelphia, PA 19103
Horace M. Lowman, Jr. Senior Vice President and None
Asst. Secretary
Robert L. Meltzer Senior Vice President None
One Battery Park Plaza
New York, NY 10004
Jonathan M. Pearl Senior Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
John A. Pliakas Senior Vice President None
125 High Street
Boston, MA 02110
Gail Reichard Senior Vice President None
Timothy C. Scheve Senior Vice President and Treasurer None
Elisabeth N. Spector Senior Vice President None
Robert J. Walker, Jr. Senior Vice President None
200 Gibraltar Road
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President and Treasurer None
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
</TABLE>
- ----------
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
Item 28. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
-12-
<PAGE>
Item 29. Management Services -- none
----------------------
Item 30. Undertakings -- none
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, LM Institutional Fund Advisors II, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore and State of
Maryland, on the 1st day of June, 1999.
LM INSTITUTIONAL FUND ADVISORS II, INC.
By: /s/ Edward A. Taber, III
-----------------------------
Edward A. Taber, III
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ W. Curtis Livingston, III Director June 1, 1999
- -----------------------------
W. Curtis Livingston, III*
/s/ Edward A. Taber, III President and Director June 1, 1999
- ------------------------
Edward A. Taber, III*
/s/ Catherine H. Bray Director June 1, 1999
- ---------------------
Catherine H. Bray*
/s/ Edmund J. Cashman, Jr. Director June 1, 1999
- --------------------------
Edmund J. Cashman, Jr.*
/s/ Emmett J. Rice Director June 1, 1999
- ------------------
Emmett J. Rice*
/s/ Robert M. Tarola Director June 1, 1999
- --------------------
Robert M. Tarola*
/s/ Linda R. Taylor Director June 1, 1999
- -------------------
Linda R. Taylor*
-13-
<PAGE>
/s/ Marie K. Karpinski Vice President June 1, 1999
- ---------------------- and Treasurer
Marie K. Karpinski
* By: /s/ Marie K. Karpinski
-------------------------
Marie K. Karpinski
Attorney-in Fact Pursuant to
Powers of Attorney Filed
previously and for Herself
14
<PAGE>
Exhibit Index
-------------
Exhibit (g) Custodian Agreement
Exhibit (h)(i) Transfer Agent Agreement
CUSTODIAN CONTRACT
Between
LM INSTITUTIONAL FUND ADVISORS II, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
CUSTODIAN CONTRACT
This Contract between LM Institutional Fund Advisors II, Inc. a
corporation organized and existing under the laws of the State of Maryland,
having its principal place of business at 100 Light Street, Baltimore, Maryland
21202 hereinafter called the "FUND", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian,"
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in six (6) series,
LM Value Institutional Portfolio, LM Mid Cap Institutional Portfolio, Brandywine
Small Cap Value Portfolio, Batterymarch Emerging Markets Portfolio,
Batterymarch International Equity Portfolio, and LM Total Return Institutional
Portfolio (such series together with all other series subsequently established
by the Fund and made subject to this Contract in accordance with paragraph 17,
being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation. The Fund on behalf of the Portfolio(s) agrees to deliver to the
Custodian all securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock of
the Fund representing interests in the Portfolios, ("Shares") as may be issued
or sold from time to time. The Custodian shall not be responsible for any
property of a Portfolio held or received by the Portfolio and not delivered to
the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Directors of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian; provided, however, that (a) the Custodian
will be liable to the Fund for the Custodian's own negligence in
<PAGE>
transmitting any instructions received by it from the Fund and for the
Custodian's own negligence in connection with the delivery of any securities,
cash or other assets held by it to any sub-custodian and (b) in the event of
any loss, damage or expense suffered or incurred by the Fund caused by or
resulting from actions or omissions for which the Custodian would be liable
pursuant to this section, the Custodian shall promptly reimburse the Fund in the
amount of any such loss, damage or expense. The Custodian may employ as
sub-custodian for the Fund's foreign securities on behalf of the applicable
Portfolio(s) the foreign banking institutions and foreign securities
depositories designated in Schedule A hereto but only in accordance with the
provisions of Section 3. The Fund may instruct the Custodian, through Proper
Instructions, to cease the employment of any one or more sub-custodians for
maintaining custody of the Fund's assets, and to cause the prompt delivery of
such assets to another sub-custodian acceptable to the Fund and the
Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held
by it in the United States including all domestic securities owned by
such Portfolio, other than (a) securities which are maintained pursuant
to Section 2.10 in a clearing agency which acts as a securities
depository or in a book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies (each, a "U.S.
Securities System") and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct
Paper System of the Custodian (the "Direct Paper System") pursuant to
Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by a Portfolio held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund on behalf of the
applicable Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
<PAGE>
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to
be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Portfolio or into the name of any nominee or nominees of
the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Section 1;
or for exchange for a different number of bonds, certificates
or other evidence representing the same aggregate face amount
or number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered
to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Portfolio, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the Fund
on behalf of the Portfolio, which may be in the form of cash or
obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with
any loans for which collateral is to be credited to the
Custodian's account in the book-entry system authorized by
the U.S. Department of the Treasury, the Custodian will not be
held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
<PAGE>
12) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Securities Exchange Act
of 1934 (the "Exchange Act") and a member of The National
Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing Corporation
and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian, and a
Futures Commission Merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the
Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to
the holders of shares in connection with distributions in kind,
as may be described from time to time in the currently
effective prospectus and statement of additional information of
the Fund, related to the Portfolio ("Prospectus"), in
satisfaction of requests by holders of Shares for repurchase or
redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund on behalf
of the applicable Portfolio, a certified copy of a resolution
of the Board of Directors or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the Portfolio
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as
the Portfolio, or in the name or nominee name of any agent appointed
pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Section 1. All securities
accepted by the Custodian on behalf of the Portfolio under the terms of
this Contract shall be in "street name" or other good delivery form.
If, however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts only to
timely collect
<PAGE>
income due the Fund on such securities and to notify the Fund on a best
efforts basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio
of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Portfolio, other than cash maintained by
the Portfolio in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds held by
the Custodian for a Portfolio may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company
shall be qualified to act as a custodian under the Investment Company
Act of 1940 and that each such bank or trust company and the funds to
be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the
Board of Directors of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
such Portfolio which are deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect, and shall require any sub-custodian to
collect, on a timely basis all income and other payments with respect
to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the
date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall promptly credit such income,
as collected, to such Portfolio's custodian account. Without limiting
the generality of the foregoing, the Custodian shall detach and present
for payment all coupons and other income items requiring presentation
as and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to
which the Portfolio is properly entitled. The Custodian shall promptly
notify the Fund by facsimile transmission or in such other manner
<PAGE>
as the Fund and the Custodian may agree in writing if any amount
payable with respect to Shares of the Fund or other assets of the Fund
is not received by the Custodian when due.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for this purpose)
registered in the name of the Portfolio or in the name of a
nominee of the Custodian referred to in Section 2.3 hereof or
in proper form for transfer; (b) in the case of a purchase
effected through a U.S. Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the
case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2. 11;
(d) in the case of repurchase agreements entered into between
the Fund on behalf of the Portfolio and the Custodian, or
another bank, or a broker-dealer which is a member of NASD,
(i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at
the Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with written evidence
of the agreement by the Custodian to repurchase such securities
from the Portfolio or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign;
such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank pursuant
to Proper Instructions from the Fund as defined in Section 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Section 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
<PAGE>
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund on behalf of such Portfolio to so pay in
advance, the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received by
the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Section 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder. In the event of any loss, damage or expense suffered or
incurred by the Fund, caused by or resulting from the actions or
omissions of any agent for which the Custodian would be liable if said
act or omission had been committed by the Custodian, the Custodian
shall promptly reimburse the Fund in the amount of any such loss,
damage or expense.
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "U.S. Securities System" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the U.S.
Securities System which shall not include any assets of the
<PAGE>
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System
shall identify by book-entry those securities belonging to
the Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Portfolio. The Custodian shall
transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the U.S. Securities System that
payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Portfolio. Copies of all advices from the U.S.
Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for
the Portfolio by the Custodian and be provided to the Fund at
its request. Upon request, the Custodian shall furnish the Fund
on behalf of the Portfolio confirmation of each transfer to or
from the account of the Portfolio in the form of a written
advice or notice and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transactions in the U.S. Securities System for the
account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with any
report obtained by the Custodian on the U.S. Securities
System's accounting system, internal accounting control or
procedures for safeguarding securities deposited in the U.S.
Securities System;
5) The Custodian shall have received from the Fund on behalf of
the Portfolio the initial certificate required by Section 14
hereof;
6) At the written request of the Fund, the Custodian will
terminate the use of any such Securities System as promptly as
practicable;
7) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting
from use of the U.S. Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the U.S. Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage
<PAGE>
if and to the extent that the Portfolio has not been made whole
for any such loss or damage. In the event of any such
subrogation, the Custodian shall cooperate with the Fund in
asserting such rights and shall take all actions reasonably
necessary to enable the Fund to assert such rights.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
an account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the Portfolio
upon the making of an entry on the records of the Custodian to
reflect such transfer and receipt of payment for the account of
the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct
Paper on the next business day following such transfer and
shall furnish to the Fund on behalf of the Portfolio copies of
daily transaction sheets reflecting each day's transaction in
the U.S. Securities System for the account of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio
with any report on its system of internal accounting control as
the Fund may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any
<PAGE>
agreement among the Fund on behalf of the Portfolio, the Custodian and
a broker-dealer registered under the Exchange Act and a member of
the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions
by the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased
or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions from the Fund on
behalf of the applicable Portfolio, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall, and shall
require any sub-custodian to, promptly execute ownership and other
certificates and affidavits for all federal and state tax purposes in
connection with receipt of income or other payments with respect to
domestic securities of each Portfolio held by it and in connection with
transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be voted,
and shall promptly deliver to the Portfolio such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Portfolio
<PAGE>
shall if reasonably practicable notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action. If the Portfolio provides the Custodian with such notification
less than three business days prior to the date on which the Custodian
is to take such action, the Custodian shall use best efforts only to
take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes
and instructs the Custodian to employ as sub-custodians for the
Portfolio's securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined
in Section 5 of this Contract, together with a certified resolution of
the Fund's Board of Directors, the Custodian and the Fund may agree to
amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to act
as sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Portfolio's assets and
to cause the delivery of such assets to the Custodian (if reasonably
practicable) or to another sub-custodian acceptable to the Custodian
and the Fund.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to:
(a) "foreign securities", as defined in paragraph (c)(l) of Rule
17f-5 under the Investment Company Act of 1940, and (b) cash and
cash equivalents in such amounts as the Custodian or the Fund may
determine to be reasonably necessary to effect the Portfolio's foreign
securities transactions. The Custodian shall identify on its books as
belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall
be maintained in a clearing agency which acts as a securities
depository or in a book-entry system for the central handling of
securities located outside of the United States (each a "Foreign
Securities System") only through arrangements implemented by the
foreign banking institutions serving as sub-custodians pursuant to
the terms hereof (Foreign Securities Systems and U.S. Securities
Systems are collectively referred to herein as the "Securities
Systems"). Where possible, such arrangements shall include entry into
agreements containing the provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other
non-cash property for all of its customers, including the Fund, with
a foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (i) the records of the Custodian with respect to
securities and other non-cash property of
<PAGE>
the Fund which are maintained in such account shall identify by
book-entry those securities and other non-cash property belonging to
the Fund and (ii) the Custodian shall require that securities and other
non-cash property so held by the foreign sub-custodian be held
separately from any assets of the Custodian, of the foreign
sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership for the assets of
each Portfolio will be freely transferable without the payment of money
or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to each
applicable Portfolio; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent public accountants for the Fund,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Portfolios held by the foreign
sub-custodian will be subject only to the instructions of the
Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the Fund,
its independent accountants and/or its attorneys to be afforded access
to the books and records of any foreign banking institution employed as
a foreign sub-custodian insofar as such books and records relate to
the performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Portfolio(s) securities and other
assets and advices or notifications of any transfers of securities to
or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of each applicable Portfolio
indicating, as to securities acquired for a Portfolio, the identity of
the entity having physical possession of such securities. The Custodian
shall also provide to the Fund such other information as may be
reasonably requested by the Fund to evidence compliance with Rule
17f-5 under the Investment Company Act.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of each applicable Portfolio and delivery of
securities maintained for the account of each applicable Portfolio may
be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction
<PAGE>
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or
dealer. (c) Securities maintained in the custody of a foreign
subcustodian may be maintained in the name of such entity's nominee to
the same extent as set forth in Section 2.3 of this Contract, and the
Fund agrees to hold any such nominee harmless from any liability as a
holder of record of such securities (except liability for failing to
act in accordance with instructions).
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable
care and diligence in the performance of its duties and to indemnify,
and hold harmless, the Custodian and each Fund from and against any
loss, damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim. In the event of such subrogation, the Custodian shall cooperate
with the Fund in asserting such rights and shall take all actions
reasonably necessary to enable the Fund to assert such rights.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.13 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care and diligence.
In the event that any sub-custodian appointed pursuant to the
provisions of this Section 3 fails to perform any of its obligations
under the terms and conditions of the applicable sub-custodian
agreement, the Custodian shall use its best efforts to cause such
sub-custodian to fully perform its obligations. In the event that
the Custodian is unable to cause such sub-custodian to perform its
obligations thereunder, the Custodian shall forthwith notify the Fund
of the same and, upon the Fund's request, terminate such
sub-custodian as a sub-custodian for the Fund in accordance with the
termination provisions of the applicable sub-custodian agreement and,
if requested by the Fund, appoint another sub-custodian acceptable
to the Custodian and the Fund.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a
Portfolio including the purchase or sale of foreign exchange or of
contracts for foreign exchange, or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or
<PAGE>
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any
time held for the account of the applicable Portfolio, having a fair
market value not in excess of 125% of the advance, shall be security
therefor if specifically identified as such by the Custodian and should
the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolios
assets to the extent necessary to obtain reimbursement. For any
property identified as security under this paragraph, the Fund may
substitute other property of equivalent value upon permission of the
Custodian, which permission shall not be unreasonably withheld.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, and as reasonably requested by the
Fund from time to time, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
shall monitor the performance and financial condition of the foreign
sub-custodians and foreign securities depositories to the extent
practicable and will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the performance or
financial condition of a foreign sub-custodian or any material loss
of the assets of the Fund.
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract. (b)
Cash held for each Portfolio of the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with
the Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.14 Tax Law. Except as provided in Section 2.13, the Custodian shall have
no responsibility or liability for any obligations now or hereafter
imposed on the Fund or the Custodian as custodian of the Fund by the
tax law of the United States of America or any state or political
subdivision thereof. It shall be the responsibility of the Fund to
notify the Custodian of the obligations imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall
be to use reasonable efforts to assist the Fund with respect to any
claim for exemption or refund under the tax law of jurisdictions for
which the Fund has provided such information.
<PAGE>
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and promptly deposit into the account of the
appropriate Portfolio such payments as are received for Shares of that Portfolio
issued or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt
of instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Directors
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
instructions are consistent with any security procedures agreed to by the Fund
and the Custodian, including but not limited to, the security procedures
selected by the Fund on the Funds Transfer Addendum to this Contract. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which
requires a segregated asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
<PAGE>
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of
the Portfolio except as otherwise directed by the Board of
Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper reasonably
believed by it to be genuine and to have been properly executed by or on behalf
of the Fund. The Custodian may receive and accept a certified copy of a vote of
the Board of Directors of the Fund as conclusive evidence (a) of the authority
of any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Directors pursuant to the Articles of
Incorporation as described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written notice to the
contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio. On each day that the Custodian computes the net asset value
per share of the Fund, the Custodian will provide information sufficient to
permit the Fund to verify that portfolio transactions are reconciled with the
Fund's trading records.
<PAGE>
9. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder and under applicable state and federal tax
laws. All such records shall be the property of the Fund and shall at all times
during the regular business hours of the Custodian be open for inspection and
audit by duly authorized officers, employees, agents and auditors of and
attorneys for the Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by each Portfolio and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding cash, securities, futures contracts and
options on futures contracts, including cash, securities, and other assets
deposited and/or maintained in a Securities System or with a sub-custodian,
relating to the services provided by the Custodian, directly or through any
agent, under this Contract; such reports, shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
<PAGE>
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon in writing from time to time
between the Fund on behalf of each applicable Portfolio and the Custodian. The
Custodian shall provide the Fund a written invoice for each such payment.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice that such actions or
omissions comply with the terms of the Contract and with all applicable laws,
provided the Custodian acts in good faith and without negligence.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution employed as a sub-custodian to the same extent as set forth
with respect to sub-custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's or agent's own negligent action, negligent failure to act or willful
misconduct, (collectively referred to herein as a "Liability"), then in such
event cash held for the account of the Fund and securities issued by United
States issuers or other securities selected by the Custodian equal in value to
not more than 125% of such Advance and accrued interest on the Advance or the
anticipated amount of such Liability, held at any time for the account of the
Fund by the Custodian or sub-custodian, shall be held as security for such
Liability or for such Advance and the accrued interest on the Advance.
<PAGE>
The Custodian shall designate the security or securities constituting security
for an Advance or Liability (the "Designated Securities") by notice in writing
to the Fund (which may be sent by telefax). In the event the value of the
Designated Securities shall decline to less than 110% of the amount of such
Advance and accrued interest on the Advance or the anticipated amount of such
Liability, then the Custodian may designate in the same manner additional
securities to be held as security for such obligation ("Additional Securities")
but the aggregate value of the Designated Securities and the Additional
Securities shall not be in excess of 125% of the amount of such Advance and the
accrued interest on the Advance or the anticipated amount of such Liability. At
the request of the Fund, the Custodian shall agree to substitution of a security
or securities which have a value equal to the value of the Designated or
Additional Securities which the Fund desires to be released from their status as
security, and such release from status as security shall be effective upon the
Custodian and the Fund agreeing in writing as to the identity of the
substituted security or securities, which shall thereupon become Designated
Securities.
Notwithstanding the above, the Custodian shall, at the request of the
Fund, immediately release from their status as security any or all of the
Designated Securities or Additional Securities upon the Custodian's receipt from
such Fund of cash or cash equivalents in an amount equal to 100% of the value of
the Designated Securities or Additional Securities that the Fund desires to be
released from their status as security pursuant to this Section. The Fund shall
reimburse the Custodian in respect of a Liability and shall pay any Advances
upon demand; provided, however, that the Custodian first notified the Fund of
such demand for repayment or reimbursement. If, upon notification, the Fund
shall fail to pay such advance or interest when due or shall fail to reimburse
the Custodian promptly in respect of a Liability, the Fund acknowledges and
agrees that the Custodian shall be entitled to apply cash held for the Fund
and/or dispose of the Designated Securities and Additional Securities to the
extent necessary to obtain repayment or reimbursement. Interest, dividends and
other distributions paid or received on the Designated Securities or Additional
Securities, other than payments of principal or payments upon retirement,
redemption or repurchase, shall remain the property of the Fund, and shall not
be subject to this Section. To the extent that the dispositions of the Fund's
property, designated as security for such Advance or Liability, results in an
amount less than necessary to obtain repayment or reimbursement, the Fund shall
continue to be liable to the Custodian for the difference between the proceeds
of the dispositions of the Fund's property, designated as security for such
Advance or Liability, and the amount of the repayment or reimbursement due to
the Custodian and the Custodian shall be entitled to designate Additional
Securities to secure the amount of the shortfall and shall have the same rights
with respect to such Additional Securities as are provided herein with respect
to Designated Securities generally.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
<PAGE>
14. Effective Period. Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Directors of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended
and that the Custodian shall not with respect to a Portfolio act under Section
2.11 hereof in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Board of Directors has approved the initial
use of the Direct Paper System by such Portfolio; provided further, however,
that the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund on behalf of one or more of
the Portfolios may at any time by action of its Board of Directors (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Directors of the Fund, the Custodian shall,
upon termination, promptly deliver to such successor custodian at the office of
the Custodian, duly endorsed and in the form for transfer, all securities and
funds, as well as all books and records, of each applicable Portfolio then held
by it hereunder and shall transfer to an account of the successor custodian all
of the securities of each such Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and promptly
transfer such securities, funds, books and records, and other properties in
accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus,
<PAGE>
and undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian on
behalf of each applicable Portfolio and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract on behalf
of each applicable Portfolio and to transfer to an account of such successor
custodian all of the securities of each such Portfolio held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract. The Custodian agrees to cooperate with the
successor custodian and the Fund in the execution of documents and performance
of other actions necessary or desirable in order to substitute the successor
custodian for the Custodian.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing, to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Articles of Incorporation
of the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to LM Value Institutional Portfolio, LM Mid Cap Institutional
Portfolio, Brandywine Small Cap Value Portfolio, Batterymarch Emerging Markets
Portfolio, Batterymarch International Equity Portfolio, and LM Total Return
Institutional Portfolio with respect to which it desires to have the Custodian
render services as custodian under the terms hereof, it shall so notify the
Custodian in writing, and if the Custodian agrees in writing to provide such
services, such series of Shares shall become a Portfolio hereunder.
<PAGE>
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Reproduction of Documents
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties
hereto all/each agree that any such reproduction shall be admissible in evidence
as the original itself in any judicial or administrative proceeding, whether or
not the original is in existence and whether or not such reproduction was made
by a party in the regular course of business, and that any enlargement,
facsimile or further reproduction of such reproduction shall likewise be
admissible in evidence.
21. Notices.
Any notice, instruction or other instrument required to be given
hereunder may be delivered in person to the offices of the parties as set forth
herein during normal business hours or delivered prepaid registered mail or by
telex, cable or telecopy to the parties at the following addresses or such other
addresses as may be notified by any party from time to time.
To the Fund: LM Institutional Fund Advisors II, Inc.
100 Light Street, 29th Floor
Baltimore, Maryland 21202
Attention: Kathi Bair
Telephone: 410-454-2744
Telecopy: 410-454-3445
To the Custodian: State Street Bank and Trust Company
1776 Heritage Drive, JAB/4SW
North Quincy, Massachusetts 02171
Attention: Edward M. Buccigross
Telephone: 617-985-6834
Telecopy: 617-985-5450
<PAGE>
Such notice, instruction or other instrument shall be deemed to have
been served in the case of a registered letter at the expiration of five
business days after posting, in the case of cable twenty-four hours after
dispatch and, in the case of telex, immediately on dispatch and if delivered
outside normal business hours it shall be deemed to have been received at the
next time after delivery when normal business hours commence and in the case of
cable, telex or telecopy on the business day after the receipt thereof. Evidence
that the notice was properly addressed, stamped and put into the post shall be
conclusive evidence of posting.
22. Data Access Service Addendum
The Fund and the Custodian agree to be bound by the terms of the Data
Access Services Addendum attached hereto.
23. Shareholder Communications
Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the Custodian
"no", the Custodian will not provide this information to requesting companies.
If the Fund tells the Custodian "yes" or do not check either "yes" or "no"
below, the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any funds
or accounts established by the Fund. For the Fund's protection, the Rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
24. Miscellaneous
24.1 Expenses of the Fund
<PAGE>
In addition to any liability to the Fund for which the Custodian is
determined to be liable under this Contract, the Custodian shall be
liable to the Fund for all reasonable costs and expenses incurred by
the Fund in connection with a claim by the Fund against the Custodian,
an Agent or sub-custodian for which the Custodian is liable under
this Contract, including, reasonable attorneys' fees and expenses and
other reasonable fees incurred in any investigation, lawsuit or other
proceeding related to such claim. Nothing in this paragraph shall
preclude the parties from agreeing to payment of such expenses by the
Custodian in connection with a claim settled by arbitration, mediation
or negotiation.
24.2 Assignment
This Contract may not be assigned by either party without the written
consent of the other.
24.3 Insurance
The Custodian agrees to maintain insurance adequate to the protection
of all assets of the Fund that may come into the Custodian's care under
this Contract.
24.4 Confidentiality
The Custodian agrees that all books, records, information and data
pertaining to the business of the Fund which are exchanged or received
pursuant to the negotiation or carrying out of this Contract shall
remain confidential, shall not be voluntarily disclosed to any other
person, except as may be required by law, and shall not be used by the
Custodian for any purpose not directly related to the business of the
Fund, except with the Fund's written consent.
24.5 Separate Portfolios
Notwithstanding any other provision of this Contract, the parties agree
that the assets and liabilities of each series of the Fund are separate
and distinct from the assets and liabilities of each other series and
that no series shall be liable or shall be charged for any debt,
obligation or liability of any other series, whether arising under this
Contract or otherwise.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the eighteenth day of August,1998.
LM INSTITUTIONAL FUND ADVISORS II, INC. FUND SIGNATURE ATTESTED TO BY:
By: /s/ MARIE K. KARPINSKI By: /s/ KATHI D. BAIR
------------------------------------ -----------------------------
Name: Marie K. Karpinski Name: Kathi D. Bair
------------------------------- ------------------------
Title: Vice President and Treasurer Title: Secretary
------------------------------ --------------------------
STATE STREET BANK AND TRUST COMPANY SIGNATURE ATTESTED TO BY:
By: /s/ RONALD E. LOGUE By: /s/ MARC L. PARSONS
---------------------------- -----------------------------
Narne: Ronald E. Logue Name: Marc L. Parsons
--------------------------------- ---------------------------
Title: Executive Vice President Title: Associate Counsel
--------------------------------- --------------------------
<PAGE>
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
AGREEMENT between LM Institutional Fund Advisors II, Inc. (the
"Customer") and State Street Bank and Trust Company ("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain assets
of the Customer pursuant to a certain Custodian Agreement (the "Custodian
Agreement") dated as of August 18, 1998;
WHEREAS, State Street has developed and utilizes proprietary accounting
and other systems, including State Street's proprietary Multicurrency
HORIZON(SM) Accounting System, in its role as custodian of the Customer, and
maintains certain Customer-related data ("Customer Data") in databases under the
control and ownership of State Street (the "Data Access Services"); and
WHEREAS, State Street makes available to the Customer certain Data
Access Services solely for the benefit of the Customer, and intends to provide
additional services, consistent with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
(a) System. Subject to the terms and conditions of this Agreement,
State Street hereby agrees to provide the Customer with access to State Street's
Multicurrency HORIZON(SM) Accounting System and the other information systems
(collectively, the "System") as described in Attachment A, on a remote basis for
the purpose of obtaining reports and information, solely on computer hardware,
system software and telecommunication links as listed in Attachment B (the
"Designated Configuration") of the Customer, or certain third parties approved
by State Street that serve as investment advisors or investment managers or in
other service capacities to the Customer such as the Customer's independent
auditors (each, an "Investment Advisor"), solely with respect to the Customer,
or on any designated substitute or back-up equipment configuration with State
Street's written consent, such consent not to be unreasonably withheld.
(b) Data Access Services. State Street agrees to make available to the
Customer the Data Access Services subject to the terms and conditions of this
Agreement and data access operating standards and procedures as may be issued by
State Street from time to time. The ability of the Customer to originate
electronic instructions to State Street on behalf of the Customer in order to
(i) effect the transfer or movement of cash or securities held under custody by
State Street or (ii) transmit accounting or other information (such transactions
are referred to herein as "Client Originated Electronic Financial
Instructions"), and (iii) access data for the purpose of reporting and analysis,
shall be deemed to be Data Access Services for purposes of this Agreement.
<PAGE>
(c) Additional Services. State Street may from time to time agree to
make available to the Customer additional Systems that are not described in the
attachments to this Agreement. In the absence of any other written agreement
concerning such additional systems, the term "System" shall include, and this
Agreement shall govern, the Customer's access to and use of any additional
System made available by State Street and/or accessed by the Customer.
2. NO USE OF THIRD PARTY SYSTEMS-LEVEL SOFTWARE
State Street and the Customer acknowledge that in connection with the
Data Access Services provided under this Agreement, the Customer will have
access, through the Data Access Services, to Customer Data and to functions of
State Street's proprietary systems; provided, however that in no event will the
Customer have direct access to any third party systems-level software that
retrieves data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. Designated Equipment: Designated Location. The System and the Data
Access Services shall be used and accessed solely on and through the Designated
Configuration at the offices of the Customer or the Investment Advisor located
in Baltimore, Maryland ("Designated Location").
b. Designated Configuration: Trained Personnel. State Street shall be
responsible for supplying, installing and maintaining the Designated
Configuration at the Designated Location. State Street and the Customer agree
that each will engage or retain the services of trained personnel to enable both
parties to perform their respective obligations under this Agreement. State
Street agrees to use commercially reasonable efforts to maintain the System so
that it remains serviceable, provided, however, that State Street does not
guarantee or assure uninterrupted remote access use of the System.
c. Scope of Use. The Customer will use the System and the Data Access
Services only for the processing of securities transactions, the keeping of
books of account for the Customer and accessing data for purposes of reporting
and analysis. The Customer shall not, and shall cause its employees and agents
not to (i) permit any third party to use the System or the Data Access Services,
(ii) sell, rent, license or otherwise use the System or the Data Access Services
in the operation of a service bureau or for any purpose other than as expressly
authorized under this Agreement, (iii) use the System or the Data Access
Services for any fund, trust or other investment vehicle without the prior
written consent of State Street, (iv) allow access to the System or the Data
Access Services through terminals or any other computer or telecommunications
facilities located outside the Designated Locations, (v) allow or cause any
information (other than portfolio holdings, valuations of portfolio holdings,
and other information reasonably necessary for the management or distribution of
the assets of the Customer) transmitted from State Street's databases, including
data from third party sources, available through use of the System or the Data
Access Services to be redistributed or retransmitted to another computer,
terminal or other device for other than use for or on behalf of the Customer or
(vi) modify the System in any way, including without limitation, developing any
software for or attaching any devices or computer programs to any equipment,
system, software or database which forms a part of or is resident on the
Designated Configuration.
d. Other Locations. Except in the event of an emergency or of a planned
System shutdown, the Customer's access to services performed by the System or to
Data Access Services at the Designated Location may be transferred to a
different location only upon the prior written consent
<PAGE>
of State Street. In the event of an emergency or System shutdown, the Customer
may use any back-up site included in the Designated Configuration or any
other back-up site agreed to by State Street, which agreement will not be
unreasonably withheld. The Customer may secure from State Street the right to
access the System or the Data Access Services through computer and
telecommunications facilities or devices complying with the Designated
Configuration at additional locations only upon the prior written consent of
State Street and on terms to be mutually agreed upon by the parties.
e. Title. Title and all ownership and proprietary rights to the System,
including any enhancements or modifications thereto, whether or not made by
State Street, are and shall remain with State Street.
f. No Modification. Without the prior written consent of State Street,
the Customer shall not modify, enhance or otherwise create derivative works
based upon the System, nor shall the Customer reverse engineer, decompile or
otherwise attempt to secure the source code for all or any part of the System.
g. Security Procedures. The Customer shall comply with data access
operating standards and procedures and with user identification or other
password control requirements and other security procedures as may be issued
from time to time by State Street for use of the System on a remote basis and to
access the Data Access Services. The Customer shall have access only to the
Customer Data and authorized transactions agreed upon from time to time by State
Street and, upon notice from State Street, the Customer shall discontinue remote
use of the System and access to Data Access Services for any security reasons
cited by State Street; provided, that, in such event, State Street shall, for a
period not less than 180 days (or such other shorter period specified by the
Customer) after such discontinuance, assume responsibility to provide accounting
services under the terms of the Custodian Agreement.
h. Inspections. State Street shall have the right to inspect the use of
the System and the Data Access Services by the Customer and the Investment
Advisor to ensure compliance with this Agreement. The on-site inspections
shall be upon prior written notice to the Customer and the Investment Advisor
and at reasonably convenient times and frequencies so as not to result in an
unreasonable disruption of the Customer's or the Investment Advisor's business.
4. PROPRIETARY INFORMATION
a. Proprietary Information. The Customer acknowledges and State Street
represents that the System and the databases, computer programs, screen formats,
report formats, interactive design techniques, documentation and other
information made available to the Customer by State Street as part of the Data
Access Services and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Customer shall be
deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Customer agrees that it will hold such
Proprietary Information in the strictest confidence and secure and protect it in
a manner consistent with its own procedures for the protection of its own
confidential information and to take appropriate action by instruction or
agreement with its employees who are permitted access to the Proprietary
Information to satisfy its obligations hereunder. The Customer further
acknowledges that State Street shall not be required to provide the Investment
Advisor with access to the System unless it has first received from the
Investment Advisor an undertaking with respect to State Street's Proprietary
Information in the form of Attachment C to this Agreement. The
<PAGE>
Customer shall use all commercially reasonable efforts to assist State Street in
identifying and preventing any unauthorized use, copying or disclosure of the
Proprietary Information or any portions thereof or any of the logic, formats or
designs contained therein.
b. Cooperation. Without limitation of the foregoing, the Customer shall
advise State Street immediately in the event the Customer learns or has reason
to believe that any person to whom the Customer has given access to the
Proprietary Information, or any portion thereof, has violated or intends to
violate the terms of this Agreement, and the Customer will, at its expense,
co-operate with State Street in seeking injunctive or other equitable relief
in the name of the Customer or State Street against any such person.
c. Injunctive Relief. The Customer acknowledges that the disclosure of any
Proprietary Information, or of any information which at law or equity ought to
remain confidential, will immediately give rise to continuing irreparable injury
to State Street inadequately compensable in damages at law. In addition, State
Street shall be entitled to obtain immediate injunctive relief against the
breach or threatened breach of any of the foregoing undertakings, in addition to
any other legal remedies which may be available.
d. Survival. The provisions of this Section 4 shall survive the
termination of this Agreement.
5. LIMITATION ON LIABILITY
a. Limitation on Amount and Time for Bringing Action. The Customer agrees
that any liability of State Street to the Customer or any third party arising
out of State Street's provision of Data Access Services or the System under this
Agreement shall be limited to the amount of fees paid to State Street for such
services. In no event shall State Street be liable to the Customer or any other
party for any special, indirect, punitive or consequential damages even if
advised of the possibility of such damages. No action, regardless of form,
arising out of this Agreement may be brought by the Customer more than two years
after the Customer has knowledge that the cause of action has arisen.
b. Limited Warranties. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, ARE MADE BY STATE STREET.
c. Third-Party Data. Organizations from which State Street may obtain
certain data included in the System or the Data Access Services are solely
responsible for the contents of such data, and State Street shall have no
liability for claims arising out of the contents of such third-party data,
including, but not limited to, the accuracy thereof.
d. Regulatory Requirements. As between State Street and the Customer,
the Customer shall be solely responsible for the accuracy of any accounting
statements or reports produced using the Data Access Services and the System and
the conformity thereof with any requirements of law.
e. Force Majeure. Neither party shall be liable for any costs or
damages due to delay or nonperformance under this Agreement arising out of any
cause or event beyond such party's control, including without limitation,
cessation of services hereunder or any damages resulting therefrom to the other
party, or the Customer as a result of work stoppage, power or other
<PAGE>
mechanical failure, computer virus, natural disaster, governmental action, or
communication disruption.
6. INDEMNIFICATION
The Customer agrees to indemnify and hold State Street harmless from any loss,
damage or expense including reasonable attorney's fees, (a "loss") suffered by
State Street arising from (i) the negligence or willful misconduct in the use by
the Customer of the Data Access Services or the System, including any loss
incurred by State Street resulting from a security breach at the Designated
Location or committed by the Customer's employees or agents or the Investment
Advisor and (ii) any loss resulting from incorrect Client Originated Electronic
Financial Instructions. State Street shall be entitled to rely on the validity
and authenticity of Client Originated Electronic Financial Instructions without
undertaking any further inquiry as long as such instruction is undertaken in
conformity with security procedures established by State Street from time to
time.
7. FEES
Fees and charges for the use of the System and the Data Access Services and
related payment terms shall be as set forth in the Custody Fee Schedule in
effect from time to time between the parties (the "Fee Schedule"). Any tariffs,
duties or taxes imposed or levied by any government or governmental agency by
reason of the transactions contemplated by this Agreement, including, without
limitation, federal, state and local taxes, use, value added and personal
property taxes (other than income, franchise or similar taxes which may be
imposed or assessed against State Street) shall be borne by the Customer. Any
claimed exemption from such tariffs, duties or taxes shall be supported by
proper documentary evidence delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at a designated
State Street training facility or at the Designated Location, to the Customer's
personnel in connection with the use of the System on the Designated
Configuration. The Customer agrees that it will set aside, during regular
business hours or at other times agreed upon by both parties, sufficient time to
enable all operators of the System and the Data Access Services, designated by
the Customer, to receive the training offered by State Street pursuant to this
Agreement.
b. Installation and Conversion. State Street shall be responsible for
the technical installation and conversion ("Installation and Conversion") of the
Designated Configuration. The Customer shall have the following responsibilities
in connection with Installation and Conversion of the System:
(i) The Customer shall be solely responsible for the timely
acquisition and maintenance of the hardware and software that
attach to the Designated Configuration in order to use the Data
Access Services at the Designated Location.
(ii) State Street and the Customer each agree that they will assign
qualified personnel to actively participate during the
Installation and Conversion phase of the System implementation
to enable both parties to perform their respective obligations
under this Agreement.
<PAGE>
9. SUPPORT
During the term of this Agreement, State Street agrees to provide the
support services set out in Attachment D to this Agreement.
10. TERM OF AGREEMENT
a. Term of Agreement. This Agreement shall become effective on the date
of its execution by State Street and shall remain in full force and effect until
terminated as herein provided.
b. Termination of Agreement. Either party may terminate this Agreement
(i) for any reason by giving the other party at least one-hundred and eighty
days' prior written notice in the case of notice of termination by State Street
to the Customer or thirty days' notice in the case of notice from the Customer
to State Street of termination; or (ii) immediately for failure of the other
party to comply with any material term and condition of the Agreement by giving
the other party written notice of termination. In the event the Customer shall
cease doing business, shall become subject to proceedings under the bankruptcy
laws (other than a petition for reorganization or similar proceeding) or shall
be adjudicated bankrupt, this Agreement and the rights granted hereunder shall,
at the option of State Street, immediately terminate with notice to the
Customer. This Agreement shall in any event terminate as to any Customer within
90 days after the termination of the Custodian Agreement applicable to such
Customer.
c. Termination of the Right to Use. Upon termination of this Agreement
for any reason, any right to use the System and access to the Data Access
Services shall terminate and the Customer shall immediately cease use of the
System and the Data Access Services. Immediately upon termination of this
Agreement for any reason, the Customer shall return to State Street all copies
of documentation and other Proprietary Information in its possession; provided,
however, that in the event that either party terminates this Agreement or the
Custodian Agreement for any reason other than the Customer's breach, State
Street shall provide the Data Access Services for a period of time and at a
price to be agreed upon by the parties.
11. MISCELLANEOUS
a. Assignment; Successors. This Agreement and the rights and
obligations of the Customer and State Street hereunder shall not be assigned by
either party without the prior written consent of the other party, except that
State Street may assign this Agreement to a successor of all or a substantial
portion of its business, or to a party controlling, controlled by, or under
common control with State Street.
b. Survival. All provisions regarding indemnification, warranty,
liability and limits thereon, and confidentiality and/or protection of
proprietary rights and trade secrets shall survive the termination of this
Agreement.
c. Entire Agreement. This Agreement and the attachments hereto
constitute the entire understanding of the parties hereto with respect to the
Data Access Services and the use of the System and supersedes any and all prior
or contemporaneous representations or agreements, whether oral or written,
between the parties as such may relate to the Data Access Services or the
<PAGE>
System, and cannot be modified or altered except in a writing duly executed by
the parties. This Agreement is not intended to supersede or modify the duties
and liabilities of the parties hereto under the Custodian Agreement or any other
agreement between the parties hereto except to the extent that any such
agreement specifically refers to the Data Access Services or the System. No
single waiver of any right hereunder shall be deemed to be a continuing waiver.
d. Severability. If any provision or provisions of this Agreement shall
be held to be invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
e. Governing Law. This Agreement shall be interpreted and construed in
accordance with the internal laws of The Commonwealth of Massachusetts without
regard to the conflict of laws provisions thereof.
<PAGE>
ATTACHMENT A
Multicurrency HORIZON(SM) Accounting System
System Product Description
--------------------------
I. The Multicurrency HORIZON(SM) Accounting System is designed to provide lot
level portfolio and general ledger accounting for SEC and ERISA type
requirements and includes the following services: 1) recording of general ledger
entries; 2) calculation of daily income and expense; 3) reconciliation of daily
activity with the trial balance, and 4) appropriate automated feeding mechanisms
to (i) domestic and international settlement systems, (ii) daily, weekly and
monthly evaluation services, (iii) portfolio performance and analytic services,
(iv) customer's internal computing systems and (v) various State Street provided
information services products.
II. HORIZON(R) Gateway. HORIZON(R) Gateway provides customers with the
ability to (i) generate reports using information maintained on the
Multicurrency HORIZON(R) Accounting System which may be viewed or printed
at the customer's location; (ii) extract and download data from the
Multicurrency HORIZON(R) Accounting System; and (iii) access previous day
and historical data. The following information which may be accessed for
these purposes: 1) holdings; 2) holdings pricing; 3) transactions, 4)
open trades; 5) income; 6) general ledger and 7) cash.
III. SaFiRe(SM). SaFiRe(SM) is designed to provide the customer with the ability
to prepare its own financial reports by permitting the customer to access
customer information maintained on the Multicurrency HORIZON(R) Accounting
System, to organize such information in a flexible reporting format and to have
such reports printed on the customer's desktop or by its printing provider.
<PAGE>
ATTACHMENT B
------------
LEGG MASON FRAME-RELAY NETWORK
[DIAGRAM OF L.M. FRAME-RELAY NETWORK HERE]
Legg Mason
100 South Light Street
25th Floor
Baltimore, Maryland 21202
Contact: Jim Manring 410-454-3032
Dan Cochran 410-454-2230
Fax 410-454-3330
<PAGE>
ATTACHMENT C
Undertaking
The Undersigned understands that in the course of its employment as
Investment Advisor to LM Institutional Fund Advisors II, Inc. (the "Customer")
it will have access to State Street Bank and Trust Company's ("State Street")
Multicurrency HORIZON(SM) Accounting System and other information systems
(collectively, the "System").
The Undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
LEGG MASON FUND ADVISER, INC.
By: __________________________________
Title: _______________________________
Date: ________________________________
<PAGE>
Undertaking
The Undersigned understands that in the course of its employment as
independent accountants for LM Institutional Fund Advisors II, Inc. (the
"Customer") it will have access to State Street Bank and Trust Company's ("State
Street") Multicurrency HORIZON(SM) Accounting System and other information
systems (collectively, the "System").
The Undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
Coopers & Lybrand L.L.P.
By: ____________________________________
Title: _________________________________
Date: __________________________________
<PAGE>
ATTACHMENT D
Support
During the term of this Agreement, State Street agrees to provide the
following on-going support services:
a. Telephone Support. The Customer Designated Persons may contact State
Street's Multicurrency HORIZON(SM) Help Desk and Customer Assistance Center
between the hours of 8 a.m. and 6 p.m. (Eastern time) on all business days for
the purpose of obtaining answers to questions about the use of the System, or to
report apparent problems with the System. From time to time, the Customer shall
provide to State Street a list of persons, not to exceed five in number, who
shall be permitted to contact State Street for assistance (such persons being
referred to as "the Customer Designated Persons").
b. Technical Support. State Street will provide technical support to assist
the Customer in using the System and the Data Access Services. The total amount
of technical support provided by State Street shall not exceed 10 resource days
per year. State Street shall provide such additional technical support as is
expressly set forth in the fee schedule in effect from time to time between the
parties (the "Fee Schedule"). Technical support, including during installation
and testing, is subject to the fees and other terms set forth in the Fee
Schedule.
c. Maintenance Support. State Street shall use commercially reasonable
efforts to correct system functions that do not work according to the System
Product Description as set forth on Attachment A in priority order in the next
scheduled delivery release or otherwise as soon as is practicable.
d. System Enhancements. State Street will provide to the Customer any
enhancements to the System developed by State Street and made a part of the
System; provided that, sixty (60) days prior to installing any such enhancement,
State Street shall notify the Customer and shall offer the Customer reasonable
training on the enhancement. Charges for system enhancements shall be as
provided in the Fee Schedule. State Street retains the right to charge for
related systems or products that may be developed and separately made available
for use other than through the System.
e. Custom Modifications. In the event the Customer desires custom
modifications in connection with its use of the System, the Customer shall make
a written request to State Street providing specifications for the desired
modification. Any custom modifications may be undertaken by State Street in its
sole discretion in accordance with the Fee Schedule.
f. Limitation on Support. State Street shall have no obligation to support
the Customer's use of the System: (i) for use on any computer equipment or
telecommunication facilities which does not conform to the Designated
Configuration or (ii) in the event the Customer has modified the System in
breach of this Agreement.
<PAGE>
FUNDS TRANSFER ADDENDUM (LOGO)
OPERATING GUIDELINES
1. OBLIGATION OF THE SENDER: State Street is authorized to promptly
debit Client's (as named below) account(s) upon the receipt of a payment order
in compliance with the selected Security Procedure chosen for funds transfer and
in the amount of money that State Street has been instructed to transfer. State
Street shall execute payment orders in compliance with the Security Procedure
and with the Client's instructions on the execution date provided that such
payment order is received by the customary deadline for processing such a
request, unless the payment order specifies a later time. All payment orders and
communications received after this time will be deemed to have been received on
the next business day.
2. SECURITY PROCEDURE: The Client acknowledges that the Security Procedure
it has designated on the Selection Form was selected by the Client from Security
Procedures offered by State Street. The Client shall restrict access to
confidential information relating to the Security Procedure to authorized
persons as communicated in writing to State Street. The Client must notify State
Street immediately if it has reason to believe unauthorized persons may have
obtained access to such information or of any change in the Client's authorized
personnel. State Street shall verify the authenticity of all instructions
according to the Security Procedure.
3. ACCOUNT NUMBERS: State Street shall process all payment orders on the basis
of the account number contained in the payment order. In the event of a
discrepancy between any name indicated on the payment order and the account
number, the account number shall take precedence and govern.
4. REJECTION: State Street reserves the right to decline to process or delay the
processing of a payment order which (a) is in excess of the collected balance in
the account to be charged at the time of State Street's receipt of such payment
order; (b) if initiating such payment order would cause State Street, in State
Street's sole judgment, to exceed any volume, aggregate dollar, network, time,
credit or similar limits upon wire transfers which are applicable to State
Street; or (c) if State Street, in good faith, is unable to satisfy itself that
the transaction has been properly authorized.
5. CANCELLATION OR AMENDMENT: State Street shall use reasonable efforts to act
on all authorized requests to cancel or amend payment orders received in
compliance with the Security Procedure provided that such requests are received
in a timely manner affording State Street reasonable opportunity to act.
However, State Street assumes no liability if the request for amendment or
cancellation cannot be satisfied.
6. ERRORS: State Street shall assume no responsibility for failure to detect any
erroneous payment order provided that State Street complies with the payment
order instructions as received and State Street complies with the Security
Procedure. The Security Procedure is established for the purpose of
authenticating payment orders only and not for the detection of errors in
payment orders.
7. INTEREST AND LIABILITY LIMITS: State Street shall assume no responsibility
for lost interest with respect to the refundable amount of any unauthorized
payment order, unless State Street is notified of the unauthorized payment order
within thirty (30) days of notification by State Street of the acceptance of
such payment order. In no event shall State Street be liable for special,
indirect or consequential damages, even if advised of the possibility of such
damages and even for failure to execute a payment order.
8. AUTOMATED CLEARING HOUSE ("ACH") CREDIT ENTRIES/PROVISIONAL PAYMENTS: When a
Client initiates or receives ACH credit and debit entries pursuant to these
Guidelines and the rules of the National Automated Clearing House Association
and the New England Clearing House Association, State Street will act as an
Originating Depository Financial Institution and/or Receiving Depository
Institution, as the case may be, with respect to such entries. Credits given by
State Street with respect to an ACH credit entry are provisional until State
Street receives final settlement for such entry from the Federal Reserve Bank.
If State Street does not receive such final settlement, the Client agrees that
State Street shall receive a refund of the amount credited to the Client in
connection with such entry, and the party making payment to the Client via such
entry shall not be deemed to have paid the amount of the entry.
9. CONFIRMATION STATEMENTS: Confirmation of State Street's execution of payment
orders shall ordinarily be provided within 24 hours notice which may be
delivered through State Street's proprietary information systems, such as, but
not limited to Horizon and GlobalQuest(R), or by facsimile or callback. The
Client must report any objections to the execution of a payment order within 30
days.
<PAGE>
FUNDS TRANSFER ADDENDUM (LOGO)
SECURITY PROCEDURE(S) SELECTION FORM
Please select one or more of the funds transfer security procedures
indicated below.
[ ] SWIFT
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a
cooperative society owned and operated by member financial institutions that
provides telecommunication services for its membership. Participation is
limited to securities brokers and dealers, clearing and depository
institutions, recognized exchanges for securities, and investment management
institutions. SWIFT provides a number of security features through
encryption and authentication to protect against unauthorized access, loss
or wrong delivery of messages, transmission errors, loss of confidentiality
and fraudulent changes to messages. SWIFT is considered to be one of the
most secure and efficient networks for the delivery of funds transfer
instructions. Selection of this security procedure would be most appropriate
for existing SWIFT members.
[ ] Standing Instructions
Standing Instructions may be used where funds are transferred to a broker on
the Client's established list of brokers with which it engages in foreign
exchange transactions. Only the date, the currency and the currency amount
are variable. In order to establish this procedure, State Street will send
to the Client a list of the brokers that State Street has determined are
used by the Client. The Client will confirm the list in writing, and State
Street will verify the written confirmation by telephone. Standing
Instructions will be subject to a mutually agreed upon limit. If the payment
order exceeds the established limit, the Standing Instruction will be
confirmed by telephone prior to execution.
[ ] Remote Batch Transmission
Wire transfer instructions are delivered via Computer-to-Computer (CPU-CPU)
data communications between the Client and State Street. Security procedures
include encryption and or the use of a test key by those individuals
authorized as Automated Batch Verifiers. Clients selecting this option
should have an existing facility for completing CPU-CPU transmissions. This
delivery mechanism is typically used for high-volume business.
[ ] Global Horizon Interchange(sm) Funds Transfer Service
Global Horizon Interchange Funds Transfer Service (FTS) is a State Street
proprietary microcomputer-based wire initiation system. FTS enables Clients
to electronically transmit authenticated Fedwire, CHIPS or internal book
transfer instructions to State Street. This delivery mechanism is most
appropriate for Clients with a low-to-medium number of transactions (50-75
per day), allowing Clients to enter, batch, and review wire transfer
instructions on their PC prior to release to State Street.
[ ] Telephone Confirmation (Callback)
Telephone confirmation will be used to verify all non-repetitive funds
transfer instructions received via untested facsimile or phone. This
procedure requires Clients to designate individuals as authorized initiators
and authorized verifiers. State Street will verify that the instruction
contains the signature of an authorized person and prior to execution, will
contact someone other than the originator at the Client's location to
authenticate the instruction. Selection of this alternative is appropriate
for Clients who do not have the capability to use other security procedures.
[ ] Repetitive Wires
For situations where funds are transferred periodically (minimum of one
instruction per calendar quarter) from an existing authorized account to the
same payee (destination bank and account number) and only the date and
currency amount are variable, a repetitive wire may be implemented.
Repetitive wires will be subject to a mutually agreed upon limit. If the
payment order exceeds the established limit, the instruction will be
confirmed by telephone prior to execution. Telephone confirmation is used to
establish this process. Repetitive wire instructions must be reconfirmed
annually. This alternative is recommended whenever funds are frequently
transferred between the same two accounts.
[ ] Transfers Initiated by Facsimile
The Client faxes wire transfer instructions directly to State Street Mutual
Fund Services. Standard security procedure requires the use of a random
number test key for all transfers. Every six months the Client receives test
key logs from State Street. The test key contains alpha-numeric characters,
which the Client puts on each document faxed to State Street. This procedure
ensures all wire instructions received via fax are authorized by the Client.
We provide this option for Clients who wish to batch wire instructions and
transmit these as a group to State Street Mutual Fund Services once or
several times a day.
<PAGE>
FUNDS TRANSFER ADDENDUM (LOGO)
[ ] Automated Clearing House (ACH)
State Street receives an automated transmission or a magnetic tape from a
Client for the initiation of payment (credit) or collection (debit)
transactions through the ACH network. The transactions contained on each
transmission or tape must be authenticated by the Client. Clients using ACH
must select one or more of the following delivery options:
[ ] Global Horizon Interchange Automated Clearing House Service
Transactions are created on a microcomputer, assembled into batches and
delivered to State Street via fully authenticated electronic transmissions
in standard NACHA formats.
[ ] Transmission from Client PC to State Street Mainframe with Telephone
Callback
[ ] Transmission from Client Mainframe to State Street Mainframe with Telephone
Callback
[ ] Transmission from DST Systems to State Street Mainframe with Encryption
[ ] Magnetic Tape Delivered to State Street with Telephone Callback
State Street is hereby instructed to accept funds transfer instructions only via
the delivery methods and security procedures indicated. The selected delivery
methods and security procedure(s) will be effective ________________ for payment
orders initiated by our organization.
Key Contact Information
Whom shall we contact to implement your selection(s)?
CLIENT OPERATIONS CONTACT ALTERNATE CONTACT
- ------------------------------ ---------------------------------
Name Name
- ------------------------------ ---------------------------------
Address Address
- ------------------------------ ---------------------------------
City/State/Zip Code City/State/Zip Code
- ------------------------------ ---------------------------------
Telephone Number Telephone Number
- ------------------------------ ---------------------------------
Facsimile Number Facsimile Number
- ------------------------------
SWIFT Number
- ------------------------------
Telex Number
<PAGE>
FUNDS TRANSFER ADDENDUM (LOGO)
INSTRUCTION(S)
TELEPHONE CONFIRMATION
Fund LM Institutional Fund Advisors II, Inc.
-----------------------------------------
Investment Adviser Legg Mason Fund Adviser, Inc.
------------------------------
Authorized Initiators
Please Type or Print
Please provide a listing of Fund officers or other individuals are currently
authorized to INITIATE wire transfer instructions to State Street:
<TABLE>
<CAPTION>
NAME TITLE (Specify whether position SPECIMEN SIGNATURE
is with Fund or Investment
Adviser)
<S> <C> <C>
Marie K. Karpinski Vice President & Treasurer /s/ Marie K. Karpinski
- ---------------------- --------------------------------- -----------------------
Susan L. Silva Fund Manager /s/ Susan L. Silva
- ---------------------- --------------------------------- -----------------------
W. Shane Hughes Fund Manager /s/ W. Shane Hughes
- ---------------------- --------------------------------- -----------------------
- ---------------------- --------------------------------- -----------------------
- ---------------------- --------------------------------- -----------------------
Authorized Verifiers
Please Type or Print
Please provide a listing of Fund officers of other individuals who will be
CALLED BACK to verify the initiation of repetitive wires of $10 million or more
and all non repetitive wire instructions:
NAME CALLBACK PHONE NUMBER DOLLAR LIMITATION (IF ANY)
Marie K. Karpinski 410-454-2790 N/A
- ---------------------- --------------------------------- -----------------------
Susan L. Silva 410-454-2759 N/A
- ---------------------- --------------------------------- -----------------------
W. Shane Hughes 410-454-2780 N/A
- ---------------------- --------------------------------- -----------------------
- ---------------------- --------------------------------- -----------------------
- ---------------------- --------------------------------- -----------------------
</TABLE>
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
between
LM INSTITUTIONAL FUND ADVISORS II, INC.
and
STATE STREET BANK AND TRUST COMPANY
1G - Domestic Corp/Series
<PAGE>
TABLE OF CONTENTS
Page
1. Terms of Appointment; Duties of the Bank ...................1
2. Fees and Expenses ..........................................3
3. Representations and Warranties of the Bank .................4
4. Representations and Warranties of the Fund .................4
5. Wire Transfer Operating Guidelines .........................5
6. Data Access and Proprietary Information ....................6
7. Indemnification ............................................8
8. Standard of Care ...........................................9
9. Confidentiality ............................................9
10. Covenants of the Fund and the Bank ........................10
11. Termination of Agreement ..................................10
12. Additional Funds ..........................................11
13. Assignment ................................................11
14. Amendment .................................................11
15. Massachusetts Law to Apply ................................11
16. Force Majeure .............................................11
17. Consequential Damages .....................................12
18. Merger of Agreement .......................................12
19. Counterparts...............................................12
20. Reproduction of Documents .................................12
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 13th day of August, 1998, by and between LM
INSTITUTIONAL FUND ADVISORS II, INC., a Maryland corporation, having its
principal office and place of business at 100 Light Street, Baltimore, Maryland
21202 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts
trust company having its principal office and place of business at 225 Franklin
Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Fund intends to initially offer shares in six (6) series, such
series shall be named in the attached Schedule A which may be amended by the
parties from time to time (each such series, together with all other series
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 13, being herein referred to as a "Portfolio", and
collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as its
transfer agent, dividend disbursing agent, custodian of certain retirement plans
and agent in connection with certain other activities, and the Bank desires to
accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
l. Terms of Appointment; Duties of the Bank
1.l Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby
employs and appoints the Bank to act as, and the Bank agrees
to act as its transfer agent for the Fund's authorized and
issued shares of its common stock, $.001 par value,
("Shares"), dividend disbursing agent, custodian of certain
retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the
shareholders of each of the respective Portfolios of the Fund
("Shareholders") and set out in the currently effective
prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable
Portfolio, including without limitation any periodic
investment plan or periodic withdrawal program.
1.2 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to
time by agreement between the Fund on behalf of each of
the Portfolios, as applicable and the Bank, the Bank
shall:
<PAGE>
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and
appropriate documentation thereof to the Custodian
of the Fund authorized pursuant to the Articles of
Incorporation of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) In respect to the transactions in items (i), (ii)
and (iii) above, the Bank shall execute
transactions directly with broker-dealers
authorized by the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed
by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio;
(viii) Issue replacement certificates for those
certificates alleged to have been lost, stolen or
destroyed upon receipt by the Bank of
indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at
its option, may issue replacement certificates in
place of mutilated stock certificates upon
presentation thereof and without such indemnity;
(ix) Maintain records of account for and advise the Fund
and its Shareholders as to the foregoing and
(x) Record the issuance of shares of the Fund and
maintain pursuant to SEC Rule 17Ad-10(e) a record
of the total number of shares of the Fund which are
authorized, based upon data provided to it by the
Fund, and issued and outstanding. The Bank shall
also provide the Fund on a regular basis with the
total number of shares which are authorized and
issued and outstanding and shall have no
obligation, when recording the issuance of shares,
to monitor the issuance of such shares or to take
cognizance of any laws relating to the issue or
sale of such shares, which functions shall be the
sole responsibility of the Fund.
2
<PAGE>
(b) In addition to and neither in lieu nor in contravention
of the services set forth in the above paragraph (a), the
Bank shall: (i) perform the customary services of a
transfer agent, dividend disbursing agent, custodian of
certain retirement plans and, as relevant, agent in
connection with accumulation, open-account or similar
plans (including without limitation any periodic
investment plan or periodic withdrawal program),
including but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing
Shareholder proxies, Shareholder reports and prospectuses
to current Shareholders, withholding taxes on U.S.
resident and non-resident alien accounts, preparing
and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and
distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms
and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and
mailing activity statements for Shareholders, and
providing Shareholder account information and (ii)
provide a system which will enable the Fund to monitor
the total number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as
exempt from blue sky reporting for each State and (ii)
verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor
the daily activity for each State. The responsibility of
the Bank for the Fund's blue sky State registration
status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund
and the reporting of such transactions to the Fund as
provided above.
(d) Procedures as to who shall provide certain of these
services in Section 1 may be established from time to
time by agreement between the Fund on behalf of each
Portfolio and the Bank per the attached service
responsibility schedule. The Bank may at times perform
only a portion of these services and the Fund or its
agent may perform these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of
the Fund (e.g., escheatment services) which may be agreed
upon in writing between the Fund and the Bank.
2. Fees and Expenses
2.1 For the performance by the Bank pursuant to this Agreement, the
Fund agrees on behalf of each of the Portfolios to pay the Bank an
annual maintenance fee for each Shareholder account as set out in
the initial fee schedule attached hereto. Such fees and
out-of-pocket expenses and advances identified under Section 2.2
below may be changed from time to time subject to mutual written
agreement between the Fund and the Bank.
3
<PAGE>
2.2 In addition to the fee paid under Section 2.1 above, the Fund
agrees on behalf of each of the Portfolios to reimburse the Bank
for out-of-pocket expenses, including but not limited to
confirmation production, postage, forms, telephone, microfilm,
microfiche, mailing and tabulating proxies, records storage, or
advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred
by the Bank at the request or with the consent of the Fund, will be
reimbursed by the Fund on behalf of the applicable Portfolio.
2.3 The Fund agrees on behalf of each of the Portfolios to pay all fees
and reimbursable expenses within five days following the receipt of
the respective billing notice. Postage for mailing of dividends,
proxies, Fund reports and other mailings to all shareholder
accounts shall be advanced to the Bank by the Fund at least seven
(7) days prior to the mailing date of such materials.
3. Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.1 It is a trust company duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
3.2 It is duly qualified to carry on its business in The Commonwealth
of Massachusetts.
3.3 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
4. Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.1 It is a corporation duly organized and existing and in good
standing under the laws of the State of Maryland.
4.2 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter
into and perform this Agreement.
4
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4.4 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.5 A registration statement under the Securities Act of 1933, as
amended on behalf of each of the Portfolios is currently effective
and will remain effective, and appropriate state securities law
filings have been made and will continue to be made, with respect
to all Shares of the Fund being offered for sale.
5. Wire Transfer Operating Guidelines/Articles 4A of the Uniform
Commercial Code
5.1 The Bank is authorized to promptly debit the appropriate Fund
account(s) upon the receipt of a payment order in compliance with
the selected security procedure (the "Security Procedure") chosen
for funds transfer and in the amount of money that the Bank has
been instructed to transfer. The Bank shall execute payment orders
in compliance with the Security Procedure and with the Fund
instructions on the execution date provided that such payment order
is received by the customary deadline for processing such a
request, unless the payment order specifies a later time. All
payment orders and communications received after this the customary
deadline will be deemed to have been received the next business
day.
5.2 The Fund acknowledges that the Security Procedure it has designated
on the Fund Selection Form was selected by the Fund from security
procedures offered by the Bank. The Fund shall restrict access to
confidential information relating to the Security Procedure to
authorized persons as communicated to the Bank in writing. The Fund
must notify the Bank immediately if it has reason to believe
unauthorized persons may have obtained access to such information
or of any change in the Fund's authorized personnel. The Bank shall
verify the authenticity of all Fund instructions according to the
Security Procedure.
5.3 The Bank shall process all payment orders on the basis of the
account number contained in the payment order. In the event of a
discrepancy between any name indicated on the payment order and the
account number, the account number shall take precedence and
govern.
5.4 The Bank reserves the right to decline to process or delay the
processing of a payment order which (a) is in excess of the
collected balance in the account to be charged at the time of the
Bank's receipt of such payment order; (b) if initiating such
payment order would cause the Bank, in the Bank's sole judgement,
to exceed any volume, aggregate dollar, network, time, credit or
similar limits which are applicable to the Bank; or (c) if the
Bank, in good faith, is unable to satisfy itself that the
transaction has been properly authorized.
5
<PAGE>
5.5 The Bank shall use reasonable efforts to act on all authorized
requests to cancel or amend payment orders received in compliance
with the Security Procedure provided that such requests are
received in a timely manner affording the Bank reasonable
opportunity to act. However, the Bank assumes no liability if the
request for amendment or cancellation cannot be satisfied.
5.6 The Bank shall assume no responsibility for failure to detect any
erroneous payment order provided that the Bank complies with the
payment order instructions as received and the Bank complies with
the Security Procedure. The Security Procedure is established for
the purpose of authenticating payment orders only and not for the
detection of errors in payment orders.
5.7 The Bank shall assume no responsibility for lost interest with
respect to the refundable amount of any unauthorized payment order,
unless the Bank is notified of the unauthorized payment order
within thirty (30) days of notification by the Bank of the
acceptance of such payment order. In no event (including failure to
execute a payment order) shall the Bank be liable for special,
indirect or consequential damages, even if advised of the
possibility of such damages.
5.8 When the Fund initiates or receives Automated Clearing House credit
and debit entries pursuant to these guidelines and the rules of the
National Automated Clearing House Association and the New England
Clearing House Association, the Bank will act as an Originating
Depository Financial Institution and/or receiving depository
Financial Institution, as the case may be, with respect to such
entries. Credits given by the Bank with respect to an ACH credit
entry are provisional until the Bank receives final settlement for
such entry from the Federal Reserve Bank. If the Bank does not
receive such final settlement, the Fund agrees that the Bank shall
receive a refund of the amount credited to the Fund in connection
with such entry, and the party making payment to the Fund via such
entry shall not be deemed to have paid the amount of the entry.
5.9 Confirmation of Bank's execution of payment orders shall ordinarily
be provided within twenty four (24) hours notice of which may be
delivered through the Bank' s proprietary information systems, or
by facsimile or call-back. Fund must report any objections to the
execution of an order within thirty (30) days.
6. Data Access and Proprietary Information
6.1 The Fund acknowledges that the data bases, computer programs,
screen formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Bank as part of
the Fund's ability to access certain Fund-related data ("Customer
Data") maintained by the Bank on data bases under the control and
ownership of the Bank ("Data Access Services") constitute
copyrighted, trade secret, or other proprietary information
(collectively, "Proprietary Information") of substantial value to
the Bank or other third party. In no event shall Proprietary
Information be deemed Customer Data. The
6
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Fund agrees to treat all Proprietary Information as proprietary to
the Bank and further agrees that it shall not divulge any
Proprietary Information to any person or organization except as may
be provided hereunder. Without limiting the foregoing, the Fund
agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in
accordance with the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
portion of the Proprietary Information, and if such
access is inadvertently obtained, to inform in a timely
manner of such fact and dispose of such information in
accordance with the Bank's instructions;
(d) to refrain from causing or allowing the data acquired
hereunder from being retransmitted to any other computer
facility or other location, except with the prior written
consent of the Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank
to protect at the Bank's expense the rights of the Bank
in Proprietary Information at common law, under federal
copyright law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Section 6. The obligations of
this Section shall survive any earlier termination of this
Agreement.
6.2 If the Fund notifies the Bank that any of the Data Access Services
do not operate in material compliance with the most recently issued
user documentation for such services, the Bank shall endeavor in a
timely manner to correct such failure. Organizations from which the
Bank may obtain certain data included in the Data Access Services
are solely responsible for the contents of such data and the Fund
agrees to make no claim against the Bank arising out of the
contents of such third-party data, including, but not limited to,
the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER
PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH
ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE BANK EXPRESSLY
DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
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6.3 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i)
effect the transfer or movement of cash or Shares or (ii) transmit
Shareholder information or other information, then in such event
the Bank shall be entitled to rely on the validity and authenticity
of such instruction without undertaking any further inquiry as long
as such instruction is undertaken in conformity with security
procedures established by the Bank from time to time.
7. Indemnification
7.1 The Bank shall not be responsible for, and the Fund shall on behalf
of the applicable Portfolio indemnify and hold the Bank harmless
from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) all actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided
that such actions are taken in good faith and without
negligence or willful misconduct;
(b) the Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any
representation or warranty of the Fund hereunder;
(c) the reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or
services which (i) are received by the Bank or its agents
or subcontractors, and (ii) have been prepared,
maintained or performed by the Fund or any other person
or firm on behalf of the Fund including but not limited
to any previous transfer agent or registrar;
(d) the reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests
of the Fund on behalf of the applicable Portfolio;
(e) the offer or sale of Shares in violation of federal or
state securities laws or regulations requiring that such
Shares be registered or in violation of any stop order or
other determination or ruling by any federal or any state
agency with respect to the offer or sale of such Shares;
(f) the negotiations and processing of checks made payable to
prospective or existing Shareholders tendered to the Bank
for the purchase of Shares, such checks are commonly
known as "third party checks"; and
(g) upon the Fund's request entering into any agreements
required by the National Securities Clearing Corporation
(the "NSCC") required by the NSCC for the transmission of
Fund or Shareholder data through the NSCC clearing
systems.
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<PAGE>
7.2 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to
any matter arising in connection with the services to be performed
by the Bank under this Agreement, and the Bank and its agents or
subcontractors shall not be liable and shall be indemnified by the
Fund on behalf of the applicable Portfolio for any action taken or
omitted by it in reliance upon such instructions or upon the
opinion of such counsel. The Bank, its agents and subcontractors
shall be protected and indemnified in acting upon any paper or
document, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction,
information, data, records or documents provided the Bank or its
agents or subcontractors by machine readable input, telex, CRT data
entry or other similar means authorized by the Fund, and shall not
be held to have notice of any change of authority of any person,
until receipt of written notice thereof from the Fund. The Bank,
its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably
believed to bear the proper manual or facsimile signatures of the
officers of the Fund, and the proper countersignature of any former
transfer agent or former registrar, or of a co-transfer agent or
co-registrar.
7.3 In order that the indemnification provisions contained in this
Section 7 shall apply, upon the assertion of a claim for which the
Fund may be required to indemnify the Bank, the Bank shall promptly
notify the Fund of such assertion, and shall keep the Fund advised
with respect to all developments concerning such claim. The Fund
shall have the option to participate with the Bank in the defense
of such claim or to defend against said claim in its own name or in
the name of the Bank. The Bank shall in no case confess any claim
or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written
consent.
8. Standard of Care
The Bank shall at all times act in good faith and agrees to use its
best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no
responsibility and shall not be liable for loss or damage due to
errors unless said errors are caused by its negligence, bad faith,
or willful misconduct or that of its employees.
9. Confidentiality
9.1 The Bank and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying
out of this Agreement shall remain confidential, and shall not be
voluntarily disclosed to any other person, except as may be
required by law.
9
<PAGE>
9.2 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify
the Fund and to secure instructions from an authorized officer of
the Fund as to such inspection. The Bank reserves the right,
however, to exhibit the Shareholder records to any person whenever
it is advised by its counsel that it may be held liable for the
failure to exhibit the Shareholder records to such person.
10. Covenants of the Fund and the Bank
10.1 The Fund shall on behalf of each of the Portfolios promptly furnish
to the Bank the following:
(a) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of the
Bank and the execution and delivery of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of
the Fund and all amendments thereto.
10.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting
devices, if any; and for the preparation or use, and for keeping
account of, such certificates, forms and devices.
10.3 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem
advisable. To the extent required by Section 31 of the Investment
Fund Act of 1940, as amended, and the Rules thereunder, the Bank
agrees that all such records prepared or maintained by the Bank
relating to the services to be performed by the Bank hereunder are
the property of the Fund and will be preserved, maintained and made
available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its
request.
11. Termination of Agreement
11.1 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
11.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will
be borne by the Fund on behalf of the applicable Portfolio(s).
Additionally, the Bank reserves the right to charge for any other
reasonable expenses associated with such termination and a charge
equivalent to the average of three (3) months' fees.
10
<PAGE>
12. Additional Funds
In the event that the Fund establishes one or more series of Shares
in addition to the attached Schedule A with respect to which it
desires to have the Bank render services as transfer agent under
the terms hereof, it shall so notify the Bank in writing, and if
the Bank agrees in writing to provide such services, such series of
Shares shall become a Portfolio hereunder.
13. Assignment
13.1 Except as provided in Section 14.3 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
13.2 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
13.3 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial
Data Services, Inc., a Massachusetts corporation ("BFDS") which is
duly registered as a transfer agent pursuant to Section 17A(c)(2)
of the Securities Exchange Act of 1934, as amended ("Section
17A(c)(2)"), (ii) a BFDS subsidiary duly registered as a transfer
agent pursuant to Section 17A(c)(2) or (iii) a BFDS affiliate;
provided, however, that the Bank shall be as fully responsible to
the Fund for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
14. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution
of the Board of Directors of the Fund.
15. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The
Commonwealth of Massachusetts.
16. Force Majeure
In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its
control, or other causes reasonably beyond its control, such party
shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such
causes.
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17. Consequential Damages
Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or
for any consequential damages arising out of any act or failure to
act hereunder.
18. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
19. Counterparts
This Agreement may be executed by the parties hereto on any number
of counterparts, and all of said counterparts taken together shall
be deemed to constitute one and the same instrument.
20. Reproduction of Documents
This Agreement and all schedules, exhibits, attachments and
amendments hereto may be reproduced by any photographic,
photostatic, microfilm, micro-card, miniature photographic or other
similar process. The parties hereto each agree that any such
reproduction shall be admissible in evidence as the original itself
in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was
made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction shall likewise be
admissible in evidence.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
LM INSTITUTIONAL FUND ADVISORS II, INC.
BY: /s/ MARIE K. KARPINSKI
-----------------------------------
ATTEST:
/s/ LAURA V. ATWATER
- -------------------------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ RONALD E. LOGUE
-----------------------------------
Executive Vice President
ATTEST:
/s/ (SIGNATURE ILLEGIBLE)
- --------------------------------------
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
Bank Fund
1. Receives orders for the purchase X
of Shares.
2. Issue Shares and hold Shares in X
Shareholders accounts.
3. Receive redemption requests. X
4. Effect transactions 1-3 above X
directly with broker-dealers.
5. Pay over monies to redeeming X
Shareholders.
6. Effect transfers of Shares. X
7. Prepare and transmit dividends X
and distributions.
8. Reporting of abandoned property. X X
9. Maintain records of account. X
10. Maintain and keep a current and X
accurate control book for each
issue of securities.
11. Mail proxies. X X
12. Mail Shareholder reports. X X
13. Mail prospectuses to current X X
Shareholders.
14. Withhold taxes on U.S. resident X
and non-resident alien accounts.
<PAGE>
Service Performed Responsibility
Bank Fund
15. Prepare and file U.S. Treasury X
Department forms.
16. Prepare and mail account and X
confirmation statements for
Shareholders.
17. Provide Shareholder account X
information.
18. Blue sky reporting. X
* Such services are more fully described in Section 1.2(a), (b) and (c) of the
Agreement.
LM INSTITUTIONAL FUND ADVISORS II, INC.
BY: /s/ Marie K. Karpinski
------------------------------------
ATTEST:
/s/ Laura V. Atwater
------------------------------
STATE STREET BANK AND TRUST
COMPANY
BY: /s/ Ronald E. Logue
------------------------------------
Executive Vice President
ATTEST:
/s/ (SIGNATURE ILLEGIBLE)
------------------------------
<PAGE>
SCHEDULE A
LM Value Institutional Portfolio
LM Mid Cap Institutional Portfolio
Brandywine Small Cap Value Portfolio
Batterymarch International Equity Portfolio
Batterymarch Emerging Markets Portfolio
LM Total Return Institutional Portfolio
