<PAGE>
LM INSTITUTIONAL FUND ADVISORS II, INC.
LM Value Institutional Portfolio
Brandywine Small Cap Value Portfolio
Report for the Period Ended
March 31, 1999
<PAGE>
PRESIDENT'S LETTER
LM Institutional Fund Advisors II, Inc.
April 30, 1999
Dear Shareholder:
We are pleased to provide you with the financial statements for the LM
Institutional Fund Advisors II, Inc. Portfolios for the periods ended March
31, 1999. Attached are narratives from the portfolio managers of the LM Value
Institutional Portfolio and Brandywine Small Cap Value Portfolio detailing key
developments as they pertain to your investment.
During 1998 and into 1999, the focus on the Year 2000 issue has increased
significantly. As you may know, the Year 2000 issue is a computer programming
problem that affects the ability of computers to correctly process dates of
January 1, 2000, and beyond. The Portfolios' Year 2000 project is well
underway, and is designed to ensure that the Year 2000 date change will have
no adverse impact on our ability to service our shareholders. The Portfolios
are committed to taking those steps necessary to protect Portfolio investors
including efforts to determine that the Year 2000 problem will not affect such
vital service functions as shareholder transaction processing and
recordkeeping. In addition, we are continuously monitoring the Year 2000
efforts of our vendors, and will perform tests with our critical vendors
throughout 1999. Although the Portfolios are taking steps to ensure that all
of their systems will function properly before, during, and after the Year
2000, the Portfolios could be adversely affected by computer related problems
associated with the Year 2000. Contingency plans are in place to ensure that
functions critical to the Portfolios' operations will continue without
interruption. We are on target to complete this important project and look
forward to continuing extensive testing (including industry-wide testing) with
our industry peers, regulators and vendors throughout 1999.
If you have any questions, please do not hesitate to contact us at 1-888-425-
6432. We look forward to hearing from you.
Sincerely,
Joseph L. Orlando
President
LM Institutional Advisors, Inc.
1
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
REVIEW OF MARKET CONDITIONS
Large capitalization stocks performed exceptionally well in the six months
ending March 31, 1999, returning 27.3% as measured by the S&P 500. Broader
measures of stock performance significantly lagged the S&P 500. The Value Line
index, which includes both large and small companies, rose just 6.8% during
that period. The Russell 2000 Index, which covers mostly smaller companies,
rose 10.1% for the six months. Such broad divergences in the returns of large
and small companies are quite unusual and we would be surprised to see them
persist. We believe they were due to the global financial crisis which erupted
last summer and which culminated in the panic lows of October 8, l998.
Investors sought the relative safety of large, well-established companies
during this period of uncertainty. With the ebbing of the crisis and the
beginning of economic recovery in many of the hardest hit emerging economies,
we think investors will once again begin to invest on the basis of hope
instead of fear. This bodes well for the returns of small and mid-size
companies where valuations remain quite attractive.
STRATEGIES AFFECTING RESULTS: GENERAL
The Value Institutional Portfolio follows a value investing style. Value
investors attempt to evaluate the intrinsic worth of a company and purchase
securities in that company at prices representing a substantial discount to
estimated value. Estimates of business value are subject to substantial
uncertainty arising from, but not limited to, the availability of accurate
information, economic growth and change, changes in competitive conditions,
technological change, changes in government policy or geo-political dynamics,
and so forth. We attempt to minimize the potentially unfavorable consequences
of errors in the estimation of business value by building in a margin of
safety between our estimates and the price we are willing to pay for a
security.
A variety of quantitative methods and qualitative assessments are used to
estimate business value. These include, but again are not limited to,
traditional valuation measures such as price earnings ratios, price to book
value and price to cash flow ratios, both prospective and historic.
Comparative valuation work is extensive, and includes historic, prospective,
and scenario-based methods, as well as volatility analyses. Theoretical
valuation frameworks are also employed. Discounted cash flow and free cash
flow analyses are extensively employed, as are private market and liquidation
value analyses.
Qualitative assessment of business prospects involves studying companies'
products, competitive positioning, strategy, industry economics and dynamics,
regulatory frameworks, and more. We pay particularly close attention to
corporate capital allocation policies and the returns resulting therefrom. We
believe a management's commitment to shareholder value is often best
demonstrated by how they allocate capital.
2
<PAGE>
PORTFOLIO MANAGERS' COMMENTS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
The Portfolio's management also devotes considerable time to the study of
important academic work in financial theory and in experimental economics. We
have found recent work in behavioral finance and complex adaptive systems to
be particularly important in assessing and understanding markets, investor
behavior, and competitive strategy.
STRATEGIES AFFECTING RESULTS: VALUE INSTITUTIONAL PORTFOLIO
The Value Institutional Portfolio follows a consistent investment strategy
characterized by careful attention to value, a focused portfolio and low
turnover.
In the six month period ending March 31, 1999, the Value Institutional
Portfolio rose 61.40% on a cumulative basis, significantly outpacing the S&P
500 which rose 27.34%. The Portfolio's results were helped by the fact that
the inception date occurred during a period when the market was weak, and we
were able to acquire securities at very favorable prices. The Portfolio also
benefited from a number of its technology and financial holdings. America
Online led the way, rising over 400% in the period. Our holdings in financial
services stocks contributed positively to our results relative to the market
and to comparable funds. Most of their contribution came in the past three
months.
The returns of the S&P 500 sharply outpaced those of other market indices
during the past six months. Our concentration in mostly large capitalization
companies helped our relative results.
Our results were also enhanced by mostly avoiding shares whose prices suffered
heavy losses. We believe our focus on having a margin of safety in the
purchase price contributed to the relative lack of poor performers in the
Portfolio. A more complete list of stocks affecting our results is included
elsewhere in this report.
MARKET OUTLOOK: NEAR TERM
As usual, we are agnostic about the market's near-term direction. A variety of
valuation tools suggest that the S&P 500 and the DJIA approximate fair value,
a view with which we concur. However, the extreme divergence of equity returns
over the last twelve months, and a global economy that appears to be
strengthening, suggests that the market's returns should broaden, leading to
more balanced returns among the small, mid, and large capitalization segments
of the market.
Share prices have begun the calendar year with another strong advance, fueled
by continued low inflation, stable monetary policy, a growing budget surplus,
and high corporate profitability.
3
<PAGE>
PORTFOLIO MANAGERS' COMMENTS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
Mergers and acquisition activity remains extremely robust and is expected to
remain so. The Financial Accounting Standards Board (FASB) has reached a
tentative conclusion to eliminate pooling of interests accounting for mergers,
thereby substituting one form of financial obfuscation for another. We think
that change will spur many companies to accelerate acquisition activities
before the deadline for poolings expires, expected to be January 1, 2001.
As our new fiscal year gets underway, the market is experiencing a sharp
change in leadership, with cyclical companies coming to life. The rebound in
what are misleadingly referred to as value stocks (i.e., cyclicals) has been
sufficiently strong that Caterpillar, Deere and Alcoa have collectively
outperformed Dell, Intel and Cisco for the calendar year to date. We do not
expect that such simple-minded security classifications as "growth" or "value"
are likely to provide much guidance in stock selection or insight into the
sources of market leadership. We do believe, as noted, that the narrow
leadership of the last few years will give way to a more normal (Gaussian)
distribution of returns.
MARKET OUTLOOK: LONG TERM
"When we think about the future of the world, we always have in mind its being
at the place where it would be if it continued to move as we see it moving
now. We do not realize that it moves not in a straight line . . . and that its
direction changes constantly."
Wittgenstein
One year ago, in a letter to Legg Mason Value Trust shareholders, we reflected
that the 50% returns in the previous twelve months were surprising, and were
driven by interest rates dropping from 7% to 6% while profits continued to
advance. We said then, and still believe, that the era of extraordinary
returns is over and that investors should expect equity market returns to
fluctuate around the 9% to 10% area. Returns substantially above that would be
driven by falling rates and rising profits, and returns substantially below by
rising rates and falling profits. Over the past 12 months rates fell about 10%
and profits rose, and the S&P 500 was up 18%, despite falling over 20%, peak
to trough, in the July to early October period.
The U.S. economy looks solid, and global growth is expected to pick up over
the next twelve months. Inflation is low, and although commodity prices have
stopped declining, capacity is ample in all commodities and sustained price
advances appear unlikely. The growing effect of the Internet is a powerful
disinflationary force. As a consequence, we expect interest rates to remain in
the 6% area or lower, and profits should work moderately higher. Valuations,
although high, are well underpinned by fundamentals.
The future is inherently unknowable, but it is bet-able. Our bet is that the
next year will provide solid returns to equity investors.
Bill Miller, CFA Mary Chris Gay
President Vice President
Legg Mason Fund Adviser, Inc. Legg Mason Fund Adviser, Inc.
April 26, 1999
4
<PAGE>
PERFORMANCE INFORMATION
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
The following graph compares the Portfolio's total return against that of a
closely matched broad-based securities market index. The lines illustrate the
cumulative total return of an initial $1,000,000 investment for the period
indicated. The line for the Portfolio represents the total return after
deducting all Portfolio investment management and other administrative
expenses and the transaction costs of buying and selling securities. The line
representing the Index does not include any transaction costs associated with
buying and selling securities in the Index or other administrative expenses
but reflects the reinvestment of dividends and capital gains distributions.
(CHART APPEARS HERE)
<TABLE>
<CAPTION>
LM Value
Institutional S&P 500
Portfolio* Index/1/
<S> <C> <C>
Sept 98 1,000,000 1,000,000
Oct 1,122,000
Nov 1,195,999
Dec 98 1,339,700 1,213,000
Jan 1,466,900
Feb 1,434,800
Mar 99 1,588,100 1,273,529
</TABLE>
* Past performance is not an indicator of future results. Investment returns
and principal value will fluctuate, and shares may be worth more or less at
redemption than at original purchase. Performance figures include
reinvestment of dividends and capital gains distributions. No adjustment
has been made for any income taxes payable by shareholders. The Portfolio
currently operates under an expense limitation. Without this limitation,
total return would be lower.
Mutual fund shares are not insured by the FDIC and are not deposits,
obligations of or guaranteed by any bank. The Portfolio is subject to
investment risks, including possible loss of principal amount invested.
/1/ The S&P 500 Index is an unmanaged index of 500 common stocks and is
considered to be a broad indicator of general market performance.
<TABLE>
<CAPTION>
STRONG PERFORMERS FOR THE SIX MONTHS ENDED
MARCH 31, 1999*
- ------------------------------------------
<S> <C>
1. America Online, Inc. +423.2%
2. The Chase Manhattan
Corporation +88.0%
3. MCI WorldCom, Inc. +81.2%
4. Citigroup Inc. +71.8%
5. BankBoston Corporation +31.3%
6. Foundation Health Systems,
Inc. +30.0%
7. MBNA Corporation +25.1%
8. Dell Computer Corporation +24.3%
9. Berkshire Hathaway Inc. -
Class A +23.1%
10. Washington Mutual, Inc. +21.1%
</TABLE>
<TABLE>
<CAPTION>
WEAK PERFORMERS FOR THE SIX MONTHS ENDED
MARCH 31, 1999*
- -----------------------------------------
<S> <C>
1. Philip Morris Companies, Inc. -23.6%
2. Starwood Hotels & Resorts
Worldwide, Inc. -6.4%
3. Compaq Computer Corporation +0.2%
4. Conseco, Inc. +1.0%
5. Fleet Financial Group, Inc. +2.5%
6. Fannie Mae +7.8%
7. Storage Technology Corporation +9.6%
8. Toys "R" Us, Inc. +16.2%
9. BankAmerica Corporation +17.5%
</TABLE>
*Securities held the entire six months
5
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
During the quarter, the Brandywine Small Cap Value Portfolio returned -8.7%
relative to a -9.7% return for the Russell 2000 Value, a -5.4% return for the
Russell 2000, and a +5.0% return for the S&P 500. The first quarter continued
the trend begun in late 1998 where a narrowly focused group of stocks rose
dramatically and drove the large cap stock indices to record levels. While the
Dow crossed the 10,000 mark, only 33% of U.S. stocks were up in the quarter.
Aggressive investor demand for Internet-oriented stocks and a select list of
large cap growth stocks generated attractive returns for large cap and growth
indices. Meanwhile the rest of the U.S. equity market languished. Over the
last seven months, small cap value stocks have underperformed by a wide margin
relative to both large cap stocks and small cap growth stocks. In this period,
the Russell 2000 Value Index gained 4.1% while the Russell 2000 Growth
benchmark was up 33.9% and the S&P 500 rose 35.5%.
The Portfolio retained a significant weighting in economically sensitive
sectors, including homebuilding, metals, chemicals and transportation. Many
stocks in these sectors were off in the quarter despite evidence that the U.S.
economy is continuing to grow at a brisk pace and that global economic
activity is beginning to improve. Transportation was one of the cyclical
sectors that did perform well as the trucking stocks responded positively to
upbeat economic news. Another area of positive performance was the oil-related
segment of industrial services. An indication that oil prices might rise
(based in part on a new OPEC output agreement) sent these very cheap stocks
soaring. The best performing segment in the Portfolio was retail stores. The
Portfolio's clothing stores had been out of favor relative to newer retailing
concepts and Internet-shopping. However, a good holiday shopping season and
strong consumer sentiment led to increased stock prices.
Two areas of the Portfolio were hurt by industry specific events. Sub-prime
mortgage lenders took a double hit to earnings due to excessive loan portfolio
write-offs. Declining interest rates allowed better quality borrowers to
refinance, thus lowering the repayment potential of remaining loans combined
with inaccurate default rate assumptions based on short experience histories.
Health care providers were hurt by the uncertainty generated from changes in
Medicare payment policies. Within the overall small cap market, the technology
sector had the highest return with Internet stocks leading the performance.
The Portfolio held a below-index weight in technology and had almost no
Internet exposure as these stocks are trading at very high valuations.
Therefore, the Portfolio had a lower technology return and weighting than the
indices, which hurt performance relative to the benchmarks.
The continued weak performance of small cap stocks has caused many investors
to question whether small cap stocks and small cap value stocks will ever
return to favor. For a number of reasons, we firmly believe that small cap
value stocks are well positioned to outperform in the next market cycle.
First, we have seen previous periods in which large cap stocks have dominated
market performance similar to the last four and a half years. These periods
have always been followed by an extended run of small cap outperformance. One
6
<PAGE>
PORTFOLIO MANAGERS' COMMENTS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
such example is the Nifty Fifty era of the late 1960s and early 1970s. While
small caps badly trailed large caps in the 1969 through 1974 period, small
caps more than made up for the lagged performance in the subsequent years of
1975 through 1983.
Second, investor focus on the Internet has led to a speculative rush into Web-
related stocks. While we observe that the Internet is creating some
revolutionary business changes, we believe that the market has taken
valuations much further than either current fundamentals or the most
optimistic predictions can justify. We have seen extremely exaggerated price
movements in the stocks of companies that, while only marginally related to
the Internet, have somehow become the targets of Internet-investing interest.
For example K-Tel and Books-a-Million, two ignored retailers, saw their stocks
increase ten-fold overnight when they became the subjects of Internet stories.
Referring again to the Nifty Fifty, investors can become too focused on a
single market segment and drive valuations beyond reason when talk begins of a
"new era" in business and investing. Once fundamental reality reasserted
itself in the early 1970s, the Nifty Fifty as a group lagged the rest of the
market for a number of years. We see strong parallels between recent events
and the earlier period, which reinforces our belief that small cap value
stocks will again provide market leadership.
As always, we welcome the opportunity to discuss the Portfolio and this report
in more detail. If you have any questions or comments, please contact us.
Henry F. Otto Steven M. Tonkovich
Managing Director Managing Director
Brandywine Asset Management, Inc. Brandywine Asset Management, Inc.
April 26, 1999
7
<PAGE>
PERFORMANCE INFORMATION
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
The following graph compares the Portfolio's total return against that of a
closely matched broad-based securities market index. The lines illustrate the
cumulative total return of an initial $1,000,000 investment for the period
indicated. The line for the Portfolio represents the total return after
deducting all Portfolio investment management and other administrative expenses
and the transaction costs of buying and selling securities. The line
representing the Index does not include any transaction costs associated with
buying and selling securities in the Index or other administrative expenses but
reflects the reinvestment of dividends and capital gains distributions.
[CHART APPEARS HERE]
<TABLE>
Brandywine
Small Cap
Value Portfolio* Russell 2000
(net of expenses) Value Index/1/
<S> <C> <C>
Aug 98 1,000,000 1,000,000
Sep 98 848,000 1,056,500
Oct 1,087,878
Nov 1,117,360
Dec 98 937,464 1,152,445
Jan 1,126,284
Feb 1,049,359
Mar 99 856,280 1,040,754
</TABLE>
* Past performance is not an indicator of future results. Investment returns
and principal value will fluctuate, and shares may be worth more or less at
redemption than at original purchase. Performance figures include
reinvestment of dividends and capital gains distributions. No adjustment
has been made for any income taxes payable by shareholders. The Portfolio
currently operates under an expense limitation. Without this limitation,
total return would be lower.
Mutual fund shares are not insured by the FDIC and are not deposits,
obligations of or guaranteed by any bank. The Portfolio is subject to
investment risks, including possible loss of principal amount invested.
/1/ The Russell 2000 Value Index is an unmanaged index that measures the
performance of those Russell 2000 companies with lower price-to-book ratios
and lower forecasted growth values. It is considered to be a broad indicator
of small cap value market perfomrance.
<TABLE>
<S> <C>
STRONG PERFORMERS FOR THE SIX MONTHS ENDED
MARCH 31, 1999*
- ------------------------------------------------
1. USFreightways Corporation +55.4%
2. Roadway Express, Inc. +55.1%
3. Brylane Inc. +51.6%
4. Aviall, Inc. +48.5%
5. Consolidated Freightways Corporation +42.4%
6. Rock-Tenn Company +39.0%
7. Lone Star Steakhouse & Saloon, Inc. +34.4%
8. Herbalife International, Inc. +33.1%
9. SEACOR SMIT Inc. +29.7%
10. Yellow Corporation +28.7%
</TABLE>
<TABLE>
<S> <C>
WEAK PERFORMERS FOR THE SIX MONTHS ENDED MARCH 31, 1999*
- ---------------------------------------------------------------------------
1. IMC Mortgage Company -92.1%
2. Sun Healthcare Group, Inc. -84.6%
3. Southern Pacific Funding Corporation -72.2%
4. Genesis Health Ventures, Inc. -60.2%
5. Titanium Metals Corporation -59.3%
6. InaCom Corp. -58.9%
7. Nymagic, Inc. -48.8%
8. NovaCare, Inc. -42.9%
9. Guilford Mills, Inc. -41.2%
10. Aftermarket Technology Corp. -38.1%
</TABLE>
* Securities held the entire six months
8
<PAGE>
STATEMENT OF NET ASSETS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
-----------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS 89.9%
Advertising 2.4%
WPP Group plc 376,444 $ 3,263,717
-----------
Automotive 1.6%
General Motors Corporation 25,371 2,204,106
-----------
Banking 13.3%
Bank One Corporation 23,962 1,319,408
BankAmerica Corporation 26,548 1,874,953
BankBoston Corporation 60,408 2,616,422
Citigroup Inc. 57,085 3,646,304
Fleet Financial Group, Inc. 16,169 608,359
Lloyds TSB Group plc 139,727 2,113,771
The Chase Manhattan Corporation 55,575 4,518,942
Zions Bancorporation 16,948 1,127,042
-----------
17,825,201
-----------
Computer Services and Systems 15.5%
Compaq Computer Corporation 69,952 2,216,604
Dell Computer Corporation 181,223 7,407,490A
First Data Corporation 20,972 896,553
Gateway 2000, Inc. 51,951 3,561,890A
International Business Machines Corporation 15,404 2,730,359
Storage Technology Corporation 79,738 2,222,697A
The Learning Company, Inc. 47,541 1,378,689A
Western Digital Corporation 48,326 383,588A
-----------
20,797,870
-----------
Electrical Equipment 1.9%
Koninklijke (Royal) Philips Electronics N.V. 30,506 2,514,838
-----------
Entertainment 2.6%
Circus Circus Enterprises, Inc. 65,807 1,155,735A
MGM Grand, Inc. 31,319 1,053,101A
Mirage Resorts, Incorporated 62,274 1,323,323A
-----------
3,532,159
-----------
Finance 5.7%
Fannie Mae 38,997 2,700,542
Freddie Mac 24,373 1,392,308
MBNA Corporation 76,937 1,836,871
The Bear Stearns Companies, Inc. 38,057 1,700,672
-----------
7,630,393
-----------
</TABLE>
9
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
--------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS
(CONTINUED)
Food, Beverage and Tobacco 1.4%
PepsiCo, Inc. 20,717 $ 811,847
Philip Morris Companies, Inc. 31,847 1,120,616
-----------
1,932,463
-----------
Food Merchandising 1.4%
The Kroger Co. 30,466 1,824,152A
-----------
Health Care 3.1%
Foundation Health Systems, Inc. 106,378 1,296,482A
United HealthCare Corporation 53,159 2,797,492
-----------
4,093,974
-----------
Hotels and Motels 0.6%
Hilton Hotels Corporation 60,710 853,734
-----------
Insurance 5.6%
Ambac Financial Group, Inc. 10,512 567,648
Berkshire Hathaway Inc. - Class A 51 3,641,400A
Conseco, Inc. 17,051 526,450
MBIA, Inc. 7,309 423,922
MGIC Investment Corporation 67,657 2,372,224
-----------
7,531,644
-----------
Manufacturing 1.1%
Danaher Corporation 28,996 1,515,041
-----------
Media 18.5%
America Online, Inc. 170,316 24,866,136A
-----------
Motion Pictures and Services 0.3%
Metro-Goldwyn-Mayer, Inc. 33,186 435,566A
-----------
Pharmaceuticals 2.0%
Amgen, Inc. 36,560 2,737,430A
-----------
Real Estate 2.1%
Starwood Hotels & Resorts Worldwide, Inc. 99,930 2,854,251
-----------
Retail Sales 1.7%
Toys "R" Us, Inc. 120,816 2,272,851A
-----------
Savings and Loan 2.0%
Washington Mutual, Inc. 65,241 2,666,726
-----------
</TABLE>
10
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
---------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS
(CONTINUED)
Telecommunications 7.1%
MCI WorldCom, Inc. 38,731 $ 3,430,114A
Nextel Communications, Inc. 56,179 2,057,556A
Nokia Oyj 18,122 2,822,501
Telefonos de Mexico S.A. ADR 19,330 1,266,115
------------
9,576,286
------------
TOTAL COMMON STOCKS AND EQUITY INTERESTS
(IDENTIFIED COST $102,542,096) 120,928,538
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 13.0%
Freddie Mac discount notes 4.80% 4/1/99
(Identified Cost $17,581,000) $ 17,581,000 17,581,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST
$120,123,096) 102.9% 138,509,538
OTHER ASSETS LESS LIABILITIES (2.9%) (3,960,582)
------------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable
to:
7,306,844 Institutional shares
outstanding $101,623,034
1,182,087 Financial Intermediary shares
outstanding 13,425,234
Undistributed net investment income 127,123
Undistributed realized gain on
investments and foreign currency
transactions 987,271
Unrealized appreciation of investments
and foreign currency translations 18,386,294
------------
NET ASSETS 100.0% $134,548,956
============
NET ASSET VALUE PER SHARE:
Institutional Class $ 15.85
============
Financial Intermediary Class $ 15.86
============
</TABLE>
- --------------------------------------------------------------------------------
A Non-income producing
See Notes to Financial Statements
11
<PAGE>
STATEMENT OF OPERATIONS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 22, 1998A
TO MARCH 31, 1999
-------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
DividendsB $ 210,902
Interest 152,370
-----------
Total income 363,272
-----------
EXPENSES:
Management fee 140,121
Distribution and service fees 15,579
Custodian fees 62,946
Directors' fees 7,000
Legal and audit fees 8,000
Registration fees 28,833
Transfer agent and shareholder servicing expense 6,351
-----------
268,830
Less fees waived (78,094)
-----------
Total expenses, net of waivers 190,736
-----------
NET INVESTMENT INCOME 172,536
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments and foreign currency
transactions 985,461
Unrealized appreciation of investments and
foreign currency translations 18,386,294
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 19,371,755
-----------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $19,544,291
===========
</TABLE>
- --------------------------------------------------------------------------------
A Commencement of operations
B Net of foreign taxes of $7,964
See Notes to Financial Statements
12
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 22, 1998A
TO MARCH 31, 1999
-------------------
<S> <C>
CHANGE IN NET ASSETS:
Net investment income $ 172,536
Net realized gain on investments and foreign currency
transactions 985,461
Unrealized appreciation of investments and foreign
currency translations 18,386,294
------------
Increase in net assets resulting from operations 19,544,291
Distributions to shareholders from net investment income:
Institutional Class (24,640)
Financial Intermediary Class (18,963)
Increase in net assets from Fund share transactions:
Institutional Class 101,608,034
Financial Intermediary Class 13,425,234
------------
Increase in net assets 134,533,956
NET ASSETS:
Beginning of period 15,000
------------
End of period (including undistributed net investment
income of $127,123) $134,548,956
============
</TABLE>
- --------------------------------------------------------------------------------
A Commencement of operations
See Notes to Financial Statements
13
<PAGE>
FINANCIAL HIGHLIGHTS
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
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>
SEPTEMBER 22, 1998A OCTOBER 22, 1998A
TO MARCH 31, 1999 TO MARCH 31, 1999
------------------- ------------------
FINANCIAL
INSTITUTIONAL CLASS INTERMEDIARY CLASS
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.00 $ 10.71
------------ -----------
Net investment income 0.04B 0.03C
Net realized and unrealized gain/(loss)
on investments and foreign currency
transactions 5.83 5.14
------------ -----------
Total from investment operations 5.87 5.17
------------ -----------
Distributions to shareholders from
net investment income (0.02) (0.02)
------------ -----------
Net asset value, end of period $ 15.85 $ 15.86
============ ===========
Total return 58.81%D 48.32%D
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets
Expenses 0.75%B,E 1.00%C,E
Net investment income 0.84%B,E 0.43%C,E
Portfolio turnover rate 28.6%E 28.6%E
Net assets, end of period $115,798,256 $18,750,700
</TABLE>
- --------------------------------------------------------------------------------
A Commencement of operations
B Net of fees waived by LMIA pursuant to a voluntary expense limitation of
0.75% until July 31, 1999. If no fees had been waived by LMIA, the annualized
ratio of expenses to average daily net assets for the period would have been
1.08%.
C Net of fees waived by LMIA pursuant to a voluntary expense limitation of
1.00% until July 31, 1999. If no fees had been waived by LMIA, the annualized
ratio of expenses to average daily net assets for the period would have been
1.33%.
D Not annualized
E Annualized
See Notes to Financial Statements
14
<PAGE>
STATEMENT OF NET ASSETS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
-----------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS 94.7%
Aerospace/Defense 1.1%
Coltec Industries Inc. 500 $ 9,094A
ESCO Electronics Corporation 200 1,800A
GenCorp Inc. 300 5,400
Kaman Corporation 400 5,125
-----------
21,419
-----------
Apparel 4.6%
Brylane Inc. 400 9,700A
Burlington Coat Factory Warehouse Corporation 900 10,575
Footstar, Inc. 300 9,600A
Fruit of the Loom, Inc. 1,200 12,450A
Goody's Family Clothing, Inc. 400 5,575A
Nautica Enterprises, Inc. 1,300 14,706A
Oxford Industries, Inc. 400 9,750
The Dress Barn, Inc. 600 8,325A
The Timberland Company 100 6,306A
Wolverine World Wide, Inc. 300 2,850
-----------
89,837
-----------
Automotive 3.0%
Aftermarket Technology Corp. 1,000 6,813A
Arvin Industries, Inc. 600 20,212
Meritor Automotive, Inc. 1,200 18,600
The Standard Products Company 800 13,000
-----------
58,625
-----------
Chemicals 6.5%
A. Schulman, Inc. 1,700 23,163
Ethyl Corporation 4,200 17,850
Georgia Gulf Corporation 1,600 17,900
M. A. Hanna Company 2,500 32,031
NL Industries, Inc. 800 7,200
The General Chemical Group Inc. 1,000 13,125
Wellman, Inc. 1,600 14,200
-----------
125,469
-----------
Commercial/Industrial Services 4.3%
Aviall, Inc. 1,000 15,500A
BancTec, Inc. 1,000 12,312A
CDI Corp. 500 12,031A
Dames & Moore Group 200 2,238
Fleming Companies, Inc. 1,900 16,269
Franklin Covey Co. 200 1,800A
</TABLE>
15
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS (CONTINUED)
Commercial/Industrial Services (continued)
Kennametal Inc. 400 $ 7,000
Knoll, Inc. 300 7,387A
Olsten Corporation 1,000 6,188
Veritas DGC Inc. 200 2,838A
-----------
83,563
-----------
Computer Services and Systems 0.1%
CHS Electronics, Inc. 900 2,869A
-----------
Construction and Building Materials 5.0%
D.R. Horton, Inc. 1,000 16,750
Del Webb Corporation 300 6,506
Hughes Supply, Inc. 600 13,650
Kaufman and Broad Home Corporation 300 6,769
Lone Star Industries, Inc. 1,000 31,000
Pulte Corporation 300 6,244
Standard Pacific Corp. 400 5,150
Toll Brothers, Inc. 300 5,437A
U.S. Home Corporation 200 6,525A
-----------
98,031
-----------
Consumer Durables 0.2%
Sola International Inc. 300 3,619A
-----------
Electrical Equipment and Electronics 4.2%
AMETEK, Inc. 300 5,475
Belden Inc. 1,300 22,181
General Semiconductor, Inc. 1,800 13,050A
InaCom Corp. 800 6,200A
MagneTek, Inc. 1,600 13,400A
Methode Electronics, Inc. 300 3,338
Pioneer-Standard Electronics, Inc. 1,600 10,500
UCAR International, Inc. 500 7,062A
-----------
81,206
-----------
Entertainment and Leisure 1.9%
Arctic Cat Inc. 2,100 20,869
Boyd Gaming Corporation 1,000 4,250A
Lakes Gaming, Inc. 525 4,298A
Midway Games Inc. 500 4,344A
Prime Hospitality Corp. 400 3,975A
-----------
37,736
-----------
</TABLE>
16
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS (CONTINUED)
Financial Services 3.9%
Advanta Corp. 1,900 $ 21,019
AMRESCO, INC. 1,100 8,456A
ARM Financial Group, Inc. 600 8,963
Downey Financial Corp. 500 9,156
Fidelity National Financial, Inc. 500 7,500
FirstFed Financial Corp. 400 6,425A
IMC Mortgage Company 1,500 234A
Interpool, Inc. 700 9,450
Resource Bancshares Mortgage Group, Inc. 300 3,863
Southern Pacific Funding Corporation 1,000 156A
-----------
75,222
-----------
Food, Beverage and Tobacco 1.8%
General Cigar Holdings, Inc. 400 3,725A
Herbalife International, Inc. 1,500 18,469
M&F Worldwide Corp. 500 3,500A
Schweitzer-Mauduit International, Inc. 100 1,150
Universal Corporation 300 7,669
-----------
34,513
-----------
Gas/Pipeline 8.5%
Cooper Cameron Corporation 400 13,550A
Marine Drilling Companies, Inc. 1,300 14,300A
National-Oilwell, Inc. 600 6,938A
Oceaneering International, Inc. 1,100 16,637A
Pride International, Inc. 2,500 20,625A
R&B Falcon Corporation 1,400 12,337A
Rowan Companies, Inc. 500 6,344A
SEACOR SMIT Inc. 700 37,669A
Tidewater Inc. 300 7,762
Tuboscope Inc. 2,300 20,700A
Varco International, Inc. 800 8,900A
-----------
165,762
-----------
Health Care 2.3%
Beverly Enterprises, Inc. 1,900 9,738A
First Health Group Corp. 500 8,031A
Genesis Health Ventures, Inc. 1,800 8,775A
Integrated Health Services, Inc. 600 3,300A
NovaCare, Inc. 700 1,225A
Quorum Health Group, Inc. 1,200 12,000A
Sun Healthcare Group, Inc. 700 700A
-----------
43,769
-----------
</TABLE>
17
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS (CONTINUED)
Industrial 6.5%
ACX Technologies, Inc. 500 $ 6,563A
AGCO Corporation 4,700 30,844
Applied Industrial Technologies, Inc. 300 3,338
Flowserve Corporation 900 14,006
Milacron Inc. 2,000 31,500
Regal-Beloit Corporation 1,000 18,062
Stewart & Stevenson Services, Inc. 400 3,075
Watts Industries, Inc. 1,400 18,987
-----------
126,375
-----------
Insurance 8.2%
Acceptance Insurance Companies Inc. 1,100 14,850A
AmerUs Life Holdings, Inc. 400 9,600
Capital Re Corporation 400 6,900
Chartwell Re Corporation 100 1,725
Foremost Corporation of America 1,400 28,175
Liberty Financial Companies, Inc. 400 9,425
MMI Companies, Inc. 900 13,838
Nymagic, Inc. 500 6,500
Orion Capital Corporation 200 6,250
Reliance Group Holdings Incorporated 1,900 14,369
Selective Insurance Group, Inc. 1,500 26,437
The Commerce Group, Inc. 900 22,106
-----------
160,175
-----------
Metals and Mining 7.5%
Armco Inc. 8,100 35,944A
Carpenter Technology Corporation 300 7,781
Citation Corporation 900 9,225A
Cleveland-Cliffs Inc. 600 20,437
Commercial Metals Company 400 8,000
Intermet Corporation 1,300 17,388
Metals USA, Inc. 600 5,250A
National Steel Corporation 2,200 18,150
Quanex Corporation 100 1,550
RTI International Metals, Inc. 200 1,875A
Texas Industries, Inc. 300 7,444
Titanium Metals Corporation 1,600 9,200
Wyman-Gordon Company 500 4,625A
-----------
146,869
-----------
</TABLE>
18
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS (CONTINUED)
Miscellaneous Manufacturing 4.5%
Columbus McKinnon Corporation 100 $ 2,013
Fleetwood Enterprises, Inc. 300 8,587
Griffon Corporation 400 2,750A
Hexcel Corporation 1,800 12,712A
Justin Industries, Inc. 300 3,300
Mark IV Industries, Inc. 400 5,225
MascoTech, Inc. 600 9,300
Robbins & Myers, Inc. 100 1,725
RPC, Inc. 400 2,575
Standex International Corporation 100 2,188
The Dexter Corporation 1,200 37,800
-----------
88,175
-----------
Process Industries 4.4%
Buckeye Technologies Inc. 1,100 15,400A
P.H. Glatfelter Company 1,000 11,188
Rock-Tenn Company 1,700 26,137
Silgan Holdings Inc. 1,000 16,687A
The Timken Company 1,000 16,250
-----------
85,662
-----------
Restaurants 1.8%
Host Marriott Services Corporation 600 4,050A
Landry's Seafood Restaurants, Inc. 1,500 9,609A
Lone Star Steakhouse & Saloon, Inc. 2,000 20,500A
-----------
34,159
-----------
Retail 0.6%
Cole National Corporation 100 1,825A
General Nutrition Companies, Inc. 600 8,400A
Oneida Ltd. 100 1,700
-----------
11,925
-----------
Technology 0.4%
Tech Data Corporation 300 6,881A
-----------
Textiles 2.8%
Burlington Industries, Inc. 3,100 20,538A
Guilford Mills, Inc. 1,300 11,375
Interface, Inc. 1,000 9,625
Unifi, Inc. 1,000 12,750
-----------
54,288
-----------
</TABLE>
19
<PAGE>
STATEMENT OF NET ASSETS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% OF SHARES/
NET ASSETS PAR VALUE
-----------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS
(CONTINUED)
Transportation 7.6%
America West Holdings Corporation 500 $ 9,531A
Arnold Industries, Inc. 1,900 28,262
Consolidated Freightways Corporation 1,200 14,100A
Offshore Logistics, Inc. 1,100 12,788A
Roadway Express, Inc. 1,000 17,063
USFreightways Corporation 1,300 42,737
Yellow Corporation 1,400 24,325A
-----------
148,806
-----------
Utilities 3.0%
El Paso Electric Company 3,000 22,875A
Public Service Company of New Mexico 2,100 35,700
-----------
58,575
-----------
TOTAL COMMON STOCKS AND EQUITY INTERESTS
(IDENTIFIED COST $2,205,115) 1,843,530
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 9.8%
State Street Bank & Trust Company
3.50%, dated 3/31/99, to be repurchased
at $190,018 on 4/1/99 (Collateral:
$200,000 Sallie Mae Student Loan-backed
notes, 5.13% due 10/25/10, value
$198,271)
TOTAL REPURCHASE AGREEMENTS
(IDENTIFIED COST $190,000) $ 190,000 190,000
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST
$2,395,115) 104.5% $2,033,530
OTHER ASSETS LESS LIABILITIES (4.5%) (87,933)
-----------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to
227,659 Institutional shares outstanding $2,245,223
Undistributed net investment income 3,067
Undistributed net realized gain on
investments 58,892
Unrealized depreciation of investments (361,585)
----------
NET ASSETS 100.0% $1,945,597
===========
NET ASSET VALUE PER SHARE $8.55
===========
</TABLE>
- --------------------------------------------------------------------------------
A Non-income producing
See Notes to Financial Statements
20
<PAGE>
STATEMENT OF OPERATIONS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 17, 1998A
TO MARCH 31, 1999
-----------------
<S> <C>
INVESTMENT INCOME:
Dividends $ 15,330
Interest 2,908
---------
Total income 18,238
EXPENSES:
Management fee 7,607
Custodian fees 37,965
Directors' fees 7,000
Legal and audit fees 20,000
Registration expense 2,313
Reports to shareholders 126
Transfer agent and
shareholder servicing
expense 731
---------
75,742
Less fees waived and
expenses reimbursed (65,794)
---------
Total expenses, net of
fees waived and
expenses reimbursed 9,948
---------
NET INVESTMENT INCOME 8,290
---------
NET REALIZED AND
UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain on
investments 58,892
Unrealized depreciation
of investments (361,585)
---------
NET REALIZED AND
UNREALIZED GAIN (LOSS) ON
INVESTMENTS (302,693)
---------
DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(294,403)
=========
</TABLE>
- --------------------------------------------------------------------------------
A Commencement of operations
See Notes to Financial Statements
21
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 17, 1998A
TO MARCH 31, 1999
-----------------
<S> <C>
CHANGE IN NET ASSETS:
Net investment income $ 8,290
Net realized gain on investments 58,892
Unrealized depreciation of investments (361,585)
----------
Increase in net assets resulting from operations (294,403)
Distributions to shareholders from net investment income (5,223)
Increase in net assets from Fund share transactions 2,230,223
----------
Increase in net assets 1,930,597
NET ASSETS:
Beginning of period 15,000
----------
End of period (including undistributed net investment income
of $3,067) $1,945,597
==========
</TABLE>
- --------------------------------------------------------------------------------
A Commencement of operations
See Notes to Financial Statements
22
<PAGE>
FINANCIAL HIGHLIGHTS
LM Institutional Fund Advisors II, Inc.
Brandywine Small Cap Value Portfolio
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>
FOR THE PERIOD
AUGUST 17, 1998A
TO MARCH 31, 1999
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 10.00
----------
Net investment incomeB 0.04
Net realized and unrealized gain (loss) on investments (1.47)
----------
Total from investment operations (1.43)
----------
Distributions to shareholders from net investment income (0.02)
----------
Net asset value, end of period $ 8.55
==========
Total return (14.38)%C
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets
ExpensesB 0.85%D
Net investment incomeB 0.71%D
Portfolio turnover rate 45.05%D
Net assets, end of period $1,945,597
</TABLE>
- -------------------------------------------------------------------------------
A Commencement of operations
B Net of fees waived and expenses reimbursed by LMIA pursuant to a voluntary
expense limitation of 0.85% until July 31, 1999. If no fees had been waived
and expenses reimbursed by LMIA, the annualized ratio of expenses to average
daily net assets for the period would have been 6.47%.
C Not annualized
D Annualized
See Notes to Financial Statements
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LM Institutional Fund Advisors II, Inc.
1. SIGNIFICANT ACCOUNTING POLICIES
LM Institutional Fund Advisors II, Inc. ("Corporation"), consisting of the LM
Value Institutional Portfolio ("Value Institutional") and the Brandywine Small
Cap Value Portfolio ("Brandywine Small Cap") (each a "Portfolio"), is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company.
Each Portfolio consists of two classes of shares: Institutional Class, offered
since September 22, 1998 for Value Institutional and since August 17, 1998 for
Brandywine Small Cap, and Financial Intermediary Class, which commenced
operations October 22, 1998 for Value Institutional. The income and expenses
for each Portfolio are allocated proportionately to the two classes of shares
based on daily net assets, except for Rule 12b-1 distribution fees, which are
charged only to the Financial Intermediary Class shares, and transfer agent
and shareholder servicing expenses, which are determined separately for each
class.
SECURITY VALUATION
Securities traded on national securities exchanges are valued at the last
quoted sales price. Over-the-counter securities and listed securities, for
which no sales price is available, are valued at the mean between the latest
bid and asked prices. Securities for which market quotations are not readily
available are valued at fair value as determined by management and approved in
good faith by the Board of Directors. Fixed income securities with 60 days or
less remaining to maturity are valued using the amortized cost method, which
approximates current market value.
FOREIGN CURRENCY TRANSLATION
The Portfolios may invest in foreign securities. Foreign currency amounts are
translated into U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the
closing daily rate of exchange, and
(ii) purchase and sales of investment securities, interest and dividend income
and expenses at the rate of exchange prevailing on the respective date of
such transactions.
The effect of changes in foreign exchange rates on realized and unrealized
security gains or losses is reflected as a component of such gains or losses.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS
Dividend and interest income and expenses are recorded on the accrual basis.
Net investment income for dividend purposes consists of dividends and interest
earned, less expenses.
Dividends from net investment income and distributions from capital gains are
recorded on the ex-dividend date. Dividends from net investment income, if
available, will be paid quarterly for Value Institutional and annually for
Brandywine Small Cap. Distributions from net capital gains, if available, will
be made annually for both Value Institutional and Brandywine Small Cap.
Additional distributions will be made when necessary.
INVESTMENT TRANSACTIONS
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis for
both financial reporting and federal income tax purposes. At March 31, 1999,
$7,589,078 was payable for securities purchased but not yet received for Value
Institutional and $119,768 for Brandywine Small Cap. At March 31, 1999,
$555,034 was receivable for securities sold but not yet delivered for Value
Institutional.
REPURCHASE AGREEMENTS
All repurchase agreements are fully collateralized by obligations issued by
the U.S. Government or its agencies and such collateral is in the possession
of the Portfolios' custodian. The value of such collateral includes accrued
interest. Risks arise from the possible delay in recovery or potential loss of
rights in the collateral should the issuer of the repurchase agreement fail
financially. The Portfolios' investment advisers, acting under the supervision
of their Board of Directors, review the value of the collateral and the
creditworthiness of those banks and dealers with which the Portfolios' enter
into repurchase agreements to evaluate potential risks.
FEDERAL INCOME TAXES
No provision for federal income or excise taxes has been made since the
Portfolios intend to qualify as regulated investment companies and distribute
all of their taxable income to their shareholders.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
2. INVESTMENT TRANSACTIONS
For the period ended March 31, 1999, investment transactions (excluding short-
term investments) were as follows:
<TABLE>
<CAPTION>
PROCEEDS
PURCHASES FROM SALES
- ---------------------------------------------
<S> <C> <C>
Value Institutional $108,309,409 $6,754,583
Brandywine Small Cap 2,645,043 498,820
</TABLE>
At March 31, 1999, cost, aggregate gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income tax
purposes for each Portfolio were as follows:
<TABLE>
<CAPTION>
COST APPRECIATION (DEPRECIATION) NET
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Value Institutional $120,198,689 $20,211,209 $(1,749,322) $18,461,887
Brandywine Small Cap 2,395,115 81,253 (442,837) (361,585)
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Each Portfolio has a management agreement with LM Institutional Advisors, Inc.
("Manager"). Pursuant to their respective agreements, the Manager provides the
Portfolios with management and administrative services for which each
Portfolio pays a fee, computed daily and payable monthly at an annual rate of
0.60% and 0.65% of the average daily net assets of Value Institutional and
Brandywine Small Cap, respectively.
The Manager has agreed to waive its fees and reimburse expenses in any month
to the extent a Portfolio's expenses during the month (exclusive of taxes,
interest, brokerage and extraordinary expense) exceed annual rates of that
Portfolio's average daily net assets as follows: 0.75% for Value Institutional
Institutional Class, 1.00% for Value Institutional Financial Intermediary
Class and 0.85% for Brandywine Small Cap, until July 31, 1999. For the period
ended March 31, 1999, management fees of $78,094 and $7,607 were waived and
expenses of $0 and $58,187 were reimbursed for Value Institutional and
Brandywine Small Cap, respectively. At March 31, 1999, $26,630 was due to the
Manager by Value Institutional and $58,187 was due from the Manager to
Brandywine Small Cap. 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.
Legg Mason Fund Adviser, Inc. ("LMFA") serves as investment adviser to Value
Institutional. LMFA is responsible for the actual investment activity of the
Portfolio. The Manager pays LMFA a fee for its services at an annual rate
equal to 0.55% of the Portfolio's average daily net assets.
Brandywine Asset Management, Inc. ("Brandywine") serves as investment adviser
to Brandywine Small Cap. Brandywine is responsible for the actual investment
activity of the Portfolio. The Manager pays Brandywine a fee for its services
at an annual rate equal to 0.60% of the Portfolio's average daily net assets.
Legg Mason Wood Walker, Incorporated ("LMWW"), a member of the New York Stock
Exchange, serves as distributor of the Portfolios. LMWW will receive from each
Portfolio an annual distribution fee of 0.25% of the average daily net assets
of the Financial Intermediary Class of each Portfolio, computed daily and
payable monthly. At March 31, 1999 distribution and service fees due to LMWW
were $3,784 for Value Institutional.
No brokerage commissions were paid to LMWW or its affiliates during the period
ended March 31, 1999.
LMFA, Brandywine, LMWW and the Manager are wholly owned subsidiaries of Legg
Mason, Inc.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LM Institutional Fund Advisors II, Inc.
4. LINE OF CREDIT
Each Portfolio, along with certain other Legg Mason Funds, participate in a
$200 million line of credit ("Credit Agreement") to be utilized as an
emergency source of cash in the event of unanticipated, large redemption
requests by shareholders. Pursuant to the Credit Agreement, each participating
Portfolio is liable only for principal and interest payments related to
borrowings made by that Portfolio. Borrowings under the line of credit bear
interest at prevailing short-term interest rates. For the period ended March
31, 1999, the Portfolios had no borrowings under the line of credit.
5. FUND SHARE TRANSACTIONS
At March 31, 1999, there were seven billion shares authorized at $0.001 par
value for all portfolios of the Corporation. Share transactions were as
follows:
<TABLE>
<CAPTION>
REINVESTMENT
SOLD OF DISTRIBUTIONS REPURCHASED NET CHANGE
-----------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VALUE INSTITUTIONAL:
Institutional Class
Period ended
March 31, 1999A 7,697,105 $107,068,729 1,709 $ 20,661 (393,470) $(5,481,356) 7,305,344 $101,608,034
Financial
Intermediary Class
Period ended
March 31, 1999B 1,283,831 $ 14,522,075 742 $ 8,987 (102,486) $(1,105,828) 1,182,087 $ 13,425,234
BRANDYWINE SMALL CAP:
Institutional Class
Period ended
March 31, 1999C 225,568 $ 2,225,000 591 $ 5,223 - - $ - - 226,159 $ 2,230,223
- --------------------------------------------------------------------------------------------------------------
</TABLE>
ASeptember 22, 1998 (commencement of operations) to March 31, 1999
BOctober 22, 1998 (commencement of operations) to March 31, 1999
CAugust 17, 1998 (commencement of operations) to March 31, 1999
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors
Legg Mason Institutional Fund Advisors II, Inc.
We have audited the accompanying statements of net assets of Legg Mason
Institutional Fund Advisors II, Inc. (the "Corporation") (comprised of the LM
Value Institutional Portfolio and the Brandywine Small Cap Value Portfolio) as
of March 31, 1999, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of March 31, 1999, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Legg Mason Institutional Fund
Advisors II, Inc. at March 31, 1999, and the results of their operations, the
changes in their net assets and their financial highlights for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
May 6, 1999
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LM INSTITUTIONAL FUND ADVISORS II, INC.
Investment Manager
LM Institutional Advisors, Inc.
P.O. Box 17635
Baltimore, Maryland 21297-1635
1-888-425-6432
Investment Advisers
Legg Mason Fund Adviser, Inc.
100 Light Street
Baltimore, Maryland 21202
Brandywine Asset Management, Inc.
Three Christina Centre, Suite 1200
201 North Walnut Street
Wilmington, Delaware 19801
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Wood Walker, Inc., Distributor
