<PAGE>
[LM PHOTO APPEARS HERE] LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
Batterymarch U.S. Small Capitalization Equity Portfolio
Annual Report
March 31, 2000
<PAGE>
President's Letter
LM Institutional Fund Advisors II, Inc.
April 24, 2000
Dear Shareholder:
We are pleased to provide you with the financial statements for the LM Value
Institutional Portfolio and the Batterymarch U.S. Small Capitalization Equity
Portfolio for the periods ended March 31, 2000. Included are narratives from the
portfolio managers of these Portfolios detailing key developments as they
pertain to your investment.
The following tables summarize the Portfolios' Institutional Class performance
for the periods ended March 31, 2000.
---------------------------------------------------------------------------
1 YEAR
---------------------------------------------------------------------------
LM Value Institutional Portfolio +7.74%
S&P 500 Index +17.94%
---------------------------------------------------------------------------
SINCE INCEPTION
(3/13/00)
---------------------------------------------------------------------------
Batterymarch U.S. Small Capitalization Equity Portfolio -3.20%
Russell 2000 Index -8.60%
As always, we thank you for your interest in the Portfolios. If you have any
questions, comments or suggestions please feel free to call us at
1-888-425-6432. We look forward to hearing from you.
Sincerely,
/s/ Joseph L. Orlando
- ---------------------
Joseph L. Orlando
President
LM Institutional Advisors, Inc.
1
<PAGE>
Portfolio Managers' Comments
LM Value Institutional Portfolio
REVIEW OF FISCAL YEAR 2000 MARKET CONDITIONS AND STRATEGIES AFFECTING RESULTS
"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
During our fiscal year ended March 31, our results lagged those of the popular
indices and those of most funds with similar objectives. This is, in part, an
accident of the calendar. Move back three months, for example, and the relative
results are dramatically better. The problem is known as sensitive dependence on
initial conditions and it afflicts any complex adaptive system such as the stock
market.
We have written extensively about the obsessive focus on and attempts to dissect
short-term performance data and won't repeat our remarks here. As numerous
academic studies have shown, past performance is not much help in predicting
future results.
The best way to understand the twelve months ending March 31 is to put that
period in a broader context. As a result of the global financial crisis that
began with the collapse of fixed exchange rates in most Asian developing
countries and culminated in the collapse of hedge fund Long Term Capital
Management in September 1998, the Federal Reserve Board cut short-term interest
rates three times that fall. As we entered calendar 1999, most observers fretted
that the Fed had not done enough and that the world faced slow growth at best, a
long workout in emerging countries, and a real risk of a global deflationary
collapse. Oil was at $12 a barrel; other commodities were similarly depressed.
No one predicted what actually happened: exceptionally strong U.S. growth, solid
international growth that was accelerating into 2000, oil prices more than
doubling, and emerging stock markets the world's best performers. As is often
the case in financial markets, when the opinions are all on one side, the
opportunities are usually on the other.
We can also describe the same period in terms of the ebb and flow of risk
preferences. Prior to the financial crisis, years of high returns made investors
risk seeking. Large losses in stocks from the summer of 1998 into the autumn led
to a flight to quality. Interest rates fell as money fled to risk free
treasuries. As 1999 progressed, investors gradually began reallocating assets
back into riskier assets as they observed that those assets were gaining in
value and treasuries were falling. Last year (1999) was among the worst bear
markets in history for fixed income securities as interest rates rose steadily
throughout the year and investors increasingly sought riskier assets.
Stock prices meandered through most of 1999; the S&P 500 Index gained only about
4% through September. Then in the 4th quarter technology stocks exploded,
propelling the S&P 500 to a gain of over 20% and the NASDAQ, over three-fourths
of whose capitalization is technology, to a yearly gain of over 85%.
Over the past four years, technology stocks have been star performers. The S&P
500 gained about 26% per year compounded from the beginning of 1996 through
1999, while the NASDAQ gained over 40% per year during the same period.
Investors, both individuals and professionals, absorbed the lesson that if you
were over-weight technology you out-performed the market, and if you were
under-weight, you under-performed.
Consensus expectations entering 2000 were for more of the same (what else?).
Most people tend to expect a continuation of observed trends. Since growth had
been strong, it was (and is) expected to remain so. Since technology had
consistently been the source of high returns, it was expected to remain so.
Since investing in the so-called old economy had been a sure path to
under-performance, it was expected to remain so.
As the first quarter got underway, technology stocks had a sharp correction, but
quickly recovered and began their expected strong advance. Old economy names
fell, as expected. The long drought in "value stocks", the concomitant
2
<PAGE>
Portfolio Managers' Comments (CONTINUED)
LM Value Institutional Portfolio
under-performance of funds that invested in them, and the apparent inability of
investors, the press, and fund boards to understand that all investment styles
and managers have periods of under-performance, led to the firing or resignation
of many outstanding investors, all of the value persuasion.
On March 10, the clamor for "new economy" technology reached its peak, with the
NASDAQ up 24% year to date, while the Dow Jones Industrial Average was down 14%.
For the 12 months ending that day, the Dow was up 3.16% with dividends
reinvested, versus 110% for the NASDAQ. The frenzy has been such that more than
100% of the net flows into equity funds this year have gone into technology
sensitive growth funds; value oriented funds have experienced redemptions.
One month later, the picture is much different. The NASDAQ is down 14% for the
year, and is down 31% from the peak reached on March 10. The Dow is down 7% for
the year, but is up 10%, including dividends since March 10.
During the first quarter, your fund was essentially flat, the result of a tug of
war between our financial and our technology holdings. Several of our major
technology holdings fell during the quarter after posting strong 4th quarter
1999 performance. These include AOL and Gateway. Other large tech holdings did
well, such as Nextel and Nokia. Our financials have performed well since early
March, but not well enough to have them outperform as a group this quarter.
Our one year results are also skewed by the very strong 1st calendar quarter of
last year, when we were up 18.55%. Our calendar 1999 results, which were well
ahead of the indices, were obtained by strong results in the 1st and 4th
quarters, and comparatively weaker numbers in the 2nd and 3rd. Rolling forward
one quarter to get fiscal year results gives a different comparative picture
since a strong, above-market quarter is being replaced by a below-market one.
We believe that some clues to future market developments can be gleaned from the
1st quarter performance statistics. The average general equity fund gained over
7% in the quarter, while the Dow was down almost 5% and the S&P 500 was up over
2%. The NASDAQ was up 12.4% in the quarter. You probably see the picture. After
years of under-performance, the average fund manager decided to get
over-weighted in technology and under-weighted in non-technology. The stampede
to tech was no doubt exacerbated by the high profile firings or resignations of
several prominent value investors. Just how over-weighted most funds are in tech
can be glimpsed when one realizes that only two of the 11 S&P sectors beat the
S&P 500 Index in the quarter: technology and utilities. Utilities make up only
2% of the market, whereas technology was 33% of the S&P 500 at quarter's end.
The funds that were buying Cisco, EMC, and Sun were not likely loaded with Duke
Power or Potomac Electric.
Perhaps more telling is the following: the technology weightings in the roughly
5,000 general equity funds averaged 42% for large company growth funds, 48% for
mid-cap, and 45% for small cap. In the value category, the comparable numbers
hover in the 14% range. The data are from the March 31 database of fund tracking
service Morningstar, but since most funds have not filed their 3/31 portfolios
yet, the weightings probably represent end of year holdings. It is reasonable to
surmise that such weightings actually rose during the quarter.
We believe the correction in the NASDAQ, and especially in the more speculative
hot spots was long overdue. Valuations had reached levels that made it highly
unlikely that one could earn a competitive return no matter how brilliant the
future turned out to be for those businesses.
We also believe that what is going on is more than just a correction in the
technology arena. Much of the excess returns earned by our shareholders since
the fund's inception has been due to our being early in investing in great
businesses such as AOL, Dell, and Nokia. The prospects for these and most other
prominent technology companies are now well recognized and well discounted by
the market. The returns earned by shareholders in these and other great
companies such as Microsoft and Cisco have led investors to bid up the shares of
large numbers of technology companies to unrealistic levels in the hope of
uncovering the next big thing.
3
<PAGE>
Portfolio Managers' Comments (CONTINUED)
LM Value Institutional Portfolio
The losses now being experienced will, we think, reintroduce the notion of risk
to people, and will, after the excess emotion has been wrung from the market,
set the stage for returns more in line with the growth of long-term business
value. As we have previously said, we believe the long-term returns of equities
going forward will approximate what it has in the past: about 10%.
As for technology, it will no doubt present considerable opportunity. But we
think that investors, who figured out in the middle of last year that the way to
win the game was to overweight tech, will have to learn a new game.
In a wonderful example of irony, The New York Times reported on the dissolution
of Julian Robertson's Tiger Management on March 31, the end of the quarter. Once
commanding over $20 billion under management, Tiger had to be dissolved after
disastrous bets in favor of old economy "value" stocks and against technology.
The Times' headline read "The End of the Game", referring to the demise of the
most prominent value hedge fund, a casualty of the new, technology-based
investment game. The game the Times thought had ended was the old economy value
game. The game we believe ended was the new economy technology game.
We have no idea what the new game will be. By "game", we mean the simple-minded
rule that will explain, after the fact, what you should have done to beat the
market during the period in question.
We are, though, optimistic about the ability of patient, disciplined investing
to produce satisfactory long-term returns. Most stocks have been declining for
two years, declines that have been masked by the sharp rise in large
capitalization "growth" and technology shares. The median price earnings ratio
of all companies with earnings peaked in April 1998 at 19.7; it is now about 13.
In 1987, after the Crash, the median P/E was 10.6. But in late 1987 the long
bond yielded 9% and inflation was 4.5%. Today bond yields are under 6% and
inflation is half what it was 13 years ago. Adjusted for inflation and interest
rates, and for today's much higher levels of productivity, today's budget
surpluses, and the prospects for continued peace and prosperity since the fall
of communism, we think the average stock in the market is as attractive is it
was post-Crash in 1987.
We believe that investments made at today's levels of the market or lower, and
made on the basis of a rational assessment of long-term business value, will
provide attractive rates of return to the long-term investor.
Bill Miller
Mary Chris Gay
April 14, 2000
4
<PAGE>
Performance Information
LM Value Institutional Portfolio
The returns shown on these pages are based on historical results and are not
intended to indicate future performance. The investment return and principal
value of an investment in the Portfolio will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. No
adjustment has been made for any income taxes payable by shareholders.
The following graphs compare each Portfolio's total returns against those of a
closely matched broad-based securities market index. The lines illustrate the
cumulative total return of an initial $1 million investment for the periods
indicated after deducting all Portfolio investment management and other
administrative expenses and the transaction costs of buying and selling
portfolio 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. Both the Portfolio's results and the index's
results assume reinvestment of all dividends and distributions.
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
LM Value Institutional Portfolio
Institutional Class
(net of expenses) S&P 500 Index/1,2/
Sept 22, 1998 $1,000,000 $1,000,000
Dec 31, 1998 1,339,654 1,198,600
Mar 31, 1999 1,588,146 1,258,290
Jun 30, 1999 1,573,115 1,347,000
Sept 30, 1999 1,497,097 1,262,947
Dec 31, 1999 1,704,557 1,450,873
Mar 31, 2000 1,711,027 1,484,098
Average Annual Total Returns as of March 31, 2000
- -------------------------------------------------
LM Value S&P 500
- -------------------------------------------------
1 Year 7.74% 17.94%
- -------------------------------------------------
Since Inception (9/22/98) 42.27% 31.14%/1/
- -------------------------------------------------
/1/From 9/30/98 through 3/31/00
/2/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.
5
<PAGE>
Performance Information (CONTINUED)
LM Value Institutional Portfolio
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
LM Value Institutional Portfolio
Financial Intermediary Class
(net of expenses) S&P 500 Index/1,2/
Oct 22, 1998 $1,000,000 $1,000,000
Dec 31, 1998 1,251,260 1,143,100
Mar 31, 1999 1,483,182 1,200,026
Jun 30, 1999 1,468,529 1,284,628
Sept 30, 1999 1,397,003 1,204,467
Dec 31, 1999 1,588,418 1,383,692
Mar 31, 2000 1,593,123 1,415,379
Average Annual Total Returns as of March 31, 2000
- -------------------------------------------------
LM Value S&P 500
- -------------------------------------------------
1 Year 7.41% 17.94%
- -------------------------------------------------
Since Inception (10/22/98) 38.15% 26.09%/1/
- -------------------------------------------------
/1/From 10/31/98 through 3/31/00
<TABLE>
<CAPTION>
Strong Performers Weak Performers
for the Year Ended March 31, 2000 for the Year Ended March 31, 2000
- ----------------------------------------------------------- -----------------------------------------------------------
<S> <C> <S> <C>
1. Nextel Communications, Inc. +304.8% 1. Storage Technology Corporation -42.8%
2. Nokia Oyj +179.0% 2. The Kroger Co. -41.3%
3. Telefonos de Mexico S.A. ADR +103.0% 3. Bank One Corporation -37.6%
4. Koninklijke (Royal) Philips Electronics N.V. +101.2% 4. Washington Mutual, Inc. -35.2%
5. WPP Group plc +100.2% 5. Foundation Health Systems, Inc. -34.4%
6. Metro-Goldwyn-Mayer, Inc. +93.8% 6. Lloyds TSB Group plc -30.1%
7. Gateway, Inc. +54.6% 7. Bank of America Corporation -25.8%
8. MGM Grand, Inc. +42.8% 8. MCI WorldCom, Inc. -23.3%
9. Citigroup Inc. +39.3% 9. Freddie Mac -22.6%
10. International Business Machines Corporation +33.1% 10. Toys "R" Us, Inc. -21.3%
</TABLE>
6
<PAGE>
Portfolio Managers' Comments
Batterymarch U.S. Small Capitalization Equity Portfolio
The start-up period for the Fund coincided with a market environment of high
volatility and style and sector rotation for U.S. equities. Since the inception
of the Fund on March 13, 2000, through March 31, 2000, the return was -3.20%, on
a net asset value basis, compared with -8.60% for the benchmark, the Russell
2000 Index.
We believe that the key to added value is a disciplined investment process that
incorporates rigorous stock selection and effective risk control. Despite the
equity market's extreme style and sector rotations, the Portfolio benefited from
good stock selection during the period. Our stock selection process incorporates
both growth and value factors.
Market Environment
The Russell 2000 Index peaked March 9 and declined 6.59% for the month of March;
the S&P 500 Index rose 9.78%. In March, the Technology sector, which had
previously outperformed other sectors, significantly underperformed previously
out-of-favor sectors such as Insurance and Finance. The technology-laden Nasdaq
Index slid 9.40% from its high on March 10, ending the month down 2.60%. Value
stocks, having under-performed growth stocks in the first two months of the
year, reversed the trend in March, and outperformed growth stocks.
The catalyst was the Federal Reserve, which campaigned to slow the economy and
to keep inflation in check. It raised short-term rates twice during the first
quarter of 2000, marking the fifth hike in less than a year, planted the seeds
for margin rate increases and expressed concern over excessive speculation in
the stock market.
Investment Process
The Batterymarch disciplined investment process incorporates rigorous stock
selection and effective risk control. We use a bottom-up quantitative approach
to managing equity assets. Our goal is to systematically replicate the
investment disciplines of the smart fundamental investor, using quantitative
techniques to process large amounts of fundamental data on a broad universe of
companies.
Our stock selection model builds a "mosaic" of attributes, as experienced
fundamental investors do of the stocks they follow, ranking stocks daily across
six dimensions: growth yield, cash flow, expectations, value, technical and
corporate signals. The process combines an array of factors and the model is
"tuned" according to which factors are most predictive of excess return within a
given sector. We optimize daily, using a multifactor risk model. A unique
approach to trading, using performance-based basket trading, enhances total
returns by ensuring that our best ideas get into each portfolio in a timely,
low-cost manner.
The portfolio review process is comprehensive: daily, weekly and monthly reports
on performance attribution and portfolio characteristics enable our investment
team to examine every component of our investment process--including stock
selection, sector weightings and trading--to confirm that they add value both
independently and together.
Looking ahead
Valuations for small capitalization stocks remain compelling. The forward P/E
ratio for the Russell 2000 is 16.2x, compared with 23.8x for the S&P 500 Index,
two-year earnings growth rates are higher for small caps, and growth-to-P/E
ratios remain significantly more attractive for the small stocks.
We believe the Portfolio is attractively valued with a forward P/E in line with
the Russell 2000 benchmark and an estimated two-year earnings growth rate higher
than the benchmark. The Portfolio is well diversified across both market cap
bands and across 20 industry sectors.
Batterymarch Financial Management, Inc.
April 18, 2000
7
<PAGE>
Statement of Net Assets
LM Value Institutional Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests 95.1%
Capital Goods 5.7%
Electrical Equipment 2.2%
Koninklijke (Royal) Philips Electronics N.V. 79,138 $ 13,557,329
Manufacturing (Diversified) 1.0%
Danaher Corporation 108,905 5,554,155
Waste Management 2.5%
Waste Management, Inc. 1,151,317 15,758,651
Communication Services 9.4%
Telecommunications (Cellular/Wireless) 4.4%
Nextel Communications, Inc. 182,165 27,005,961/A/
Telecommunications (Long Distance) 5.0%
MCI WorldCom, Inc. 460,798 20,879,909/A/
Telefonos de Mexico S.A. ADR 147,457 9,879,619
------------
30,759,528
Consumer Cyclicals 12.5%
Automobiles 1.8%
General Motors Corporation 136,132 11,273,431
Gaming, Lottery, & Parimutuel Companies 1.5%
Mandalay Resort Group 322,540 5,442,863/A/
MGM Grand, Inc. 145,330 3,487,920
------------
8,930,783
Leisure Time (Products) 0.8%
Mattel, Inc. 461,019 4,811,886
Lodging/Hotels 1.8%
Starwood Hotel & Resorts Worldwide, Inc. 414,695 10,885,744
Retail (Specialty) 1.7%
Toys "R" Us, Inc. 718,884 10,648,469/A/
Retail (Home Shopping) 1.6%
Amazon.com, Inc. 147,457 9,879,619/A/
Services (Advertising/Marketing) 3.3%
WPP Group plc 1,176,576 20,418,179
</TABLE>
8
<PAGE>
Statement of Net Assets (CONTINUED)
LM Value Institutional Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (CONTINUED)
Consumer Staples 4.9%
Distributors (Food and Health) 1.3%
McKesson HBOC, Inc. 370,965 $ 7,790,265
Entertainment 0.7%
Metro-Goldwyn-Mayer, Inc. 170,706 4,342,334/A/
Retail Stores - (Food Chains) 2.9%
Albertson's, Inc. 391,126 12,124,906
The Kroger Co. 337,501 5,927,361/A/
------------
18,052,267
Financials 27.6%
Banks (International) 2.3%
Lloyds TSB Group plc 1,307,475 13,822,035
Banks (Major Regional) 5.3%
Bank One Corporation 506,611 17,414,753
FleetBoston Financial Corporation 414,695 15,136,368
------------
32,551,121
Banks (Money Center) 4.6%
Bank of America Corporation 184,322 9,665,385
The Chase Manhattan Corporation 211,935 18,478,083
------------
28,143,468
Consumer Finance 1.2%
MBNA Corporation 291,548 7,434,474
Financial (Diversified) 6.4%
Citigroup Inc. 327,178 19,405,745
Fannie Mae 258,112 14,567,196
Freddie Mac 119,846 5,295,695
------------
39,268,636
Insurance (Property /Casualty) 4.2%
Berkshire Hathaway Inc. - Class A 191 10,925,200/A/
MGIC Investment Corporation 348,561 15,205,974
------------
26,131,174
Investment Banking/Brokerage 1.1%
The Bear Stearns Companies, Inc. 148,896 6,793,380
</TABLE>
9
<PAGE>
Statement of Net Assets (CONTINUED)
LM Value Institutional Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (CONTINUED)
Financials (continued)
Savings & Loan Companies 2.5%
Washington Mutual, Inc. 579,753 $ 15,363,454
Health Care 6.3%
Health Care (Managed Care) 6.3%
Aetna Inc. 276,099 15,375,263
Foundation Health Systems, Inc. 503,687 4,029,496/A/
United HealthCare Corporation 317,899 18,954,728
------------
38,359,487
Technology 28.7%
Communications Equipment 2.9%
Nokia Oyj 82,278 17,874,896
Computers (Hardware) 13.0%
Dell Computer Corporation 648,542 34,980,734/A/
Gateway, Inc. 552,188 29,265,964/A/
International Business Machines Corporation 129,050 15,227,900
------------
79,474,598
Computers (Peripherals) 0.9%
Storage Technology Corporation 363,018 5,785,599/A/
Computers (Software/Services) 11.9%
America Online, Inc. 1,088,140 73,177,415/A/
------------
Total Common Stocks and Equity Interests
(Identified Cost - $551,497,682) 583,848,338
- -----------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements 6.3%
Bank of America
6.15%, dated 3/31/00, to be repurchased at $19,311,467 on 4/3/00
(Collateral: $21,680,215 Freddie Mac mortgage-backed securities,
6%, due 9/1/28, value $19,837,396) $ 19,301,575 19,301,575
Goldman Sachs & Company
6.15%, dated 3/31/00, to be repurchased at $19,311,468 on 4/3/00
(Collateral: $21,874,625 Fannie Mae mortgage-backed securities,
6%, due 10/1/29, value $20,008,446) 19,301,576 19,301,576
------------
Total Repurchase Agreements
(Identified Cost - $38,603,151) 38,603,151
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Statement of Net Assets (CONTINUED)
LM Value Institutional Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
% of Market
Net Assets Value
------------------------------------------------------------
<S> <C> <C> <C>
Total Investments (Identified Cost - $590,100,833) 101.4% $622,451,489
Other Assets Less Liabilities (1.4)% (8,768,938)
------------
Net Assets Consisting Of:
Accumulated paid-in capital applicable to:
25,558,756 Institutional Shares outstanding $395,257,131
10,668,664 Financial Intermediary Shares outstanding 162,352,337
Undistributed net investment income 705,293
Accumulated net realized gain/(loss) on investments and
foreign currency transactions 23,018,611
Unrealized appreciation/(depreciation) of investments and
foreign currency translations 32,349,179
------------
Net Assets 100.0% $613,682,551
============
Net Asset Value Per Share:
Institutional Class $ 16.94
============
Financial Intermediary Class $ 16.93
============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Non-income producing
See Notes to Financial Statements
11
<PAGE>
Statement of Operations
LM Value Institutional Portfolio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
For the year ended
March 31, 2000
------------------
<S> <C>
Investment Income:
Dividends/A/ $ 2,766,848
Interest 1,116,743
-----------
Total Income 3,883,591
-----------
Expenses:
Management fee 1,945,541
Distribution and service fees 199,857
Transfer agent and shareholder servicing expense 34,964
Audit and legal fees 67,905
Custodian fees 156,962
Directors' fees 24,000
Registration fees 154,348
Reports to shareholders 38,240
Other expenses 4,074
-----------
2,625,891
Less fees waived (4,080)
-----------
Total expenses, net of waivers 2,621,811
-----------
Net Investment Income 1,261,780
-----------
Net Realized and Unrealized Gain on Investments:
Realized gain/(loss) on investments and foreign currency transactions 23,096,622
Change in unrealized appreciation/(depreciation) of investments
and foreign currency translations 13,962,885
-----------
Net Realized and Unrealized Gain on Investments 37,059,507
-----------
Change in Net Assets Resulting From Operations $38,321,287
===========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Net of foreign taxes of $42,752.
See Notes to Financial Statements
12
<PAGE>
Statement of Changes in Net Assets
LM Value Institutional Portfolio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
For the Year For the Period
Ended September 22, 1998/A/
March 31, 2000 to March 31, 1999
-------------- ---------------------
<S> <C> <C>
Change in Net Assets:
Net investment income $ 1,261,780 $ 172,536
Net realized gain/(loss) on investments and foreign currency transactions 23,096,622 985,461
Change in unrealized appreciation/(depreciaton) of investments
and foreign currency translations 13,962,885 18,386,294
------------ ------------
Change in net assets resulting from operations 38,321,287 19,544,291
Distributions to shareholders:
From net investment income:
Institutional Class (618,214) (24,640)
Financial Intermediary Class (52,385) (18,963)
From net realized gain on investments:
Institutional Class (939,018) --
Financial Intermediary Class (139,275) --
Change in net assets from Fund share transactions:
Institutional Class 293,634,097 101,608,034
Financial Intermediary Class 148,927,103 13,425,234
------------ ------------
Change in net assets 479,133,595 134,533,956
Net Assets:
Beginning of year 134,548,956 15,000
------------ ------------
End of year (including undistributed net investment income
of $705,293 and $127,123, respectively) $613,682,551 $134,548,956
============ ============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Commencement of operations
See Notes to Financial Statements
13
<PAGE>
Financial Highlights
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 in the
financial statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Class Financial Intermediary Class
-------------------------------------- ------------------------------------
Year Ended September 22, 1998/A/ Year Ended October 22, 1998/A/
March 31, 2000 to March 31, 1999 March 31, 2000 to March 31, 1999
-------------- --------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 15.85 $ 10.00 $ 15.86 $ 10.71
------------ ------------ ------------ -----------
Net investment income 0.05 0.04/B/ 0.02/C/ 0.03/C/
Net realized and unrealized gain/(loss)
on investments and foreign currency
transactions 1.17 5.83 1.15 5.14
------------ ------------ ------------ -----------
Total from investment operations 1.22 5.87 1.17 5.17
------------ ------------ ------------ -----------
Distributions to shareholders from
net investment income (0.05) (0.02) (0.02) (0.02)
net realized gain on investments (0.08) -- (0.08) --
------------ ------------ ------------ -----------
Total distributions (0.13) (0.02) (0.10) (0.02)
------------ ------------ ------------ -----------
Net asset value, end of period $16.94 $15.85 $16.93 $15.86
============ ============ ============ ===========
Total return 7.74% 58.81%/D/ 7.41% 48.32%/D/
Ratios/Supplemental Data:
Ratios to average net assets
Expenses 0.75% 0.75%/B,E/ 1.00%/C/ 1.00%/C,E/
Net investment income 0.44% 0.84%/B,E/ 0.22%/C/ 0.43%/C,E/
Portfolio turnover rate 23.1% 28.6%/E/ 23.1% 28.6%/E/
Net assets, end of period $433,035,982 $115,798,256 $180,646,569 $18,750,700
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Commencement of operations
/B/ Net of fees waived or reimbursements made by the Advisor in excess of a
voluntary expense limitation of 0.75% until July 31, 1999. If no fees had
been waived the annualized ratio of expenses to average daily net assets for
the period would have been 1.08%.
/C/ Net of fees waived or reimbursements made by the Advisor in excess of a
contractual expense limitation of 1.00% until August 1, 2000. If no fees had
been waived the annualized ratio of expenses to average daily net assets for
the year ended March 31, 2000 would have been 1.01% and for the period ended
March 31, 1999 would have been 1.33%.
/D/ Not annualized
/E/ Annualized
See Notes to Financial Statements
14
<PAGE>
Statement of Net Assets
Batterymarch U.S. Small Capitalization Equity Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests 98.1%
Capital Goods 8.9%
Cable Design Technologies Corporation 100 $ 3,394/A/
Commercial Metals Company 2,700 74,588
Harsco Corporation 3,400 98,388
IDEX Corporation 3,100 84,475
Lincoln Electric Holdings, Inc. 500 12,093
Littelfuse, Inc. 2,300 84,381/A/
Rofin-Sinar Technologies, Inc. 5,800 69,600/A/
The Shaw Group Inc. 2,300 81,075/A/
The Timken Company 5,700 92,625
----------
600,619
Commercial Services 1.6%
Actrade International, Ltd. 300 4,838/A/
Copart, Inc. 500 8,750/A/
Direct Focus, Inc. 300 8,344/A/
Fleming Companies, Inc. 700 10,544
United Stationers Inc. 2,200 78,512/A/
----------
110,988
Conglomerates & Other 1.1%
Anixter International Inc. 2,600 72,475/A/
Consumer Durables 0.4%
The Rayland Group, Inc. 600 11,250
Winnebago Industries, Inc. 800 14,450
----------
25,700
Consumer Non-Durables 1.0%
Rexall Sundown, Inc. 500 7,063/A/
Wolverine World Wide, Inc. 5,600 61,600
----------
68,663
Consumer Services 1.2%
Career Education Corporation 175 6,125/A/
GTECH Holdings Corporation 600 11,138/A/
Scholastic Corporation 1,200 64,725/A/
----------
81,988
Energy 7.9%
Mitchell Energy & Development Corp. 4,600 101,200
Patina Oil & Gas Corporation 6,500 88,156
Pioneer Natural Resources Company 700 7,437/A/
Tom Brown, Inc. 400 7,350/A/
Santa Fe Snyder Corporation 18,200 175,175/A/
Vintage Petroleum, Inc. 7,500 150,938
----------
530,256
</TABLE>
15
<PAGE>
Statement of Net Assets (CONTINUED)
Batterymarch U.S. Small Capitalization Equity Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (CONTINUED)
Finance 5.3%
Advanta Corp. 3,500 $ 71,094
Affiliated Managers Group, Inc. 1,800 85,500/A/
AmeriCredit Corp. 200 3,263/A/
First Industrial Realty Trust, Inc. 600 16,350
Jefferies Group, Inc. 200 4,575
Liberty Financial Companies, Inc. 600 11,887
MeriStar Hospitality Corporation 4,700 81,956
Raymond James Financial, Inc. 4,100 85,075
----------
359,700
Health Care 5.5%
Abgenix, Inc. 430 59,394/A/
Biosite Diagnostics Incorporated 200 4,875/A/
Celgene Corporation 800 79,650/A/
Cell Pathways, Inc. 200 6,875/A/
Cephalon, Inc. 200 7,500/A/
Datascope Corp. 200 6,350
Jones Pharma Incorporated 2,800 85,050
King Pharmaceuticals, Inc. 2,400 75,600/A/
Noven Pharmaceuticals, Inc. 600 6,562/A/
Perrigo Company 1,500 11,391/A/
PolyMedica Corporation 100 5,875/A/
Protein Design Labs, Inc. 30 2,385/A/
SICOR Inc. 700 7,263/A/
The Liposome Company, Inc. 500 8,734/A/
Techne Corporation 100 6,900/A/
----------
374,404
Health Services 1.2%
First Health Group Corp. 2,300 72,737/A/
Quorum Health Group, Inc. 1,100 11,069/A/
----------
83,806
Industrial Services 5.0%
Atwood Oceanics, Inc. 100 6,631/A/
Dycom Industries, Inc. 2,600 126,750/A/
Helmerich & Payne, Inc. 600 18,600
Insituform Technologies, Inc. 3,000 91,875/A/
MasTec, Inc. 900 80,100/A/
URS Corporation 1,000 13,125/A/
----------
337,081
</TABLE>
16
<PAGE>
Statement of Net Assets (CONTINUED)
Batterymarch U.S. Small Capitalization Equity Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (CONTINUED)
Insurance 0.3%
Hartford Life, Inc. 200 $ 9,375
Radian Group Inc. 100 4,762
Triad Guaranty Inc. 200 4,063/A/
----------
18,200
Metals & Minerals 1.1%
Justin Industries, Inc. 4,000 72,000
Process Industries 3.0%
Airgas, Inc. 9,300 77,306/A/
Boise Cascade Corporation 500 17,375
FMC Corporation 200 11,300/A/
The Geon Company 3,700 79,550
The Lubrizol Corporation 500 14,406
----------
199,937
Retail 2.6%
DAMARK International, Inc. 1,800 68,625/A/
The Neiman Marcus Group, Inc. 600 16,688/A/
ValueVision International, Inc. 2,200 91,025/A/
----------
176,338
Technology 31.8%
3D Systems Corporation 800 8,300/A/
ACT Manufacturing, Inc. 100 5,594/A/
Advanced Digital Information Corporation 2,400 82,200/A/
Advanced Energy Industries, Inc. 1,600 81,600/A/
Amphenol Corporation 1,200 122,700/A/
Asyst Technologies, Inc. 200 11,700/A/
Audiovox Corporation 2,000 87,250/A/
Brooks Automation, Inc. 1,200 75,000/A/
Brooktrout Inc. 200 5,800/A/
Burr-Brown Corporation 2,000 108,750/A/
CAM Data Systems, Inc. 300 4,837/A/
Centigram Communications Corporation 3,800 72,200/A/
Cohu, Inc. 2,100 87,544
Credence Systems Corporation 650 81,331/A/
CyberOptics Corporation 100 4,244/A/
Cymer, Inc. 100 5,000/A/
Cypress Semiconductor Corporation 2,000 98,625/A/
ECCS, Inc. 5,000 72,500/A/
Electroglas, Inc. 2,400 82,200/A/
</TABLE>
17
<PAGE>
Statement of Net Assets (CONTINUED)
Batterymarch U.S. Small Capitalization Equity Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (CONTINUED)
Technology (continued)
Integrated Device Technology, Inc. 3,000 $ 118,875/A/
InterDigital Communications Corporation 200 5,050/A/
KEMET Corporation 1,600 101,200/A/
Kent Electronics Corporation 300 8,756/A/
Kulicke and Soffa Industries, Inc. 1,300 83,281/A/
Lam Research Corporation 2,060 92,829/A/
Loronix Information Systems, Inc. 100 3,631/A/
LTX Corporation 2,200 99,412/A/
Mattson Technology, Inc. 2,300 98,037/A/
MICROS Systems, Inc. 200 12,587/A/
Nanometrics Incorporated 1,600 78,000/A/
Parlex Corporation 2,300 70,150/A/
Pericom Semiconductor Corporation 1,700 60,669/A/
Radyne ComStream Inc. 100 2,669/A/
Sawtek Inc. 100 5,256/A/
ScanSource, Inc. 2,000 71,000/A/
Semtech Corporation 1,500 96,094/A/
TriQuint Semiconductor, Inc. 65 4,778/A/
Varian Semiconductor Equipment Associates, Inc. 100 6,363/A/
Xicor, Inc. 2,300 32,487/A/
----------
2,148,499
Technology Services 16.2%
AremisSoft Corporation 1,900 64,600/A/
Aspect Communications Corporation 100 3,706/A/
Aspen Technology, Inc. 2,000 80,750/A/
BroadVision, Inc. 1,350 60,581/A/
F.Y.I. Incorporated 400 10,850/A/
Hyperion Solutions Corporation 2,600 84,500/A/
Informix Corporation 900 15,244/A/
JDA Software Group, Inc. 500 7,312/A/
Mercury Interactive Corporation 870 68,948/A/
META Group, Inc. 2,600 67,762/A/
MicroStrategy Incorporated 1,040 90,545/A/
Objective Systems Integrators, Inc. 5,000 75,938/A/
ON Technology Corporation 6,400 67,200/A/
Phoenix Technologies Ltd. 3,800 80,275/A/
Progress Software Corporation 3,300 77,344/A/
RADWARE Ltd. 200 7,750/A/
Remedy Corporation 200 8,425/A/
SERENA Software, Inc. 1,000 31,875/A/
Spyglass, Inc. 100 7,755/A/
</TABLE>
18
<PAGE>
Statement of Net Assets (CONTINUED)
Batterymarch U.S. Small Capitalization Equity Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (CONTINUED)
Technology Services (continued)
TenFold Corporation 1,800 $ 108,900/A/
The InterCept Group, Inc. 2,800 72,100/A/
TTI Team Telecom International Ltd. 200 6,600/A/
----------
1,098,960
Telecommunications 0.4%
Commonwealth Telephone Enterprises, Inc. 200 9,387/A/
Pegasus Communications Corporation 100 14,075/A/
Powertel, Inc. 100 6,919/A/
----------
30,381
Transportation 1.1%
Yellow Corporation 3,900 71,906/A/
Utilities 2.5%
Eastern Utilities Associates 100 3,138
Equitable Resources, Inc. 1,700 76,181
The United Illuminating Company 300 11,775
UGI Corporation 3,600 77,850
----------
168,944
----------
Total Common Stocks and Equity Interests
(Identified Cost - $6,747,628) 6,630,845
- ----------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement 83.7%
Bank of America
6.15%, dated 3/31/00, to be repurchased at $5,660,113 on 4/3/00
(Collateral: $6,358,657 Freddie Mac mortgage-backed securities,
6%, due 9/1/28, value $5,818,171) $5,657,214 5,657,214
----------
Total Repurchase Agreement
(Identified Cost - $5,657,214) 5,657,214
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Statement of Net Assets (CONTINUED)
Batterymarch U.S. Small Capitalization Equity Portfolio
March 31, 2000
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
% of Market
Net Assets Value
-----------------------------------------------------------
<S> <C> <C> <C>
Total Investments (Identified Cost - $12,404,842) 181.8% $12,288,059
Other Assets Less Liabilities (81.8)% (5,531,471)
-----------
Net assets consisting of:
Accumulated paid-in capital applicable to:
698,102 Institutional shares outstanding $6,871,850
Undistributed net investment income 3,074
Accumulated net realized gain/(loss) on investments (1,553)
Unrealized appreciation/(depreciation) of investments (116,783)
----------
Net Assets 100.0% $ 6,756,588
===========
Net Asset Value Per Share:
Institutional Class $ 9.68
===========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Non-income producing
See Notes to Financial Statements
20
<PAGE>
Statement of Operations
Batterymarch U.S. Small Capitalization Equity Portfolio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
For the Period
March 13, 2000/A/
to March 31, 2000
-----------------
<S> <C>
Investment Income:
Dividends $ 617
Interest 3,311
---------
Total Income 3,928
---------
Expenses:
Investment advisory fee 630
Other 4,495
---------
5,125
Less fees waived and expenses reimbursed (4,271)
---------
Total expenses, net of fees waived and expenses reimbursed 854
---------
Net Investment Income 3,074
---------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain/(loss) on investments (1,553)
Net unrealized appreciation/(depreciation) of investments (116,783)
---------
Net Realized and Unrealized Gain (Loss) on Investments (118,336)
---------
Decrease in Net Assets Resulting from Operations $(115,262)
=========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Commencement of operations.
See Notes to Financial Statements
21
<PAGE>
Statement of Changes in Net Assets
Batterymarch U.S. Small Capitalization Equity Portfolio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
For the Period
March 13, 2000/A/
to March 31, 2000
-----------------
<S> <C>
Change in Net Assets:
Net investment income $ 3,074
Net realized gain/(loss) on investments (1,553)
Net unrealized appreciation/(depreciation) of investments (116,783)
----------
Decrease in net assets resulting from operations (115,262)
Increase in net assets from Fund share transactions 6,871,850
----------
Increase in net assets 6,756,588
Net Assets:
Beginning of period --
----------
End of period (including undistributed net investment income of $3,074) $6,756,588
==========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Commencement of operations.
See Notes to Financial Statements
22
<PAGE>
Financial Highlights
Batterymarch U.S. Small Capitalization Equity 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
March 13, 2000/A/
to march 31, 2000
-----------------
<S> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 10.00
----------
Net investment income N.M./B/
Net realized and unrealized gain/(loss) on investments (0.32)
----------
Total from investment operations (0.32)
----------
Net asset value, end of period $ 9.68
==========
Total return (3.20)%/C/
Ratios/Supplemental Data:
Ratios to average net assets
Expenses 0.95%/B,D/
Net investment income 3.42%/B,D/
Portfolio turnover rate N.M.
Net assets, end of period $6,756,588
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Commencement of operations
/B/ Net of fees waived and expenses reimbursed by LMIA pursuant to a contractual
expense limitation of 0.95% until August 1, 2000. If no fees had been waived
or expenses reimbursed by LMIA, the annualized ratio of expenses to average
daily net assets for the period would have been 5.70%.
/C/ Not annualized
/D/ Annualized
N.M. Not meaningful
See Notes to Financial Statements
23
<PAGE>
Notes to Financial Statements
1. Significant Accounting Policies
LM Institutional Fund Advisors II, Inc. ("Corporation"), consisting of the LM
Value Institutional Portfolio ("Value Institutional") and the Batterymarch U.S.
Small Capitalization Equity Portfolio ("Batterymarch 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 March 13, 2000 for
Batterymarch 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 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 under procedures 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 dates 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
Batterymarch Small Cap. Distributions from net capital gains, if available, will
be made annually for both Value Institutional and Batterymarch 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, 2000,
$12,858,736 was payable for securities purchased but not yet received for Value
Institutional and $5,542,083 for Batterymarch Small Cap. At March 31, 2000,
$2,865,437 was receivable for securities sold but not yet delivered for Value
Institutional and $9,872 for Batterymarch Small Cap.
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 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.
24
<PAGE>
Notes to Financial Statements (CONTINUED)
Federal Income Taxes
No provision for federal income or excise taxes has been made since the
Portfolios intend to qualify or continue to qualify as regulated investment
companies and distribute all of their taxable income to their shareholders. At
March 31, 2000 Batterymarch U.S. Small Cap had capital loss carryforwards for
federal income tax purposes of $1,553 expiring in 2008.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States 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. Portfolio transactions
For the period ended March 31, 2000, investment transactions (excluding
short-term investments) were as follows:
Proceeds
Purchases from Sales
--------- ----------
Value Institutional $497,677,309 $71,645,283
Batterymarch U.S. Small Cap 6,759,053 9,872
At March 31, 2000, 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 $591,200,498 $62,774,765 $(31,523,774) $31,250,991
Batterymarch U.S. Small Cap 12,404,842 181,140 (297,923) (116,783)
</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
0.70% of the average daily net assets of Value Institutional and Batterymarch
Small Cap, respectively.
The Manager has, until August 1, 2000, contractually 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 0.95% for Batterymarch U.S. Small Cap. For the
period ended March 31, 2000, management fees of $630 were waived and expenses of
$3,641 were reimbursed for Batterymarch U.S. Small Cap. At March 31, 2000,
$285,889 was due to the Manager by Value Institutional. Any amounts waived or
reimbursed in a particular fiscal year will be subject to repayment by a
Portfolio to the Manager 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 at that time. At March 31,
2000, cumulative expenses waived or reimbursed amounted to $78,094 and $4,271
for Value Institutional and Batterymarch Small Cap, respectively.
To the extent the Manager receives a management fee after taking into account
its contractual obligation to limit expenses as discussed above, the Manager
will pay a Portfolio's Adviser the entire management fee it receives from the
Portfolio.
Legg Mason Fund Adviser, Inc. serves as investment adviser to Value
Institutional and Batterymarch Financial Management, Inc. serves as investment
adviser to Batterymarch U.S. Small Cap. The investment advisers are responsible
for the actual investment activity of the Portfolios.
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, 2000, distribution and service fees of $4,080 were waived
and $48,403 was due to LMWW for Value Institutional.
25
<PAGE>
Notes to Financial Statements (CONTINUED)
No brokerage commissions were paid to LMWW or its affiliates during the period
ended March 31, 2000.
LMFA, Batterymarch, LMWW and the Manager are wholly owned subsidiaries of Legg
Mason, Inc.
4. Line of Credit
Each Portfolio, along with certain other Legg Mason Funds, participates 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, 2000, the Portfolios
had no borrowings under the line of credit.
5. Fund Share Transactions
At March 31, 2000, 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
Year ended
March 31, 2000 23,986,792 $382,938,610 27,968 $430,337 (5,762,848) $(89,734,850) 18,251,912 $293,634,097
March 31, 1999/A/ 7,697,105 $107,068,729 1,709 $ 20,661 (393,470) $ (5,481,356) 7,305,344 $101,608,034
Financial Intermediary
Class
Year ended
March 31, 2000 10,592,787 $166,462,335 2,388 $ 36,401 (1,108,598) $(17,571,633) 9,486,577 $148,927,103
March 31, 1999/B/ 1,283,831 $ 14,522,075 742 $ 8,987 (102,486) $ (1,105,828) 1,182,087 $ 13,425,234
Batterymarch U.S. Small Cap:
Institutional Class
Period ended
March 31, 2000/C/ 698,102 $ 6,871,850 -- $ -- -- $ -- 698,102 $ 6,871,850
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ September 22, 1998 (commencement of operations) to March 31, 1999.
/B/ October 22, 1998 (commencement of operations) to March 31, 1999.
/C/ March 13, 2000 (commencement of operations) to March 31, 2000.
26
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors
LM Institutional Fund Advisors II, Inc.:
We have audited the accompanying statements of net assets of LM Institutional
Fund Advisors II, Inc. (the "Corporation") (comprised of the LM Value
Institutional Portfolio and the Batterymarch U.S. Small Capitalization Equity
Portfolio) as of March 31, 2000, 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2000, 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
audits provide 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 LM Institutional Fund Advisors II,
Inc. at March 31, 2000, 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 accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
---------------------
Philadelphia, Pennsylvania
May 3, 2000
27
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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
Batterymarch Financial Management, Inc.
200 Clarendon Street
Boston, Massachusetts 22116
This report is not to be distributed unless preceded or
accompanied by a prospectus.
Legg Mason Wood Walker, Inc., Distributor
