<PAGE>
LM Institutional Fund Advisors II, Inc.
LM Value Institutional Portfolio
Batterymarch U.S. Small Capitalization Equity Portfolio
Semi-Annual Report
September 30, 2000
<PAGE>
Portfolio Managers' Comments
LM Value Institutional Portfolio
Portfolio Commentary
Monthly and daily volatility remain high both for the fund and for the market.
In August the Value Institutional Portfolio rose 8.28%, in September we fell
5.78%. These price changes were not the result of changing business values being
reflected in changed stock prices, they reflect changing emotions and attitudes
of investors in response to the flow of news into the market.
The decline that began in September continued into the first two weeks of
October, giving us six consecutive weeks of a falling stock market. As explained
more fully in the Market Commentary section of this report, we think the decline
has brought the market to an attractive level of valuation and we are optimistic
about returns from the levels reached in the second week of this month.
Our portfolio activity was characteristically muted during the quarter. We sold
two of our foreign holdings, Philips and Nokia. Both have performed well for us
over the years, and both were trading at valuations we believed fully reflected
the solid prospects of those two companies. We also sold Mattel, which performed
poorly for us. The company has new management and has finally disposed of its
money losing subsidiary The Learning Company. That company, bought for over $3
billion in Mattel stock, fetched exactly zero when it was finally "sold",
although Mattel stands to get some consideration if the business ever improves.
The stock represented a small position for us and we thought we could more
effectively deploy the cash in some companies we owned that we believe have
better long-term prospects.
During the quarter we added no new positions, but did add to existing holdings
such as Gateway, Albertsons, Kodak, WorldCom, Nextel, and Amazon.com. Subsequent
to the quarter's end, we added to our Dell Computer position, as the stock fell
to the low 20s in reaction to expectations of slower future growth. Trading at a
market multiple for the first time in years, Dell, we think, can grow at over
twice the market's rate for the next several years and once again represents
good value. As you may recall, we sold a large portion of our Dell holding
earlier in the year at considerably higher prices.
The best names in your portfolio this quarter were the financials, which
rebounded from the poor results of prior quarters. It appears as if the six
interest rate increases the Fed has imposed in the past year are having the
desired effect of slowing the economy. The market has begun to believe that
perhaps the Fed will begin lowering rates next year, especially if the effect of
rising oil prices is to further inhibit economic growth. Any hint of potential
Fed easing is, of course, bullish for financials. We are agnostic about the
direction of rates, but believe that financials continue to represent solid
value and will perform well for us over the next few years.
Before this quarter is over, we will have elected a new President. Many
investors grow concerned around election time about the impact a new
administration may have on the market. We believe that the administration per se
has little market impact; it is the policies that are enacted that count. Those
policies, though, are themselves often shaped by the market. The tremendous
expansion of equity ownership through 401(k) and stock option plans has
democratized the stock market over the past 10 years. It is much harder to pass
legislation perceived to be market unfriendly than it was a generation ago. Now
when markets react strongly, politicians are often forced to respond. The felt
necessity to "do something" about oil prices is a current manifestation of the
sensitivity of government to changes in markets. There is, of course, the real
risk that governments over-react to normal market fluctuations, but that is
balanced by their being unlikely to actively pursue policies that would have a
substantial negative market impact. Legislation, no doubt, will continue to be
proposed and sometimes passed that could have significant effects on individual
industries.
It is always more pleasant to write quarterly letters saying how well the market
did and that we did even better than it is to write how the market has spent
nine months doing little except drive price-earnings ratios lower. After five
years where share prices rose faster than earnings, we are in a year where
earnings are rising and share prices aren't. High oil prices and international
tensions, higher short-term interest rates, upward pressure on inflation, and
the uncer-
1
<PAGE>
Portfolio Managers' Comments (continued)
LM Value Institutional Portfolio
tainty of an election year, have all taken their toll on the market. The third
quarter has also seen the highest level of pre-announced earnings warnings in
several years, solid evidence that the economy is slowing. The good news is that
the bad news is reflected in the market. At current prices, we believe the
market represents good value and your portfolio even better value.
Market Commentary
"It's not about calling market bottoms. It's about identifying levels of
---
attractive valuations."
Ed Kerschner
Chief Investment Strategist, PaineWebber
October 13, 2000
Economists have been able to develop greater understanding about how people make
financial decisions by importing insights from psychology, replacing some of the
assumptions of classical economics by descriptions of how people actually
behave. Maybe next the economists can round up some cognitive scientists and
have them investigate the subject of investors' memory, which seems to differ
significantly from the everyday variety.
Our memory provides continuity and context to our daily activities, enabling us
to recognize familiar situations, see their similarities and differences,
integrate experience into a broader context, draw lessons from the past, and so
on. Investment memory, though, seems considerably more short-term, selective,
and sub-optimal. Normal memory, though far from perfect, allows us to function
reasonably effectively; investment memory often fails just when it is most
needed. We don't remember that similar situations have occurred in the recent
past; we don't put current events in perspective. The result is sub-optimal
investment decisions.
When T.S. Eliot said April was the cruelest month, he wasn't thinking about tech
stocks, but during April those stocks collapsed, finally bottoming in early May.
Spring has often been a good time to sell technology, just as fall has often
been a good time to buy. Securities prices seem to have a habit of dropping in
September and October, and the fall has seen many important market bottoms. The
market crash in October 1929 provided a nice trade into the spring of 1930. More
recently, the bear market of l973-74 ended in the fall, the October 1987 crash
was a low, the bear market of 1990 bottomed in the fall, and the panic of 1998
saw an October bottom.
We have just finished six straight weeks of decline, beginning on the 1/st/ of
September and carrying the market down over 12%. This is the second correction
of 10% or more this year; the only other years this decade with two 10% drops
were 1990 and 1998. In both years we had external and internal sources of market
angst. In 1990 it was war in the Middle East, high oil prices, recession, and
the impact of fed tightening. In 1998 it was emerging markets, Russia's default,
Long Term Capital Management's collapse, and Fed tightening. Now it is tensions
in the Middle East, rising oil prices, earnings warnings, and Fed tightening.
There are the rudiments of pattern here. In each case, either the decline in the
market itself, or the causes of the decline finally made the front page of the
New York Times and other newspapers. By the time market declines (or advances)
are front-page news, they usually have run their course.
In the summer of 1983 we had a technology driven new issue boom that drove the
NASDAQ to a peak. Over the ensuing 12 months that index fell about 40% before
resuming its advance. In 1987 the S&P 500 peaked in August. It fell 40% in 40
days, bottoming with the crash's 20%, one day decline. This year the NASDAQ
peaked in the spring at 5,000. By the end of last week, its decline reached 40%
peak to trough.
There are of course differences between this decline and the others. Previous
shifts from decline to advance have often been catalyzed by a change in Fed
policy toward risk. No such change is evident today.
2
<PAGE>
Portfolio Managers' Comments (continued)
LM Value Institutional Portfolio
October is also when Institutional Investor releases the results of its annual
survey of Wall Street analysts, highlighting those voted best in their
respective categories. For the first time, Ed Kerschner of Paine Webber was
named best strategist, outpolling Abby Joseph Cohen, the justly celebrated
Goldman Sachs strategist who has been correctly bullish on the market for the
past 10 years. I have long admired Ed's work, which is always quantitatively
sound, analytically rigorous, and conceptually interesting. During the tech
frenzy this March, he correctly called the top, just as he correctly called the
bottom in 1998. This past week, he said the stock market was the most attractive
it had been since October 1998. This, like his other market judgments, was not a
psychological assessment, nor was it based on his reading of the charts; it was
a valuation call. Declining stock prices, positive fundamentals, and a benign
macroeconomic environment have combined to produce the best opportunity for
excess returns since 1998.
Of course the market may continue lower, fundamentals may deteriorate, oil may
rise further, tensions may escalate, the macro-environment may darken. There are
always reasons why the market is down, and those reasons dominate investor's
consciousness; but current fears are reflected in current prices. Justice Holmes
once said people need to be reminded more than they need to be instructed. Once
reminded, we remember October has often been a time to be bullish.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
Mary Chris Gay
October 14, 2000
<TABLE>
<CAPTION>
Strong Performers Weak Performers
for the Six Months Ended September 30, 2000* for the Six Months Ended September 30, 2000*
-------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C>
1. Foundation Health Systems, Inc. +107.8% 1. Dell Computer Corporation -42.9%
2. United HealthCare Corporation +65.6% 2. Amazon.com, Inc. -42.6%
3. MGM Mirage Inc. +59.1% 3. Nextel Communications, Inc. -36.9%
4. MBNA Corporation +51.0% 4. WorldCom, Inc. -33.0%
5. Washington Mutual, Inc. +50.2% 5. Albertson's, Inc. -32.3%
6. McKesson HBOC, Inc. +45.5% 6. WPP Group plc -31.0%
7. MGIC Investment Corporation +40.1% 7. General Motors Corporation -21.5%
8. The Bear Stearns Companies, Inc. +38.1% 8. Telefonos de Mexico SA de CV(Telmex) -20.6%
9. The Kroger Co. +28.5% 9. The Chase Manhattan Corporation -20.5%
10. Waste Management Inc. +27.4% 10. America Online, Inc. -20.1%
</TABLE>
*Securities held during the entire period.
3
<PAGE>
Portfolio Managers' Comments
Batterymarch U.S. Small Capitalization Equity Portfolio
Performance
For the six months ended September 30, 2000, the Fund's return was 1.03%, on a
net asset value basis, compared with -2.72% for the benchmark, the Russell 2000
Index.
Since the Fund's inception on March 13, 2000, through September 30, 2000, the
return was -2.20%, on a net asset value basis, well ahead of the Russell 2000
Index return of -11.07%.
Market Environment
For the six-month period, small capitalization stocks outperformed large caps;
the S&P 500 declined -3.60% compared with -2.72% for the Russell 2000.
Among small capitalization issues, value-oriented stocks outperformed growth
stocks; the Russell 2000 Value Index rose 9.43% while the Russell 2000 Growth
Index declined -11.05%. For the Russell 2000 benchmark, the best performing
sectors were Health Services, Health Care, Energy, Utilities and Finance, all of
which significantly outperformed the index. The worst performing sectors were
Telecommunications and Technology Services, which significantly underperformed
the index.
Our stock selection process, which incorporates both growth and value factors,
had a positive result for the six months. The Fund benefited from positive stock
selection, particularly in the Technology, Technology Services, Utilities and
Health Care sectors. In addition, the Fund's underweight in Telecommunications
and overweight in Energy, relative to the benchmark, added value.
The six-month period had its share of cross currents. During the second quarter
ended June 30, the Fund's return was 2.27%, on a net asset basis, compared with
-3.78% for the Russell 2000. Early in the period, rate hike anticipation and the
antitrust ruling on Microsoft combined to trigger a sell-off in technology
stocks, particularly the Internet-related issues. The Fed raised short-term
rates in May. The Nasdaq Composite, which began its retreat in April, lost
nearly 12% in May. Small capitalization stocks also lost ground, declining over
11% in the first two months of the quarter. Investors subsequently moved away
from the high-flying momentum sectors into defensive value sectors, such as
Utilities and Energy. By quarter-end, investor optimism increased that the
economy was slowing and the Fed was nearing the end of its rate-raising
campaign. As a result, the Nasdaq ran up once again in June, and the Russell
2000 gained nearly 9%.
During the third quarter ended September 30, the Fund's return was -1.21% on a
net asset value basis, compared with 1.11% for the Russell 2000. Although the
Nasdaq declined during the quarter, small caps outperformed large caps. The
Federal Reserve took a wait-and-see stance toward further rate increases after
its long campaign to slow the economy and keep inflation in check. Investors
again shifted their focus from momentum-driven stocks toward value-oriented
stocks as company fundamentals came back into play. By September, investors were
worried about the weak Euro, rising oil prices and company preannouncements of
earnings shortfalls.
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, incorporating both
growth and value, and the model is
4
<PAGE>
Portfolio Managers' Comments
Batterymarch U.S. Small Capitalization Equity Portfolio
"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 compared with large
caps. With a forward P/E ratio of 13.6x, the Russell 2000 is more attractively
valued than the S&P 500 Index with a forward P/E of 22.6x. In addition, the
Russell 2000 has a higher two-year earnings growth rate than the S&P 500.
The portfolio is attractively valued compared with its benchmark, with a forward
P/E of 13.1x, slightly lower than that of the Russell 2000, and a higher two-
year earnings growth rate. The Fund is well diversified across both market cap
bands and across 20 industry sectors.
Batterymarch Financial Management, Inc.
October 16, 2000
<TABLE>
<CAPTION>
Strong Performers Weak Performers
for the Six Months Ended September 30, 2000* for the Six Months Ended September 30, 2000*
-------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C>
1. Noven Pharmaceuticals, Inc. +290.9% 1. Varian Semiconductor Equipment Associates, Inc. -41.2%
2. Career Education Corporation +154.3% 2. Cymer, Inc. -38.6%
3. Direct Focus, Inc. +114.4% 3. TTI Team Telecom International Ltd. -38.3%
4. AmeriCredit Corp. +76.6% 4. Advanced Energy Industries, Inc. -35.3%
5. Biosite Diagnostics Incorporated +63.6% 5. CyberOptics Corporation -35.3%
6. Techne Corporation +62.3% 6. United Stationers Inc. -24.7%
7. Scholastic Corporation +47.5% 7. Harsco Corporation -23.8%
8. Triad Guaranty Inc. +46.5% 8. RADWARE Ltd. -22.6%
9. SERENA Software, Inc. +44.5% 9. Littelfuse, Inc. -19.1%
10. Radian Group Inc. +41.7% 10. The Timken Company -15.8%
</TABLE>
*Securities held during the entire period.
5
<PAGE>
Statement of Net Assets
LM Value Institutional Portfolio
<TABLE>
<CAPTION>
September 30, 2000 (Unaudited)
(Amounts in Thousands)
-------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
---------------------------------------------
<S> <C> <C> <C>
Common Stock and Equity Interests 98.9%
Capital Goods 4.9%
Manufacturing (Diversified) 0.9%
Danaher Corporation 114 $ 5,657
---------
Waste Management 4.0%
Waste Management Inc. 1,420 24,755
---------
Communications Services 7.7%
Telecommunications (Cellular/Wireless) 2.5%
Nextel Communications, Inc. 335 15,639/A/
---------
Telephone 5.2%
Telefonos de Mexico SA de CV (Telmex) 182 9,661
WorldCom, Inc. 733 22,258/A/
---------
31,919
Consumer Cyclicals 13.9%
Automobiles 1.6%
General Motors Corporation 158 10,273
---------
Gaming, Lottery and Parimutuel Companies 1.8%
MGM Mirage Inc. 295 11,253
---------
Lodging/Hotels 2.2%
Starwood Hotels & Resorts Worldwide, Inc. 431 13,466
---------
Retail (Home Shopping) 3.5%
Amazon.com, Inc. 575 22,086/A/
---------
Retail (Specialty) 2.0%
Toys "R" Us, Inc. 752 12,219/A/
---------
Services (Advertising/Marketing) 2.8%
WPP Group plc 1,434 17,175
---------
Consumer Staples 7.3%
Distributors (Food and Health) 2.2%
McKesson HBOC, Inc. 454 13,879
---------
Entertainment 0.7%
Metro-Goldwyn-Mayer, Inc. 175 4,203/A/
---------
</TABLE>
6
<PAGE>
Statement of Net Assets (continued)
LM Value Institutional Portfolio
<TABLE>
<CAPTION>
September 30, 2000 (Unaudited)
(Amounts in Thousands)
------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
----------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (continued)
Retail (Food Chains) 4.4%
Albertson's, Inc. 790 $ 16,594
The Kroger Co. 474 10,697/A/
---------
27,291
Financials 35.4%
Banks (International) 2.3%
Lloyds TSB Group plc 1,532 14,294
---------
Banks (Major Regional) 6.6%
Bank One Corporation 623 24,048
FleetBoston Financial Corporation 430 16,777
---------
40,825
Banks (Money Center) 4.1%
Bank of America Corporation 191 10,015
The Chase Manhattan Corporation 335 15,450
---------
25,465
Consumer Finance 1.8%
MBNA Corporation 287 11,059
---------
Financial (Diversified) 9.1%
Citigroup Inc. 446 24,117
Fannie Mae 358 25,619
Freddie Mac 124 6,717
---------
56,453
Insurance (Property/Casualty) 5.9%
Berkshire Hathaway Inc. - Class A .20 12,945/A/
MGIC Investment Corporation 383 23,402
---------
36,347
Investment Banking/Brokerage 1.6%
The Bear Stearns Companies, Inc. 158 9,954
---------
Savings and Loan Companies 4.0%
Washington Mutual, Inc. 632 25,152
---------
Health Care 9.7%
Health Care (Managed Care) 9.7%
Aetna Inc. 295 17,144
Foundation Health Systems, Inc. 531 8,835/A/
United HealthCare Corporation 345 34,053
---------
60,032
</TABLE>
7
<PAGE>
Statement of Net Assets (continued)
LM Value Institutional Portfolio
<TABLE>
<CAPTION>
September 30, 2000 (Unaudited)
(Amounts in Thousands)
-----------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
----------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (continued)
Technology 20.0%
Computers (Hardware) 9.0%
Dell Computer Corporation 177 $ 5,449/A/
Gateway, Inc. 718 33,559/A/
International Business Machines Corporation 153 17,249
--------
56,257
Computers (Peripherals) 0.8%
Storage Technology Corporation 354 4,796/A/
--------
Computers (Software/Services) 7.3%
America Online, Inc. 850 45,673/A/
--------
Photography/Imaging 2.9%
Eastman Kodak Company 435 17,776
--------
Total Common Stock and Equity Interests
(Identified Cost $622,942) 613,898
------------------------------------------------------------------------------------------------------------
Repurchase Agreements 2.1%
Goldman, Sachs & Company
6.60%, dated 9/29/00, to be repurchased at $6,623 on 10/2/00
(Collateral: $7,299 Fannie Mae mortgage-backed securities,
6%, due 1/1/29, value $6,856) $6,620 6,620
Morgan Stanley Dean Witter
6.58%, dated 9/29/00, to be repurchased at $6,623 on 10/2/00
(Collateral: $6,668 Ginnie Mae mortgage-backed securities,
8%, due 9/20/27, value $6,799) 6,619 6,619
--------
Total Repurchase Agreements (Identified Cost $13,239) 13,239
-----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Statement of Net Assets (continued)
LM Value Institutional Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
% of Market
Net Assets Value
-----------------------------------------------
<S> <C> <C> <C>
Total Investments (Identified Cost $636,181) 101.0% $ 627,137
Other Assets Less Liabilities (1.0)% (6,151)
---------
Net Assets Consisting Of:
Accumulated paid-in capital applicable to:
27,137 Institutional Class shares outstanding $422,383
11,346 Financial Intermediary Class shares outstanding 173,199
Undistributed net investment income 808
Accumulated net realized gain/(loss) on investments 33,642
Unrealized appreciation/(depreciation) of investments and
foreign currency transactions (9,046)
Net Assets 100.0% $ 620,986
=========
Net Asset Value Per Share:
Institutional Class $ 16.14
=========
Financial Intermediary Class $ 16.12
=========
---------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Non-income producing
N.M. Not meaningful
See Notes to Financial Statements
9
<PAGE>
Statement of Operations
LM Value Institutional Portfolio
(Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
For the Six Months ended
September 30, 2000
--------------------------
<S> <C>
Investment Income:
Dividends/A/ $ 3,237
Interest 834
--------
Total Income 4,071
--------
Expenses:
Management fee 1,854
Distribution and service fees 230
Transfer agent and shareholder servicing expense 42
Audit and legal fees 35
Custodian fees 118
Directors' fees 12
Registration fees 35
Reports to shareholders 27
Other expenses 5
--------
Total expenses 2,358
--------
Net Investment Income 1,713
--------
Net Realized and Unrealized Gain on Investments:
Realized gain/(loss) on investments and foreign currency transactions 34,510
Change in unrealized appreciation/(depreciation) of investments
and foreign currency translations (41,395)
--------
Net Realized and Unrealized Gain on Investments (6,885)
--------
Change in Net Assets Resulting From Operations $ (5,172)
========
--------------------------------------------------------------------------------------
</TABLE>
/A/ Net of foreign taxes of $39.
See Notes to Financial Statements
10
<PAGE>
Statement of Changes in Net Assets
LM Value Institutional Portfolio
(Amounts in Thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
For the Six For the Year
Months Ended Ended
September 30, 2000 March 31, 2000
------------------ --------------
(Unaudited)
<S> <C> <C>
Change in Net Assets:
Net investment income $ 1,713 $ 1,262
Net realized gain/(loss) on investments and foreign currency transactions 34,510 23,096
Change in unrealized appreciation/(depreciaton) of investments
and foreign currency translations (41,395) 13,963
-------- --------
Change in net assets resulting from operations (5,172) 38,321
Distributions to shareholders:
From net investment income:
Institutional Class (1,286) (618)
Financial Intermediary Class (324) (52)
From net realized gain on investments:
Institutional Class (17,063) (939)
Financial Intermediary Class (6,824) (139)
Change in net assets from Fund share transactions:
Institutional Class 27,126 293,634
Financial Intermediary Class 10,846 148,927
-------- --------
Change in net assets 7,303 479,134
Net Assets:
Beginning of period 613,683 134,549
-------- --------
End of period (including undistributed net investment income
of $808 and $705, respectively) $620,986 $613,683
======== ========
</TABLE>
11
<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
---------------------------------------------------------------
Six Months Ended Year Ended September 22, 1998/A/
September 30, 2000* March 31, 2000 to March 31, 1999
------------------- -------------- ---------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 16.94 $ 15.85 $ 10.00
-------- -------- --------
Net investment income 0.05 0.05 0.04/B/
Net realized and unrealized gain/(loss) on investments
and foreign currency transactions (0.17) 1.17 5.83
-------- -------- --------
Total from investment operations (0.12) 1.22 5.87
-------- -------- --------
Distributions to shareholders from:
Net investment income (0.05) (0.05) (0.02)
Net realized gain on investments (0.63) (0.08) --
-------- -------- --------
Total distributions (0.68) (0.13) (0.02)
-------- -------- --------
Net asset value, end of period $ 16.14 $ 16.94 $ 15.85
======== ======== ========
Total return -0.65%/D/ 7.74% 58.81%/D/
Ratios/Supplemental Data:
Ratios to average net assets
Expenses 0.69%/E/ 0.75% 0.75%/B,E/
Net investment income 0.63%/E/ 0.44% 0.84%/B,E/
Portfolio turnover rate 44.7%/E/ 23.1% 28.6%/E/
Net assets, end of period (in thousands) $ 438,071 $433,036 $115,798
</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
* Unaudited
See Notes to Financial Statements
12
<PAGE>
<TABLE>
<CAPTION>
Financial Intermediary Class
-------------------------------------------------------------------------------------
Six Months Ended Year Ended October 22, 1998/A/
September 30, 2000* March 31, 2000 to March 31, 1999
------------------- -------------- -------------------
<S> <C> <C>
$ 16.93 $ 15.86 $ 10.71
-------- -------- --------
0.03 0.02/C/ 0.03/C/
(0.18) 1.15 5.14
-------- -------- --------
(0.15) 1.17 5.17
-------- -------- --------
(0.03) (0.02) (0.02)
(0.63) (0.08) --
-------- -------- --------
(0.66) (0.10) (0.02)
-------- -------- --------
$ 16.12 $ 16.93 $ 15.86
-------- -------- --------
-0.82%/D/ 7.41% 48.32%/D/
0.94%/E/ 1.00%/C/ 1.00%/C,E/
0.38%/E/ 0.22%/C/ 0.43%/C,E/
44.7%/E/ 23.1% 28.6%/E/
$182,915 $180,647 $ 18,751
</TABLE>
--------------------------------------------------------------------------------
Statement of Net Assets
13
<PAGE>
Statement of Net Assets
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------------
Common Stock and Equity Interests 93.0%
Basic Materials 5.0%
Chemicals 0.2%
W. R. Grace & Co. 13 $ 89/A/
------
Chemicals (Specialty) 0.6%
Minerals Technologies Inc. 4 189
NL Industries, Inc. 3 57
------
246
Containers & Packaging (Paper) 0.8%
Pactiv Corporation 30 335/A/
------
Household Furnishings and Appliances 0.4%
Lennox International Inc. 18 164
------
Industrial Services 1.6%
Harsco Corporation 15 329
Olin Corporation 19 304
------
633
Metals 1.4%
Commercial Metals Company 11 285
Reliance Steel & Aluminum Co. 10 213
The Timken Company 6 81
------
579
Capital Goods 5.8%
Electrical Equipment 0.8%
Technitrol, Inc. 3 303
------
Homebuilding 0.3%
NVR, Inc. 2 138/A/
------
Machinery (Diversified) 0.4%
Milacron Inc. 12 160
------
Manufacturing (Specialized) 4.3%
Advanced Energy Industries, Inc. 4 129/A/
Cognex Corporation 7 288/A/
Cymer, Inc. 8 239/A/
Mitel Corporation 24 496/A/
Nanometrics Incorporated 5 262/A/
Silicon Valley Group, Inc. 12 316/A/
Varian Semiconductor
Equipment Associates, Inc. 1 48/A/
------
1,778
14
<PAGE>
Statement of Net Assets (continued)
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------------
Common Stocks and Equity
Interests (continued)
Communications Services 1.8%
Telecommunications (Cellular/Wireless) 1.8%
Glenayre Technologies, Inc. 13 $ 139/A/
Inet Technologies, Inc. 3 94/A/
Millicom International Cellular S.A. 7 263/A/
TTI Team Telecom International Ltd. 7 139/A/
Wire One Technologies, Inc. 9 103/A/
-----
738
Consumer Cyclicals 17.4%
Advertising 0.8%
ADVO, Inc. 10 337/A/
-----
Broadcasting (TV, Radio & Cable) 0.5%
XM Satellite Radio Holdings Inc. 5 224/A/
-----
Cable and Media 0.1%
Insight Communications Company, Inc. 2 28/A/
-----
Commercial Services 1.3%
F. Y. I. Incorporated 12 445/A/
Regis Corporation 6 84
-----
529
Consumer Products 1.3%
Alberto-Culver Company 13 375
Direct Focus, Inc. 4 153/A/
-----
528
Consumer Services 0.5%
Dollar Thrifty Automotive Group, Inc. 10 188/A/
-----
Educational Services 1.5%
Career Education Corporation 8 362/A/
Learning Tree International, Inc. 3 138/A/
ProsoftTraining.com 7 100/A/
-----
600
Household Furnishings and Appliances 1.8%
Mohawk Industries, Inc. 20 434/A/
Salton, Inc. 10 317/A/
-----
751
Leisure Time (Products) 1.9%
SCP Pool Corporation 13 377/A/
WMS Industries Inc. 18 412/A/
-----
789
15
<PAGE>
Statement of Net Assets (continued)
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
-----------------------------------
Common Stocks and Equity
Interests (continued)
Office Equipment and Supplies 0.5%
United Stationers Inc. 8 $ 212/A/
-----
Publishing 1.2%
Martha Stewart Living Omnimedia, Inc. 7 194/A/
Scholastic Corporation 4 279/A/
-----
473
Retail 0.6%
InterTAN, Inc. 16 235/A/
-----
Retail (Specialty-Apparel) 2.0%
Chico's FAS, Inc. 5 170/A/
Footstar, Inc. 7 219/A/
Kenneth Cole Productions, Inc. 6 205/A/
The Talbots, Inc. 3 212
-----
806
Retail (Specialty) 1.4%
Coldwater Creek Inc. 9 230/A/
Michaels Stores, Inc. 2 84/A/
The Neiman Marcus Group, Inc. 8 256/A/
-----
570
Services (Commercial and Consumer) 1.6%
Administaff, Inc. 2 129/A/
Hall, Kinion & Associates, Inc. 2 42/A/
Lightbridge, Inc. 5 63/A/
Penton Media, Inc. 8 212
TeleTech Holdings, Inc. 9 230/A/
-----
676
Textiles (Apparel) 0.4%
Columbia Sportswear Company 4 179/A/
-----
Energy 7.1%
Gas and Pipeline Utilities 0.5%
Equitable Resources, Inc. 3 203
-----
Oil Field Services 0.7%
Trico Marine Services, Inc. 18 288/A/
-----
Oil and Gas (Drilling and Equipment) 0.7%
Marine Drilling Companies, Inc. 10 294/A/
-----
16
<PAGE>
Statement of Net Assets (continued)
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
--------------------------------------
Common Stocks and Equity
Interests (continued)
Oil and Gas (Exploration and Production) 5.2%
Chesapeake Energy Corporation 55 $ 395/A/
Patterson Energy, Inc. 13 457/A/
St. Mary Land & Exploration Company 9 210
The Houston Exploration Company 21 530/A/
Vintage Petroleum, Inc. 23 523
------
2,115
Financials 20.8%
Banks (Major Regional) 2.7%
City National Corporation 11 436
East West Bancorp, Inc. 22 438
Hibernia Corporation 19 227
------
1,101
Brokerage 0.6%
Southwest Securities Group, Inc. 9 257
------
Consumer Finance 1.0%
AmeriCredit Corp. 14 406/A/
------
Insurance (Life/Health) 2.7%
Delphi Financial Group, Inc. 11 454/A/
The MONY Group Inc. 16 642
------
1,096
Insurance (Multi-Line) 1.2%
StanCorp Financial Group, Inc. 12 500
------
Insurance (Property/Casualty) 1.9%
RenaissanceRe Holdings Ltd. 7 435
The Commerce Group, Inc. 12 356
------
791
Investment Management 2.7%
Affiliated Managers Group, Inc. 4 234/A/
BlackRock, Inc. 13 422/A/
The John Nuveen Company 9 445
------
1,101
Miscellaneous 1.7%
Metris Companies Inc. 9 354
Radian Group Inc. 2 121
Triad Guaranty Inc. 7 208/A/
------
683
17
<PAGE>
Statement of Net Assets (continued)
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Shares/ Market
Net Assets Par Value
------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (continued)
Real Estate Investment Trusts 5.0%
Amli Residential Properties Trust 11 $ 257
Bedford Property Investors, Inc. 18 361
CBL & Associates Properties, Inc. 16 391
Colonial Properties Trust 14 370
Highwoods Properties, Inc. 18 416
IRT Property Company 10 84
MeriStar Hospitality Corporation 9 186
-------
2,065
Savings and Loan Companies 1.3%
Dime Bancorp, Inc. 8 181
Richmond County Financial Corp. 15 361
-------
542
Health Care 12.0%
Biotechnology 0.4%
Diversa Corporation 6 159/A/
-------
Health Care (Drugs/Major Pharmaceuticals) 0.9%
Noven Pharmaceuticals, Inc. 3 128/A/
SICOR Inc. 23 234/A/
-------
362
Health Care (Managed Care) 2.0%
Coventry Health Care, Inc. 24 369/A/
Mid Atlantic Medical Services, Inc. 22 334/A/
PacificCare Health Systems, Inc. 4 126/A/
-------
829
Health Care (Medical Products and Supplies) 3.9%
Biosite Diagnostics Incorporated 5 179/A/
Invacare Corporation 17 556
Owens & Minor, Inc. 18 284
Packard BioScience Company 10 203/A/
Techne Corporation 1 56/A/
Varian, Inc. 8 327/A/
-------
1,605
Health Care (Specialized Services) 4.8%
Charles River Laboratories International, Inc. 11 367/A/
Datascope Corp. 1 34
First Health Group Corp. 7 226/A/
Oxford Health Plans, Inc. 3 83/A/
Syncor International Corporation 4 140/A/
Trigon Healthcare, Inc. 3 131/A/
Universal Health Services, Inc. 7 565/A/
Varian Medical Systems, Inc. 10 447/A/
-------
1,993
</TABLE>
18
<PAGE>
Statement of Net Assets (continued)
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Shares/ Market
Net Assets Par Value
------------------------------------------
<S> <C> <C> <C>
Common Stocks and Equity Interests (continued)
Miscellaneous 0.9%
Miscellaneous Manufacturing 0.5%
Measurement Specialties, Inc. 4 $ 213/A/
------
Multi-Industry 0.4%
Kaman Corporation 14 174
------
Technology 14.2%
Computers (Software/Services) 10.3%
Actuate Corporation 7 238/A/
AremisSoft Corporation 5 188/A/
Aspen Technology, Inc. 10 460/A/
CryptoLogic Inc. 9 118/A/
Documentum, Inc. 1 106/A/
Forrester Research, Inc. 7 414/A/
Informatica Corporation 3 280/A/
JDA Software Group, Inc. 15 194/A/
Keynote Systems, Inc. 2 64/A/
Manhattan Associates, Inc. 5 294/A/
MatrixOne, Inc. 1 40/A/
Metasolv Software, Inc. 1 57/A/
Netegrity, Inc. 6 388/A/
RADWARE Ltd. 5 150/A/
SERENA Software, Inc. 10 438/A/
SonicWall, Inc. 10 291/A/
The Descartes Systems Group Inc. 6 272/A/
WebTrends Corporation 6 224/A/
------
4,216
Electronics 1.5%
Amphenol Corporation 4 233/A/
CyberOptics Corporation 7 120/A/
KEMET Corporation 6 163/A/
Littelfuse, Inc. 3 98/A/
------
614
Electronics (Semiconductors) 1.3%
Exar Corporation 1 169/A/
Oak Technology, Inc. 13 364/A/
------
533
</TABLE>
19
<PAGE>
Statement of Net Assets (continued)
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
---------------------------------
Common Stocks and Equity Interests (continued)
Photography/Imaging 0.7%
Orbotech, Ltd. 6 $ 304/A/
------
Technology Services 0.4%
Ditech Communications Corporation 4 164/A/
------
Transportation 2.7%
Airlines 0.4%
Frontier Airlines, Inc. 8 150/A/
------
Shipping 1.7%
OMI Corporation 6 53/A/
Teekay Shipping Corporation 14 647
------
700
Truckers 0.6%
American Freightways Corporation 15 241/A/
------
Utilities 5.3%
Electric Companies 3.3%
ALLETE 16 354
El Paso Electric Company 42 578/A/
Public Service Company of New Mexico 17 448
------
1,380
Natural Gas 1.5%
Energen Corporation 15 444
National Fuel Gas Company 3 157
------
601
Telecommunications 0.5%
Time Warner Telecom Inc. 4 193/A/
------
Total Common Stock and Equity Interests (Identified Cost $36,600) 38,161
--------------------------------------------------------------------------------
20
<PAGE>
Statement of Net Assets (continued)
Batterymarch U.S. Small Capitalization Equity Portfolio
September 30, 2000 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
% of Shares/ Market
Net Assets Par Value
------------------------------------
<S> <C> <C> <C>
Repurchase Agreements 3.2%
Goldman, Sachs & Company
6.60% dated 9/29/00, to be repurchased at $1,311 on 10/2/00
(Collateral:$1,445 Fannie Mae mortgage-backed securities
6% due 1/1/29, value $1,358) $ 1,310 $ 1,310
-------
Total Repurchase Agreements (Identified Cost $1,310) 1,310
------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost 6.2% $39,471
Other Assets Less Liabilities 3.8% 1,572
-------
Net Assets Consisting Of:
Accumulated paid-in capital applicable to:
4,194 Institutional Class shares outstanding $40,657
Undistributed net investment income 35
Accumulated net realized gain/(loss) on investments (1,210)
Unrealized appreciation/(depreciation) of investments 1,561
-------
Net Assets 100.0% $41,043
=======
Net Asset Value Per Share:
Institutional Class $ 9.79
=======
-----------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Non-income producing
See Notes to Financial Statements
21
<PAGE>
Statement of Operations
Batterymarch U.S. Small Capitalization Equity Portfolio
(Unaudited)
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended
September 30, 2000
------------------
<S> <C>
Investment Income:
Dividends/A/ $ 82
Interest 36
-------
Total Income 118
-------
Expenses:
Management fee 64
Transfer agent and shareholder servicing expense 6
Audit and legal fees 13
Custodian fees 39
Directors' fees 2
Registration fees 10
Reports to shareholders 1
-------
135
Less fees waived (49)
-------
Total expenses, net of fees waived 86
-------
Net Investment Income 32
-------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain/(loss) on investments (1,208)
Net unrealized appreciation/(depreciation) of investments 1,677
-------
Net Realized and Unrealized Gain (Loss) on Investments 469
-------
Change in Net Assets Resulting From Operations $ 501
=======
</TABLE>
--------------------------------------------------------------------------------
/A/ Net of foreign taxes of $1.
See Notes to Financial Statements
22
<PAGE>
Statement of Changes in Net Assets
Batterymarch U.S. Small Capitalization Equity Portfolio
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months For the Period
Ended March 13, 2000/A/
September 30, 2000 to March 31, 2000
------------------ -----------------
(Unaudited)
<S> <C> <C>
Change in Net Assets:
Net investment income $ 32 $ 3
Net realized gain/(loss) on investments (1,208) (2)
Net unrealized appreciation/(depreciation) of investments 1,677 (116)
------- ------
Change in net assets resulting from operations 501 (115)
Change in net assets from Fund share transactions 33,785 6,872
------- ------
Change in net assets 34,286 6,757
Net Assets:
Beginning of period 6,757 --
------- ------
End of period (including undistributed net investment
income of $35 and $3, respectively) $41,043 $6,757
======= ======
</TABLE>
--------------------------------------------------------------------------------
/A/ Commencement of operations.
See Notes to Financial Statements
23
<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 Six Months For the Period
Ended March 13, 2000/A/
September 30, 2000/*/ to March 31, 2000
------------------- -----------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 9.68 $10.00
------- ------
Net investment income N.M./B/ N.M./B/
Net realized and unrealized gain/(loss) on investments 0.11 (0.32)
------- ------
Total from investment operations 0.11 (0.32)
------- ------
Net asset value, end of period $ 9.79 $ 9.68
------- ------
Total return 1.03%/C/ (3.20)%/C/
Ratios/Supplemental Data:
Ratios to average net assets
Expenses 0.95%/B,D/ 0.95%/B,D/
Net investment income 0.35%/B,D/ 3.42%/B,D/
Portfolio turnover rate 137.7%/D/ N.M.
Net assets, end of period (in thousands) $41,043 $6,757
</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, 2001. If no fees had been waived
or expenses reimbursed by LMIA, the annualized ratio of expenses to average
daily net assets for the six months ended September 30, 2000 would have been
1.70% and for the period ended March 31, 2000 would have been 5.70%.
/C/ Not annualized
/D/ Annualized
/*/ Unaudited
N.M. Not meaningful
See Notes to Financial Statements
24
<PAGE>
Notes to Financial Statements
(Unaudited)
(Amounts in Thousands)
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
established by and under the general supervision of 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 annually for both Value Institutional and 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 September 30, 2000,
receivables for securities sold and payables for securities purchased for each
of the Portfolios were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
--------------- --------------------
Value Institutional $2,549 $9,012
Batterymarch Small Cap 1,072 1,572
25
<PAGE>
Notes to Financial Statements (continued)
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.
Federal Income Taxes
No provision for federal income or excise taxes has been made since the
Portfolios intend to continue to qualify as regulated investment companies and
distribute substantially all of their taxable income to their shareholders. At
September 30, 2000 Batterymarch Small Cap had capital loss carryforwards for
federal income tax purposes of $2 expiring in 2008.
Use of Estimates
Preparation of the 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 September 30, 2000, investment transactions (excluding
short-term investments) were as follows:
Proceeds
Purchases from Sales
--------- ----------
Value Institutional $169,528 $132,601
Batterymarch U.S. Small Cap 43,364 12,304
At September 3o, 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 $636,181 $58,995 $(68,039) $(9,044)
Batterymarch U.S. Small Cap 37,910 3,652 (2,091) 1,561
</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 annual rates of each
Portfolio's average daily net assets as shown in the chart that follows.
To the extent the Manager receives a management fee after taking into account
its contractual obligation to limit expenses as discussed below, the Manager
will pay a Portfolio's Adviser the entire management fee it receives from the
Portfolios.
Legg Mason Funds Management, Inc. ("LMFM")serves as investment adviser to Value
Institutional and Batterymarch Financial Management, Inc. ("Batterymarch")
serves as investment adviser to Batterymarch Small Cap. The investment advisers
are responsible for the actual investment activity of the Portfolios.
Prior to August 1, 2000, Legg Mason Fund Adviser, Inc. ("LMFA") served as
investment adviser to Value Institutional, under compensation arrangements
substantially similar to those with the current adviser.
26
<PAGE>
Notes to Financial Statements (continued)
The Manager has, until August 1, 2001, contractually agreed to waive its fees
and reimburse expenses in any month to the extent a Portfolio's expenses
(exclusive of taxes, interest, brokerage and extraordinary expense) exceed
during that month certain annual rates of that Portfolio's average daily net
assets as shown in the following chart:
<TABLE>
<CAPTION>
Six Months Ended At
September 30, 2000 September 30, 2000
------------------ ------------------
Management Expense Management Management
Fund Fee Limitation Fee Waived Fee Payable
---- ---------- ---------- ------------------ ------------------
<S> <C> <C> <C> <C>
Value Institutional
Institutional Class 0.60% 0.75% NA $220
Financial Intermediary Class 0.60% 1.00% NA 94
Batterymarch Small Cap 0.70% 0.95% $49 15
</TABLE>
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
September 30, 2000 cumulative expenses waived or reimbursed amounted to $78 and
$53 for Value Institutional and Batterymarch Small Cap, respectively.
Legg Mason Wood Walker, Incorporated ("LMWW"), a member of the New York Stock
Exchange, serves as distributor of the Portfolios. LMWW receives an annual
distribution fee, based on each Portfolio's Financial Intermediary Class's
average daily net assets, computed daily and payable monthly as follows:
<TABLE>
<CAPTION>
At September 30, 2000
---------------------
Distribution Distribution
Fund Fee Fee Payable
---- ------------ -----------
<S> <C> <C>
Value Institutional
Financial Intermediary Class 0.25% $39
</TABLE>
No brokerage commissions were paid by the Portfolios to LMWW or its affiliates
during the period ended September 30, 2000.
LMFM, 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 Credit Agreement bear interest at
prevailing short-term interest rates. For the period ended September 30, 2000,
the Portfolios had no borrowings under the line of credit.
27
<PAGE>
Notes to Financial Statements (continued)
5. Fund Share Transactions
At September 30, 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
Six Months ended
September 30, 2000 5,955 $ 98,889 1,066 $16,921 (5,443) $ (88,684) 1,578 $ 27,126
Year ended
March 31, 2000 23,987 382,939 28 430 (5,763) (89,735) 18,252 293,634
Financial Intermediary
Class
Six Months ended
September 30, 2000 1,561 $ 25,797 407 $ 6,449 (1,291) $ (21,400) 677 $ 10,846
Year ended
March 31, 2000 10,593 166,462 2 36 (1,108) (17,571) 9,487 148,927
Batterymarch U.S. Small Cap:
Institutional Class
Six Months ended
September 30, 2000 3,496 $ 33,785 -- $ -- -- $ -- 3,496 $ 33,785
Period ended
March 31, 2000/A/ 698 6,872 -- -- -- -- 698 6,872
------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ March 13, 2000 (commencement of operations) to March 31, 2000.
28
<PAGE>
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 Funds Management, 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
