<PAGE>
As filed with the Securities and Exchange Commission on December 20, 2000
Registration No.
---------------------------------
---------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
[_] Pre-Effective Amendment No.
[_] Post-Effective Amendment No.
Legg Mason Value Trust, Inc.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Office)
(410) 539-0000
(Area Code and Telephone Number)
Marc R. Duffy, Esq.
100 Light Street
Baltimore, Maryland 21202
(Name and Address of Agent for Service)
Copy to:
Arthur C. Delibert, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Second Floor
Washington, D.C. 20036-1800
----------------
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement is declared effective
Title of Securities Being Registered:
Shares of Common Stock (par value $.001) of the Registrant
----------------
It is proposed that this filing become effective on January 22, 2001
pursuant to Rule 488.
----------------
The Registrant has registered an indefinite amount of its securities under
the Securities Act of 1933, pursuant to Rule 24f-2 under the Investment Company
Act of 1940. In reliance upon Rule 24f-2, no filing fee is being paid at this
time.
<PAGE>
LM VALUE INSTITUTIONAL PORTFOLIO
(a series of LM Institutional Fund Advisors II, Inc.)
January 26, 2001
Dear LM Value Institutional Portfolio Shareholder:
The attached proxy materials describe a proposal that LM Value
Institutional Portfolio ("Value Institutional Portfolio") merge into Legg Mason
Value Trust, Inc. (each, a "Fund"). If the proposal is approved and implemented,
each shareholder of Value Institutional Portfolio will automatically become a
shareholder of Legg Mason Value Trust, Inc.
Your board of directors recommends a vote FOR the proposal. The board
believes that combining the two Funds will benefit Value Institutional
Portfolio's shareholders. The attached proxy materials provide more information
about the proposed reorganization and the two Funds.
Your vote is important no matter how many shares you own. Voting your
--------------------------------------------------------
shares early will help prevent costly follow-up mail and telephone solicitation.
After reviewing the attached materials, please complete, date and sign your
proxy card and mail it in the enclosed return envelope today. As an alternative
to using the paper proxy card to vote, you may vote by telephone, by facsimile,
through the Internet or in person.
Very truly yours,
Edward A. Taber, III
President
LM Institutional Fund Advisors II, Inc.
<PAGE>
LM VALUE INSTITUTIONAL PORTFOLIO
(a series of LM Institutional Fund Advisors II, Inc.)
______________
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
January 26, 2001
______________
To Shareholders:
A special meeting of shareholders of LM Value Institutional Portfolio
("Value Institutional Portfolio"), a series of LM Institutional Fund Advisors
II, Inc. (the "Corporation"), will be held on March 9, 2001 at 11:00 a.m., at
the offices of the Corporation at 100 Light Street, Baltimore, Maryland 21202,
for the following purposes:
(1) To approve an Agreement and Plan of Reorganization and Termination
under which Legg Mason Value Trust, Inc. ("Value Trust") would acquire all the
assets of Value Institutional Portfolio in exchange solely for shares of Value
Trust and the assumption by Value Trust of all of Value Institutional
Portfolio's liabilities, followed by the distribution of those shares to the
shareholders of Value Institutional Portfolio, all as described in the
accompanying Prospectus/Proxy Statement; and
(2) To transact such other business as may properly come before the
meeting or any adjournment thereof.
You are entitled to vote at the meeting and any adjournment thereof if
you owned shares of Value Institutional Portfolio at the close of business on
January 26, 2001. If you attend the meeting, you may vote your shares in person.
If you do not expect to attend the meeting, please complete, sign, date and
return the enclosed proxy card in the enclosed postage paid envelope. As an
alternative to using the paper proxy card to vote, you may vote by telephone, by
facsimile, through the Internet, or in person.
By order of the Board of Directors,
Marc R. Duffy
Secretary
January 26, 2001
<PAGE>
--------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed proxy card,
sign and date the card, and return it in the envelope provided. IF YOU SIGN,
DATE AND RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL
BE VOTED "FOR" THE PROPOSAL DESCRIBED ABOVE. In order to avoid the additional
expense of further solicitation, we ask your cooperation in mailing your proxy
card promptly. As an alternative to using the paper proxy card to vote, you may
vote by mail, telephone, through the Internet, by facsimile machine, or in
person. Shares that are registered in your name, as well as shares held in
"street name" through a broker, may be voted via the Internet or by telephone.
To vote in this manner, you will need the 12-digit "control" number(s) that
appear on your proxy card(s). To vote via the Internet, please access
http://www.________.com on the World Wide Web. In addition, shares that are
registered in your name may be voted by faxing your completed proxy card(s) to
1-___-____. You may also call 1-___-____ and vote by phone. If we do not receive
your completed proxy cards after several weeks, we or someone on our behalf may
contact you.
Unless proxy cards submitted by corporations and partnerships are signed by the
appropriate persons as indicated in the voting instructions on the proxy card,
they will not be voted.
--------------------------------------------------------------------------------
2
<PAGE>
LEGG MASON VALUE TRUST, INC.
LM VALUE INSTITUTIONAL PORTFOLIO
(a series of LM Institutional Fund Advisors II, Inc.)
100 Light Street
Baltimore, MD 21202
(410) 539-0000
PROSPECTUS/PROXY STATEMENT
January 26, 2001
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished
to shareholders of LM Value Institutional Portfolio ("Value Institutional
Portfolio"), a series of LM Institutional Fund Advisors II, Inc., in connection
with the solicitation of proxies by its board of directors for use at a special
meeting of its shareholders to be held on March 9, 2001 at 11:00 a.m., Eastern
time, and at any adjournment thereof, if it is adjourned for any reason.
As more fully described in this Proxy Statement, the purpose of the
meeting is to vote on a proposed reorganization in which Legg Mason Value Trust,
Inc. ("Value Trust") would acquire all the assets of Value Institutional
Portfolio, in exchange solely for shares of Value Trust and the assumption by
Value Trust of all the liabilities of Value Institutional Portfolio. Those
shares of Value Trust would then be distributed to the shareholders of Value
Institutional Portfolio, so that each shareholder would receive a number of full
and fractional shares of Value Trust having an aggregate value that, on the
effective date of the reorganization, would equal the aggregate net asset value
of the shareholder's shares of Value Institutional Portfolio. These transactions
are referred to collectively as the "Reorganization." As soon as practicable
following the distribution of shares, Value Institutional Portfolio would be
terminated.
Value Trust is a diversified, open-end management investment company.
Value Trust's investment objective is to seek long-term growth of capital.
This Proxy Statement, which should be retained for future reference,
sets forth concisely information about the Reorganization and Value Trust that a
shareholder should know before voting on the Reorganization. A Statement of
Additional Information, dated January 26, 2001, relating to the Reorganization
(the "Reorganization Statement of Additional Information"), has been filed with
the Securities and Exchange Commission ("SEC") and is incorporated herein by
this reference (that is, the Reorganization Statement of Additional Information
is legally a part of this Proxy Statement). A Value Trust Institutional Class
and Financial Intermediary Class Prospectus dated January 21, 2001 has been
filed with the SEC and is incorporated herein by reference. Also, management's
discussion of the performance of Value Trust, which is included in the Annual
Report to Shareholders of Value Trust for the fiscal year ended March 31, 2000,
is attached as Appendix C to this Proxy Statement. Additional information about
Value Institutional Portfolio may be found in Value Institutional Portfolio's
Prospectus and Statement
<PAGE>
of Additional Information, each dated August 1, 2000 and each as amended, Annual
Report to Shareholders for the fiscal year ended March 31, 2000 and Semi-Annual
Report to Shareholders for the period ended September 30, 2000, each of which
has been filed with the SEC and is incorporated herein by this reference. The
Value Trust and Value Institutional Portfolio documents incorporated herein by
reference, additional information about Value Trust and Value Institutional
Portfolio and the Reorganization Statement of Additional Information have been
filed with the SEC and may be obtained without charge, and further inquiries may
be made, by writing to LM Institutional Advisors, Inc., 100 Light Street, P.O.
Box 17635, Baltimore, Maryland 21297-1635, or by calling toll-free 1-888-425-
6432.
The SEC maintains a website (http://www.sec.gov) that contains the
material incorporated by reference, together with other information regarding
Value Trust and Value Institutional Portfolio.
The SEC has not approved or disapproved the shares of Value Trust being
offered in the Reorganization, or determined whether this Proxy Statement is
accurate or complete. Any representation to the contrary is a criminal offense.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Title Page
------------- ----
<S> <C>
VOTING INFORMATION........................................................................................... 1
THE REORGANIZATION........................................................................................... 3
SYNOPSIS..................................................................................................... 3
The Proposed Reorganization............................................................................. 3
Comparative Fee Table................................................................................... 4
Example of Effect on Fund Expenses...................................................................... 5
Forms of Organization................................................................................... 6
Investment Adviser...................................................................................... 6
Distributor............................................................................................. 7
Other Fund Service Providers............................................................................ 7
Fund Directors and Officers............................................................................. 8
Investment Objectives, Policies, and Restrictions....................................................... 8
Operations of Value Trust Following the Reorganization.................................................. 8
Performance............................................................................................. 8
Purchases and Redemptions............................................................................... 10
Exchanges............................................................................................... 11
Dividends and Other Distributions....................................................................... 11
Federal Income Tax Consequences of the Reorganization................................................... 11
PRINCIPAL RISK FACTORS....................................................................................... 12
Market Risk............................................................................................. 12
Value Style Risk........................................................................................ 12
Foreign Securities Risk................................................................................. 12
Investments Models...................................................................................... 13
Interest Rate and Credit Risk of Debt Securities........................................................ 13
Call Risk............................................................................................... 13
Convertible Securities.................................................................................. 14
THE PROPOSED TRANSACTION..................................................................................... 14
Reorganization Plan..................................................................................... 14
Reasons for the Reorganization.......................................................................... 15
Description of Securities to be Issued.................................................................. 16
Temporary Waiver of Investment Restrictions............................................................. 17
Federal Income Tax Considerations....................................................................... 17
Capitalization.......................................................................................... 18
Additional Information about Value Trust - Financial Highlights........................................ 19
OTHER BUSINESS............................................................................................... 20
MISCELLANEOUS................................................................................................ 21
Available Information................................................................................... 21
Legal Matters........................................................................................... 21
Experts................................................................................................. 21
APPENDIX A: Principal Shareholders.......................................................................... A-1
APPENDIX B: Agreement and Plan of Reorganization and Termination............................................ B-1
APPENDIX C: Management's Discussion of Fund Performance (Legg Mason Value Trust, Inc.)...................... C-1
APPENDIX D: Comparison of Investment Restrictions........................................................... D-1
</TABLE>
iii
<PAGE>
LM VALUE INSTITUTIONAL PORTFOLIO
(a series of LM Institutional Fund Advisors II, Inc.)
________________
PROSPECTUS/PROXY STATEMENT
Special Meeting of Shareholders
to be held on March 9, 2001
________________
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of LM Value Institutional Portfolio ("Value Institutional
Portfolio"), a series of LM Institutional Fund Advisors II, Inc. (the
"Corporation"), in connection with the solicitation of proxies from Value
Institutional Portfolio shareholders by the board of directors of the
Corporation ("Board") for use at a special meeting of shareholders to be held on
March 9, 2001 ("Meeting"), and at any adjournment of the Meeting. This Proxy
Statement will first be mailed to shareholders on or about January 26, 2001.
Thirty percent of Value Institutional Portfolio's shares outstanding on
January 26, 2001 ("Record Date"), represented in person or by proxy, shall
constitute a quorum and must be present for the transaction of business at the
Meeting. If a quorum is not present at the Meeting or sufficient votes approving
the Reorganization (as defined below) are not received by the time scheduled for
the Meeting, the persons named as proxies may propose one or more adjournments
of the Meeting after the date set for the Meeting to permit further solicitation
of proxies. In addition, if, in the judgment of the persons named as proxies, it
is advisable to defer action on the Reorganization, those persons may propose
one or more adjournments of the Meeting for up to 120 days from the Record Date.
Any such adjournments will require the affirmative vote of a majority of the
votes cast on the question in person or by proxy at the Meeting. The persons
named as proxies will vote in favor of such adjournment those proxies that they
are entitled to vote approving the Reorganization. They will vote against any
such adjournment those proxies required to be voted against the Reorganization.
The costs of any additional solicitation and of any adjourned session will be
borne by Legg Mason Wood Walker, Incorporated ("Legg Mason") or one of its
affiliates.
Broker non-votes are shares held in "street name" for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes effectively
will be a vote against the Reorganization and will have no effect on
adjournments.
The individuals named as proxies on the enclosed proxy card will vote in
accordance with your directions as indicated on the proxy card, if your proxy
card is received properly executed by you or by your duly appointed agent or
attorney-in-fact. If you sign, date and return the proxy card, but give no
voting instructions, your shares will be voted in favor of approval of
<PAGE>
the proposal. In addition, if you sign, date and return the proxy card, but give
no voting instructions, the duly appointed proxies may, in their discretion,
vote upon any other matters that come before the Meeting. The proxy card may be
revoked by giving another proxy or by letter or telegram revoking the initial
proxy. To be effective, revocation must be received by the Corporation prior to
the Meeting and must indicate your name and account number. If you attend the
Meeting in person you may, if you wish, vote by ballot at the Meeting, thereby
canceling any proxy previously given. Proxies voted by telephone, facsimile or
Internet may be revoked at any time before they are voted in the same manner
that proxies voted by mail may be revoked.
As of January 22, 2001, Value Institutional Portfolio had _____________
shares outstanding, which were allocated to the following classes: __________
Institutional Class shares and __________ Financial Intermediary Class shares.
Shareholder Communications Corp., 17 State Street, 22nd Floor, New York, New
York 10004, has been retained to aid in the solicitation of proxies. The costs
of retaining Shareholder Communications Corp., which are anticipated to be
approximately $_____, and other expenses incurred in connection with the
solicitation of proxies and the holding of the Meeting, will be borne by Legg
Mason or one of its affiliates and not by either Value Institutional Portfolio
or Value Trust (each a "Fund").
Except as set forth in Appendix A, to the knowledge of either Fund, no
other shareholder owned of record or beneficially 5% or more of the shares of
any class of either Fund. [As of January 22, 2001, Directors and officers of the
Corporation did not own any shares of Value Institutional Portfolio.]
Required Vote. Approval of the proposal requires the affirmative vote of a
majority of the outstanding voting securities of Value Institutional Portfolio
at the Record Date. Each outstanding full share of Value Institutional Portfolio
is entitled to one vote, and each outstanding fractional share thereof is
entitled to a proportionate fractional share of one vote. If the proposal is not
approved by the requisite vote of shareholders of Value Institutional Portfolio,
the Board will consider what other action to take regarding the future of Value
Institutional Portfolio.
2
<PAGE>
THE REORGANIZATION
PROPOSAL. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION AND
--------
TERMINATION ("REORGANIZATION PLAN") UNDER WHICH LEGG MASON VALUE
TRUST, INC. ("VALUE TRUST") WOULD ACQUIRE ALL THE ASSETS OF VALUE
INSTITUTIONAL PORTFOLIO IN EXCHANGE SOLELY FOR SHARES OF VALUE TRUST
AND THE ASSUMPTION BY VALUE TRUST OF ALL OF VALUE INSTITUTIONAL
PORTFOLIO'S LIABILITIES, FOLLOWED BY THE DISTRIBUTION OF THOSE SHARES
TO THE SHAREHOLDERS OF VALUE INSTITUTIONAL PORTFOLIO
("REORGANIZATION").
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement, the Prospectus and Statement of Additional Information of
each Fund and the Reorganization Plan. The Reorganization Plan is attached as
Appendix B to this Proxy Statement. As discussed more fully below, the Board
believes that the Reorganization will benefit Value Institutional Portfolio's
shareholders.
The Proposed Reorganization
The Board considered the Reorganization Plan at a meeting held on November
29, 2000 and approved the Reorganization Plan at a meeting held on December 14,
2000. The Reorganization Plan provides for the acquisition of all the assets of
Value Institutional Portfolio by Value Trust, in exchange solely for shares of
common stock of Value Trust and the assumption by Value Trust of all the
liabilities of Value Institutional Portfolio. Value Institutional Portfolio then
will distribute those shares of Value Trust to its shareholders, so that each
Value Institutional Portfolio shareholder will receive the number of full and
fractional shares that is equal in aggregate value to the value of the
shareholder's holdings in Value Institutional Portfolio as of the day the
Reorganization is completed. Value Institutional Portfolio will be terminated as
soon as practicable thereafter.
If the Reorganization Plan is approved by Value Institutional Portfolio
shareholders, shareholders of each class of Value Institutional Portfolio shares
will receive in the Reorganization shares of the comparable class of Value
Trust. That is, Institutional Class shareholders of Value Institutional
Portfolio will receive Institutional Class shares of Value Trust and Financial
Intermediary Class shareholders of Value Institutional Portfolio will receive
Financial Intermediary Class shares of Value Trust. No shares of the Primary
Class of Value Trust will be issued as part of the Reorganization.
The Reorganization will occur as of the close of business on or about March
30, 2001, or at any other date when the Reorganization is approved and all
contingencies have been met ("Closing Date").
3
<PAGE>
For the reasons set forth below under "The Proposed Transaction - Reasons
for the Reorganization," the Board, including its directors ("Independent
Directors") who are not "interested persons," as that term is defined in the
Investment Company Act of 1940, as amended ("1940 Act"), of the Corporation or
Value Trust has determined that the Reorganization is in the best interests of
Value Institutional Portfolio and that the interests of Value Institutional
Portfolio's shareholders will not be diluted as a result of the Reorganization.
Accordingly, the Board recommends approval of the Reorganization. In addition,
the board of directors of Value Trust, including its directors who are not
"interested persons," as that term is defined in the 1940 Act, of Value Trust or
the Corporation has determined that the Reorganization is in the best interests
of Value Trust and that the interests of Value Trust's shareholders will not be
diluted as a result of the Reorganization.
Comparative Fee Table
The current annualized fees and expenses incurred by each Fund for the
six months ended September 30, 2000, and pro forma fees and expenses for Value
Trust after the Reorganization, are shown below. Expenses for the Financial
Intermediary Class of Value Trust are based on estimated amounts for the current
fiscal year.
Annual Fund Operating Expenses (expenses that are deducted from fund assets) (as
a % of net assets) (after fee waivers or expense reimbursements, if any)
<TABLE>
<CAPTION>
Value Pro Forma
Value Trust Institutional Portfolio/(a)/ Combined Fund
----------------------------- ------------------------------- -------------
Financial Financial Financial
Intermediary Institutional Intermediary Institutional Intermediary Institutional
Class Class Class Class Class Class
Shares Shares Shares Shares Shares Shares
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Management fees 0.66% 0.66% 0.60% 0.60% 0.66% 0.66%
Rule 12b-1 fees 0.25%/(b)/ none 0.25%/(b)/ none 0.25%/(b)/ none
Other expenses 0.04% 0.04% 0.09% 0.09% 0.04% 0.04%
----- ----- ----- ----- ----- -----
Expense Reimbursement/
Waiver none none none none none none
==== ==== ==== ==== ==== ====
Total fund operating
expenses (net of
waivers) 0.95% 0.70% 0.94% 0.69% 0.95% 0.70%
</TABLE>
/(a)/ LMIA, as investment adviser, has agreed to waive fees so that expenses of
Institutional Class shares and Financial Intermediary Class shares
(exclusive of taxes, interest, brokerage and extraordinary expenses) do
not exceed annual rates of 0.75% and 1.00%, respectively, of the Fund's
average daily net assets attributable to that particular class. LMIA is
contractually obligated to limit fund expenses as described until August
1, 2001.
/(b)/ The 12b-1 fee shown reflects the amount to which the Board has currently
limited payments under the Fund's Distribution Plan. Pursuant to the
Fund's Distribution Plan, the Board may increase the 12b-1 fees to 0.40%
of average net assets without shareholder approval.
A sales charge will not be imposed on purchases or redemptions occurring
as a result of the Reorganization. Although the pro forma fees and expenses
indicate that shareholders of
4
<PAGE>
Value Institutional Portfolio will pay slightly greater expenses after the
Reorganization than they currently pay, the Board believes the Reorganization is
in the best interests of shareholders. See "The Proposed Transaction - Reasons
for the Reorganization."
Example of Effect on Fund Expenses
The Example is intended to help you compare the cost of investing in Value
Institutional Portfolio with the cost of investing in Value Trust, as it
presently exists, and the cost of investing in Value Trust, assuming the
Reorganization has been completed.
The Example assumes that you invest $10,000 in the specified Fund for the
time periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year, that all dividends and other distributions are reinvested and that the
Fund's operating expenses are those shown in the tables above. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Value Institutional Portfolio:
Financial Intermediary $96 $300 $520 $1,155
Class shares
Institutional Class shares $70 $221 $384 $ 859
Value Trust:
Financial Intermediary $97 $303 $525 $1,166
Class shares
Institutional Class shares $72 $224 $390 $ 871
Combined Fund (pro forma):
Financial Intermediary $97 $303 $525 $1,166
Class shares
Institutional Class shares $72 $224 $390 $ 871
</TABLE>
5
<PAGE>
Forms of Organization
Value Trust is a diversified open-end management investment company that
was organized as a Maryland corporation on January 20, 1982. That Fund currently
offers three classes of shares: Primary Class shares, Financial Intermediary
Class shares and Institutional Class shares. As stated above, no Primary Class
shares will be issued as part of the Reorganization. In November 2000, the
Navigator Class of Value Trust was renamed the Institutional Class.
Value Institutional Portfolio is a series of the Corporation, a diversified
open-end management investment company that was organized as a Maryland
corporation on January 13, 1998. That Fund currently offers two classes of
shares, Institutional Class shares and Financial Intermediary Class shares.
Neither the Corporation nor Value Trust is required to (nor does it) hold
annual shareholder meetings. Neither Fund issues share certificates.
Investment Adviser
Legg Mason Funds Management, Inc. ("LMFM") and LM Institutional Fund
Advisors, Inc. ("LMIA"), both wholly owned subsidiaries of Legg Mason, Inc.,
currently serve as the investment adviser and investment manager, respectively,
to Value Institutional Portfolio. LMIA has contracted with LMFM to provide day-
to-day portfolio management services as investment adviser for Value
Institutional Portfolio. LMFM has been providing management services to Value
Trust and advisory services to Value Institutional Portfolio since August 2000.
LMFM had aggregate assets under management of approximately $__ billion as of
December 31, 2000.
On August 1, 2000, LMFM replaced Legg Mason Fund Adviser, Inc. ("LMFA") as
the investment adviser to Value Trust and Value Institutional Portfolio. The
advisory personnel who previously managed Value Trust and Value Institutional
Portfolio as employees of LMFA continue to do so as employees of LMFM. LMFM is
newly organized; however, its principal employee advised Value Trust and Value
Institutional Portfolio during the period that LMFA was each Fund's adviser.
Value Institutional Portfolio pays LMIA a fee, subject to any fee waiver
arrangements in place, computed daily and paid monthly at the annual rate of
0.60% of Value Institutional Portfolio's net assets. LMIA has agreed to waive
fees until August 1, 2001 to the extent that the Fund's expenses exceed the
following annual rates of average daily net assets: Institutional Class--0.75%
and Financial Intermediary Class--1.00%. If the Reorganization is not approved
by Value Institutional Portfolio shareholders, LMIA is not expected to continue
to waive fees after August 1, 2001, and Fund expenses could be higher. To the
extent LMIA receives a management fee after taking into account its contractual
obligation to limit expenses as discussed above, LMIA will pay LMFM the entire
management fee it receives from the Fund. For the fiscal year ended March 31,
2000, Value Institutional Portfolio paid LMIA management fees of $1,945,541.
6
<PAGE>
LMFM serves as the manager of Value Trust and receives for its services a
management fee, calculated daily and payable monthly, at an annual rate equal to
1.00% up to $100 million of average daily net assets, 0.75% between $100 million
and $1 billion of average daily net assets, and 0.65% of average daily net
assets exceeding $1 billion. For the fiscal year ended March 31, 2000, Value
Trust paid LMFA management fees of $80,416,828.
Distributor
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., serves as
distributor for both Value Institutional Portfolio and Value Trust. Legg Mason
will continue to distribute shares of Value Trust after the Reorganization.
Legg Mason acts as distributor of Value Trust's shares pursuant to an
underwriting agreement with Value Trust (the "Underwriting Agreement"). The
Underwriting Agreement obligates Legg Mason to promote the sale of Fund shares
and to pay certain expenses in connection with its distribution efforts,
including the printing and distribution of prospectuses and periodic reports
used in connection with the offering to prospective investors (after the
prospectuses and reports have been prepared, set in type and mailed to existing
shareholders at the Fund's expense) and for supplementary sales literature and
advertising costs.
Value Trust has adopted a Distribution and Shareholder Services Plan
("Plan") pertaining to Financial Intermediary Class shares. The Plan, among
other things, permits the Fund to pay Legg Mason fees for its services related
to sales and distribution of Financial Intermediary Class shares and the
provision of ongoing services to holders of those shares. Payments with respect
to the Plan are made only from assets attributable to the Fund's Financial
Intermediary Class shares. Distribution activities for which such payments may
be made include, but are not limited to, compensation to persons who engage in
or support distribution and redemption of shares, printing of prospectuses and
reports for persons other than existing shareholders, advertising, preparation
and distribution of sales literature, overhead, travel and telephone expenses
all with respect to Financial Intermediary Class shares only.
As compensation for its services and expenses, Value Trust can pay Legg
Mason an annual distribution and service fee of up to 0.40% of its average daily
net assets attributable to Financial Intermediary Class shares in accordance
with the Plan (to date the directors have approved payments of only 0.25% of
average net assets). The distribution and service fees are calculated daily and
paid monthly.
Other Fund Service Providers
The Funds have the same transfer and shareholder servicing agent (Boston
Financial Data Services ("BFDS")) and the same custodian (State Street Bank &
Trust Company). Value Trust's independent accountants are PricewaterhouseCoopers
LLP, and Value Institutional Portfolio's independent auditors are Ernst & Young
LLP. Upon completion of the Reorganization, the service providers of Value Trust
will continue to provide services to the combined Fund.
7
<PAGE>
Fund Directors and Officers
Value Trust's directors will continue to serve in that capacity for Value
Trust after the Reorganization. For a complete description of the directors and
officers of Value Trust, including a description of each director's principal
occupation for the past five years and compensation paid to each director, see
the Value Trust Primary Class Shares, Institutional Class Shares and Financial
Intermediary Class Shares Statement of Additional Information, incorporated by
reference into the Reorganization Statement of Additional Information.
Investment Objectives, Policies, and Restrictions
The two Funds have the same investment objectives and strategies and
similar investment restrictions. For a description of each Fund's investment
objectives and strategies, see the Value Trust Institutional Class and Financial
Intermediary Class Prospectus and the Value Institutional Portfolio Prospectus,
each as filed with the SEC and each as incorporated by reference.
A chart comparing the investment restrictions of each Fund is attached as
Appendix D hereto. The differing investment restrictions do not produce a
material difference in the management of Value Trust and Value Institutional
Portfolio.
Operations of Value Trust Following the Reorganization
The operations of Value Trust are not expected to differ materially
following the Reorganization.
Performance
Value Trust has two authorized classes of shares involved in the
Reorganization: Financial Intermediary Class shares and Institutional Class
shares. The information provided below is for Institutional Class shares
(formerly Navigator Class shares); the Financial Intermediary Class is new and
has no performance history. Each class is subject to the same expenses, except
that a 0.25% Rule 12b-1 fee is paid by the Financial Intermediary Class shares;
this will generally lower the performance of Financial Intermediary Class shares
as compared to Institutional Class shares. The information below provides an
indication of the risks of investing in the Fund by showing changes in the
Fund's performance from year to year. Annual returns assume reinvestment of
dividends and distributions. Historical performance of a fund does not
necessarily indicate what will happen in the future.
Value Trust Institutional Class Shares -
Year by year total return as of December 31 of each year (%)
------------------------------------------------------------
[Bar chart with the following values to be inserted]
8
<PAGE>
Calendar Year Total Return
------------- ------------
1995 42.18%
1996 39.82%
1997 38.49%
1998 49.40%
1999 27.99%
2000 __.__%
Quarter Ended Total Return
------------- ------------
Best quarter December 31, 1998 +36.15%
Worst quarter [September 30, 1998] [-11.47%]
Set forth below are the average annual total returns for the periods
indicated for the two Funds, by class. The tables also compare each Fund's
returns to returns of a broad-based market index, the Standard & Poor's 500
Composite Stock Index ("S&P 500 Index"). The S&P 500 Index is an index of 500
common stocks and is considered to be a broad indicator of general market
performance. The S&P 500 Index is unmanaged and, therefore, does not include any
sales charges or expenses.
Value Trust
Average Annual Total Returns for periods ended December 31, 2000
----------------------------------------------------------------
1 Year 5 Years Life of Class
------ ------- -------------
Value Trust -
Institutional Class/(c)/ __.__% __.__% __.__%/(a)/
S&P 500 Index __.__% __.__% __.__%/(b)/
/(a)/ From December 1, 1994 (commencement of operations of this class).
/(b)/ From December 31, 1994.
/(c)/ The Financial Intermediary Class had no performance history as of this
date.
Value Institutional Portfolio
Average Annual Total Returns for periods ended December 31, 2000
----------------------------------------------------------------
1 Year Life of Class
------ -------------
Value Institutional Portfolio -
Institutional Class __.__% __.__%*
Value Institutional Portfolio -
Financial Intermediary Class __.__% __.__%**
S&P 500 Index __.__% __.__%***
* From September 22, 1998 (commencement of operations of this class).
** From October 22, 1998 (commencement of operations of this class).
*** From September 30, 1998.
9
<PAGE>
Purchases and Redemptions
Purchases. Value Trust shares and Value Institutional Portfolio shares
may be purchased by qualified investors either directly from Legg Mason or
through certain institutional intermediaries. Shares of each Fund are sold on a
continuous basis at a price based on the net asset value ("NAV") per share next
determined after receipt of a purchase order in good form. Purchase orders
received before the close of the New York Stock Exchange (the "Exchange")
(normally 4:00 p.m., Eastern time) will be processed at the Fund's NAV as of the
close of the Exchange on that day. Generally, for both Funds, orders received
after the close of the Exchange will be processed at the Fund's NAV as of the
close of the Exchange on the next day that the Exchange is open. However, both
Funds permit orders received by certain retirement plans and other financial
intermediaries by the close of the Exchange and communicated to Legg Mason (BFDS
in the case of Value Institutional Portfolio) by 9:00 a.m., Eastern time, on the
following business day to be processed at the NAV determined on the prior
business day. For a more complete discussion of share purchases, see the "How to
Invest" section in the Value Trust Institutional Class and Financial
Intermediary Class Prospectus or the "Purchase of Shares" section in the Value
Institutional Portfolio Prospectus.
Redemptions. Value Trust and Value Institutional Portfolio shares may
be redeemed through three methods: (1) by sending a written request for
redemption to Legg Mason, P.O. Box 17635, Baltimore, Maryland 21297-1635, Attn:
LMIA, (2) by calling 1-888-425-6432, or (3) by wire communication with the
Fund's Transfer Agent.
Upon receipt of a request for redemption in good order before the close
of the Exchange on any day the Exchange is open, fund shares will be redeemed at
that day's NAV per share. Requests for redemption received by Legg Mason after
the close of the Exchange will be executed at the NAV next determined. However,
orders received by certain retirement plans and other financial intermediaries
by the close of the Exchange and communicated to Legg Mason (BFDS in the case of
Value Institutional Portfolio) by 9:00 a.m., Eastern time, on the following
business day will be effected at the NAV determined on the prior business day.
For both Funds, payment of the proceeds of redemptions normally will be
made by wire one business day after receipt of a redemption request in good
order. Payment of the proceeds of redemptions of shares of Value Trust that were
recently purchased by check or acquired through reinvestment of dividends on
such shares may be delayed for up to 10 days from the purchase date in order to
allow for the check to clear.
Each Fund has reserved the right under certain conditions to redeem its
shares in kind by distributing portfolio securities in payment for redemptions.
In addition, each Fund reserves the right to take up to seven days to make
payment upon redemption under certain limited circumstances, including if, in
the judgment of that Fund's investment adviser, the Fund could be adversely
affected by immediate payment. For a more complete discussion of share
redemption procedures, see the "How to Sell Your Shares" section in the Value
Trust Institutional Class and Financial Intermediary Class Prospectus and
"Redemption of Shares" section in the Value Institutional Portfolio Prospectus.
Redemptions of Value Institutional Portfolio shares may be effected
through the Closing Date.
10
<PAGE>
Exchanges
Financial Intermediary and Institutional Class shares of Value Trust
may be exchanged for the corresponding class of shares of any of the other Legg
Mason Funds, except Legg Mason Opportunity Trust, provided these funds are
eligible for sale in your state of residence, the investor meets the eligibility
criteria of that class of that fund and the value of exchanged shares is at
least $1 million. Financial Intermediary and Institutional Class shares of Value
Trust may also be exchanged for shares of the Legg Mason Cash Reserve Trust.
Shareholders of Value Institutional Portfolio may generally exchange their
shares for shares of the same class of any of the other portfolios of the
Corporation or LM Institutional Fund Advisors I, Inc. For a more complete
discussion of Value Trust's exchange policies, see "Services for Investors -
Exchange Privilege" in the Value Trust Institutional Class and Financial
Intermediary Class Prospectus. For a more complete discussion of Value
Institutional Portfolio's exchange policies, see "Exchange Privilege" in that
Fund's Prospectus.
Dividends and Other Distributions
Each Fund earns investment income in the form of dividends on
investments, substantially all of which is distributed in the form of dividends
to its shareholders. Each Fund declares and pays any dividends from net
investment income and from any net short-term gains annually. Dividends and
other distributions are automatically reinvested in the same class of shares of
the distributing Fund unless otherwise requested.
Each Fund also realizes capital gains and losses when it sells
securities or derivatives for more or less than it paid. If total gains on these
sales exceed total losses (including losses carried forward from previous
years), the Fund has capital gain net income. Net realized capital gains, if
any, together with net gains realized on foreign currency transactions, if any,
are distributed to each Fund's shareholders at the end of the taxable year in
which the gains are realized. Capital and foreign currency gain distributions
are automatically reinvested in additional shares of the distributing Fund on
the payable date unless otherwise requested.
On or immediately before the Closing Date, Value Institutional
Portfolio will declare as a distribution substantially all of its net investment
income and realized net capital gain, if any, through that date and distribute
that amount plus any previously declared but unpaid distributions, in order to
maintain its tax status as a regulated investment company.
Federal Income Tax Consequences of the Reorganization
The Reorganization is conditioned upon the Funds having received an
opinion of counsel to the effect that the Reorganization will qualify as a
tax-free reorganization within the meaning of section 368(a) of the Internal
Revenue Code of 1986, as amended ("Code"). Accordingly, neither Fund nor their
shareholders will recognize any gain or loss as a result of the Reorganization.
See "The Proposed Transaction - Federal Income Tax Considerations," below. If
Value Institutional Portfolio sells securities prior to the Closing Date, there
may be net recognized gains or losses to that Fund. Any net recognized gains
would increase the amount of
11
<PAGE>
any distribution made to shareholders of Value Institutional Portfolio prior to
or on the Closing Date.
PRINCIPAL RISK FACTORS
An investment in Value Trust is subject to specific risks arising from
the types of securities in which the Fund invests and general risks arising from
investing in any mutual fund. Investors can lose money by investing in the Fund.
There is no assurance that the Fund will meet its investment objective. Because
Value Institutional Portfolio's investment objective and strategy are the same
as those of Value Trust, and differences in investment restrictions do not
produce a material difference in the management of the Funds, an investment in
Value Trust is generally subject to the same risks as an investment in Value
Institutional Portfolio. The principal specific risks associated with investing
in Value Trust include:
Market Risk
Stock prices generally fluctuate more than those of other securities,
such as debt securities. Market risk, the risk that prices of securities will go
down because of the interplay of market forces, may affect a single issuer,
industry or section of the economy or may affect the market as a whole. Value
Trust may experience a substantial or complete loss of the amount invested in an
individual stock.
Value Style Risk
The value approach to investing involves the risk that those stocks may
remain undervalued. Value stocks as a group may be out of favor and underperform
the overall equity market for a long period of time, while the market
concentrates on "growth" stocks.
Value funds often concentrate much of their investments in certain
industries, and thus will be more susceptible to factors adversely affecting
issuers within that industry than would a more diversified portfolio of
securities.
Foreign Securities Risk
Investments in foreign securities (including those denominated in U.S.
dollars) involve certain risks not typically associated with investments in
domestic issuers. These risks can include political and economic instability,
foreign taxation issues, different or lower standards in accounting, auditing
and financial reporting, less-developed securities regulation and trading
systems, restrictions on the repatriation of proceeds, and, for securities
denominated in foreign currencies, fluctuations in foreign currency exchange
rates and the risk that a country may impose controls on the exchange of foreign
currency. These risks are intensified when investing in countries with
developing economies and securities markets, also known as "emerging
12
<PAGE>
markets." Moreover, securities of many foreign issuers may be less liquid and
their prices more volatile than those of comparable domestic issuers.
Investment Models
The proprietary models used by LMFM to evaluate securities or
securities markets are based on LMFM's understanding of the interplay of market
factors and do not assure successful investment. The markets, or the prices of
individual securities, may be affected by factors not foreseen in developing the
models.
Interest Rate and Credit Risk of Debt Securities
Debt securities are subject to interest rate risk, which is the
possibility that the market prices of the Fund's investments may decline due to
an increase in market interest rates. Generally, the longer the maturity of a
fixed income security, the greater is the effect on its value when rates change.
Debt securities are also subject to credit risk, i.e., the risk that an
issuer of securities will be unable to pay principal and interest when due, or
that the value of the security will suffer because investors believe the issuer
is less able to pay. This is broadly gauged by the credit ratings of the
securities in which Value Trust invests. However, ratings are only the opinions
of the agencies issuing them and are not absolute guarantees as to quality.
Debt securities rated BBB/Baa or better, and unrated securities
considered by LMFM to be of equivalent quality, are considered investment grade.
Debt securities rated below BBB/Baa, which Value Trust may purchase from time to
time, are deemed by the ratings agencies to be speculative and may involve major
risk or exposure to adverse conditions. Those in the lowest rating categories
may involve a substantial risk of default or may be in default. Changes in
economic conditions or developments regarding the individual issuer are more
likely to cause price volatility and weaken the capacity of such securities to
make principal and interest payments than is the case for higher grade debt
securities.
Call Risk
Many fixed income securities, especially those issued at high interest
rates, provide that the issuer may repay them early. Issuers often exercise this
right when interest rates are low. Accordingly, holders of callable securities
may not benefit fully from the increase in value that other fixed income
securities experience when rates decline. Furthermore, Value Trust may reinvest
the proceeds of the payoff at current yields, which are lower than those paid by
the securities that were paid off.
13
<PAGE>
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. Convertible securities are
typically issued by small capitalization companies whose stock prices may be
volatile. The price of a convertible security often reflects such variations in
the price of the underlying common stock in a way that a non-convertible
security does not.
THE PROPOSED TRANSACTION
Reorganization Plan
The terms and conditions under which the proposed transaction will be
consummated are set forth in the Reorganization Plan. Significant provisions of
the Reorganization Plan are summarized below; however, this summary is qualified
in its entirety by reference to the Reorganization Plan, which is attached as
Appendix B to this Proxy Statement.
The Reorganization Plan provides for (a) the acquisition by Value Trust
on the Closing Date of all the assets of Value Institutional Portfolio in
exchange solely for Value Trust shares and the assumption by Value Trust of all
of Value Institutional Portfolio's liabilities and (b) the distribution of those
Value Trust shares to the shareholders of Value Institutional Portfolio.
The assets of Value Institutional Portfolio to be acquired by Value
Trust include all cash, cash equivalents, securities, receivables, claims and
rights of action, rights to register shares under applicable securities laws,
books and records, deferred and prepaid expenses shown as assets on Value
Institutional Portfolio's books, and all other property owned by Value
Institutional Portfolio. Value Trust will assume all of Value Institutional
Portfolio's liabilities, debts, obligations and duties of whatever kind or
nature; provided, however, that Value Institutional Portfolio will use its best
efforts to discharge all of its known liabilities before the Closing Date. Value
Trust will deliver its shares to Value Institutional Portfolio, which will
distribute the shares to Value Institutional Portfolio's shareholders.
The value of Value Institutional Portfolio's assets to be acquired by
Value Trust and the NAV per share of the Value Trust shares to be exchanged for
those assets will be determined as of the close of regular trading on the
Exchange on the Closing Date ("Valuation Time"), using the valuation procedures
described in each Fund's then-current Prospectus and Statement of Additional
Information. Value Institutional Portfolio's net value shall be the value of its
assets to be acquired by Value Trust, less the amount of its liabilities, as of
the Valuation Time.
On, or as soon as practicable after, the Closing Date, Value
Institutional Portfolio will distribute the Value Trust shares it receives pro
rata to its shareholders of record as of the
14
<PAGE>
effective time of the Reorganization, so that each Value Institutional Portfolio
shareholder will receive a number of full and fractional Value Trust shares of
the corresponding class equal in aggregate value to the shareholder's holdings
in Value Institutional Portfolio (i.e. the account for a shareholder of
Financial Intermediary Class or Institutional Class shares of Value
Institutional Portfolio will be credited with the respective pro rata number of
Financial Intermediary Class or Institutional Class shares of Value Trust,
respectively, due that shareholder). Value Institutional Portfolio will be
terminated as soon as practicable after the share distribution. The shares will
be distributed by opening accounts on the books of Value Trust in the names of
Value Institutional Portfolio shareholders and by transferring to those accounts
the shares previously credited to the account of Value Institutional Portfolio
on those books. Fractional shares in Value Trust will be rounded to the third
decimal place.
Because Value Trust shares will be issued at NAV in exchange for the
net assets of Value Institutional Portfolio, the aggregate value of Value Trust
shares issued to Value Institutional Portfolio shareholders will equal the
aggregate value of Value Institutional Portfolio shares. The NAV per share of
each class of Value Trust will be unchanged by the transaction. Thus, the
Reorganization will not result in a dilution of any shareholder's interest.
Any transfer taxes payable upon the issuance of Value Trust shares in a
name other than that of the registered Value Institutional Portfolio shareholder
will be paid by the person to whom those shares are to be issued as a condition
of the transfer. Any reporting responsibility of Value Institutional Portfolio
to a public authority will continue to be its responsibility until it is
dissolved.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Reorganization Plan, some of which may be waived by
either Fund. In addition, the Reorganization Plan may be amended in any mutually
agreeable manner, except that no amendment may be made subsequent to the Meeting
that has a material adverse effect on the interests of shareholders of either
Fund.
All costs of either Fund pertaining to the Reorganization will be borne
by Legg Mason or one of its affiliates.
Reasons for the Reorganization
At meetings on November 29, 2000 and December 14, 2000, the Board
discussed Legg Mason's proposal concerning the Reorganization. During the course
of their deliberations, the Board considered a variety of factors, including:
. Legg Mason's decision to focus its institutional marketing efforts on
selling shares of Value Trust, not Value Institutional Portfolio; LMIA's
decision to no longer waive Value Institutional Portfolio's expenses after
August 1, 2001; and the possibility that, as a result of these two facts,
Value Institutional Portfolio's expenses may increase over time if, for
example, the size of the Fund decreases;
15
<PAGE>
. the compatibility of each Fund's investment objective, policies and
restrictions, as well as the fact that the same investment personnel of
LMFM currently advise both Funds;
. the compatibility of the Value Institutional Portfolio assets to be
acquired by Value Trust to those currently held by Value Trust;
. given the limited number of shareholder accounts in Value Institutional
Portfolio, the possibility that a redemption by a large shareholder could
adversely impact the Fund;
. the possible benefits from the proposal to other persons, including Legg
Mason and its affiliates;
. Value Trust's longer-term investment performance and the effect of the
Reorganization on investment performance;
. the differences in the expense ratios between the two Funds;
. Legg Mason's agreement to pay costs associated with the Reorganization;
. the possible impact of unrealized gains and losses of the two Funds and the
composition of Value Institutional Portfolio's shareholders, a large
portion of which are exempt from federal income tax; and
. possible alternatives to the Reorganization, such as the liquidation of the
Fund in a transaction that would not be tax-free.
Of these various factors, the Board discussed at length the fact that
Value Trust's projected total expenses were slightly higher than Value
Institutional Portfolio's expenses (by an amount projected to be less than one
basis point, with one basis point equaling one-one hundredth of a percentage
point). The Board also discussed at length the fact that Value Trust currently
has unrealized gains, while Value Institutional Portfolio currently has a modest
amount of unrealized losses, with the potential result that if all such gains
and losses were realized after the Reorganization occurred, shareholders who are
not exempt from taxes would lose the benefit of a tax loss and would be required
to pay tax on such gains, thereby adversely impacting their after-tax return.
The Board, however, believed that the potential for somewhat higher expenses in
light of Legg Mason's decision to no longer actively market Value Institutional
Portfolio's shares and LMIA's decision to no longer waive expenses outweighed
these aspects of the proposal. Therefore, the Board, as well as LMIA, believe
that the Reorganization would be in the best interests of the Fund and its
shareholders.
Description of Securities to be Issued
Value Trust is registered with the SEC as an open-end management
investment company. It has authorized capitalization of common stock of
600,000,000 shares (par value $0.001 per share), which includes 100,000,000
shares allocated to Institutional Class shares and 100,000,000 shares allocated
to Financial Intermediary Class shares. Shares of Value Trust entitle their
holders to one vote per full share and fractional votes for fractional shares
held.
Value Trust does not hold annual meetings of shareholders. There
normally will be no meetings of shareholders for the purpose of electing
directors unless fewer than a majority of the directors holding office have been
elected by shareholders, at which time the directors then in office will call a
shareholders' meeting for the election of directors. The directors will call
16
<PAGE>
meetings of shareholders for action by shareholder vote as may be required by
the 1940 Act or Value Trust's Charter or Bylaws, or at their discretion.
Temporary Waiver of Investment Restrictions
Certain fundamental investment restrictions of Value Institutional
Portfolio, which prohibit it from acquiring more than a stated percentage of
ownership of another company or industry, might be construed as restricting its
ability to carry out the Reorganization. By approving the Reorganization Plan,
Value Institutional Portfolio shareholders will be agreeing to waive, only for
the purpose of the Reorganization, those fundamental investment restrictions
that could prohibit or otherwise impede the transaction.
Federal Income Tax Considerations
The exchange of Value Institutional Portfolio's assets for Value Trust
shares and Value Trust's assumption of Value Institutional Portfolio's
liabilities is intended to qualify for federal income tax purposes as a tax-free
reorganization under section 368(a) of the Code. The Reorganization is
conditioned upon the Funds having received an opinion of Ropes & Gray
substantially to the effect that -
(1) Value Trust's acquisition of Value Institutional Portfolio's
assets in exchange solely for Value Trust shares and Value Trust's
assumption of Value Institutional Portfolio's liabilities, followed by
Value Institutional Portfolio's distribution of those shares pro rata
to its shareholders constructively in exchange for their Value
Institutional Portfolio shares, will qualify as a reorganization within
the meaning of section 368(a)(1)(C) of the Code, and each Fund will be
"a party to a reorganization" within the meaning of section 368(b) of
the Code;
(2) Under Section 361 of the Code, Value Institutional Portfolio
will recognize no gain or loss on the transfer to Value Trust of its
assets in exchange solely for Value Trust shares and Value Trust's
assumption of Value Institutional Portfolio's liabilities or on the
subsequent distribution of those shares by Value Institutional
Portfolio to its shareholders in liquidation;
(3) Under Section 1032 of the Code, Value Trust will recognize
no gain or loss on its receipt of the transferred assets in exchange
solely for Value Trust shares and its assumption of Value Institutional
Portfolio's liabilities;
(4) Under Section 362(b) of the Code, Value Trust's basis for
the transferred assets will be the same as the basis therefor in Value
Institutional Portfolio's hands immediately before the Reorganization,
and, under Section 1223(2) of the Code, Value Trust's holding period
for those assets will include Value Institutional Portfolio's holding
period therefor;
17
<PAGE>
(5) Under Section 354 of the Code, a Value Institutional
Portfolio shareholder will recognize no gain or loss on the
constructive exchange of all its Value Institutional Portfolio shares
solely for Value Trust shares pursuant to the Reorganization;
(6) Under Section 358 of the Code, a Value Institutional
Portfolio shareholder's aggregate basis for the Value Trust shares it
receives in the Reorganization will be the same as the aggregate basis
for its Value Institutional Portfolio shares it constructively
surrenders in exchange for those Value Trust shares, and, under Section
1223(1) of the Code, its holding period for those Value Trust shares
will include its holding period for those Value Institutional Portfolio
shares, provided they are held as capital assets by the shareholder on
the Closing Date; and
(7) Value Trust will succeed to and take into account the items
of Value Institutional Portfolio described in Section 381(c) of the
Code, subject to the conditions and limitations specified in Section
381, 382, 383 and 384 of the Code and the regulations thereunder.
Notwithstanding paragraphs (2), (3) and (5) above, the Ropes & Gray
opinion may state that no opinion is expressed as to the effect of the
Reorganization on the Funds or any shareholder with respect to any asset as to
which any unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.
Value Trust's utilization after the Reorganization of any
pre-Reorganization capital losses realized by Value Institutional Portfolio (or
any unrealized built-in loss of Value Institutional Portfolio) could be subject
to limitations in future years under the Code.
Shareholders of Value Institutional Portfolio should consult their tax
advisers regarding the effect, if any, of the Reorganization in light of their
individual circumstances. Because the foregoing discussion only relates to the
federal income tax consequences of the Reorganization, those shareholders also
should consult their tax advisers about state and local tax consequences, if
any, of the Reorganization.
Capitalization
The following table shows the capitalization of each Fund as of
September 30, 2000, and on a pro forma combined basis as of that same date,
giving effect to the Reorganization (net assets and share amounts are in
thousands and all information in the table is unaudited):
<TABLE>
<CAPTION>
Value Trust Value Institutional Combined Fund
Portfolio (Pro Forma)
<S> <C> <C> <C>
Net Assets Composite............... $12,967,528 $ 620,986 $ 13,588,514
Net Asset Value Per Share.......... N/A Financial $16.12 Financial $69.88 Financial
Intermediary Intermediary Intermediary
Class Class Class
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Value Trust Value Institutional Combined Fund
Portfolio (Pro Forma)
<S> <C> <C> <C>
$69.88 Navigator $16.14 Institutional $69.88 Institutional
Class Class Class
$67.30 Primary Class $67.30 Primary
Class
Shares Outstanding............ N/A Financial 11,346 Financial 2,618 Financial
Intermediary Intermediary Intermediary
Class Class Class
18,070 Navigator 27,137 Institutional 24,338 Institutional
Class Class Class
</TABLE>
Additional Information about Value Trust - Financial Highlights
The financial highlights table is intended to help you understand the
financial performance for the past five years of the Institutional Class shares
of Value Trust. Total return represents the rate that an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of all
dividends and other distributions. Certain information reflects financial
results for a single fund share. This information has been audited by Value
Trust's independent accountants, PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, is incorporated by reference into the
Reorganization Statement of Additional Information and is included in the annual
report for the Institutional/Navigator Class of Value Trust. This information
has been updated to include semi-annual unaudited data for the six months ended
September 30, 2000. The annual and semi-annual reports are available upon
request by calling toll-free 1-888-425-6432. As the Financial Intermediary Class
shares of Value Trust were not in existence as of September 30, 2000, no
financial highlights are provided for that class.
Investment Operations
<TABLE>
<CAPTION>
Sixth Month
Period Ended For the Years Ended March 31,
-------------------------------------------
September 30,
2000/(c)/ 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $77.52 $74.49 $50.57 $34.30 $27.08 $20.27
Net Investment Income (Loss) .06 .12 .20 .35 .41 .43
Net Realized & Unrealized Gain (Loss) (1.05) 5.37 25.13 18.55 8.75 8.02
On Investments
Total From Investment Operations (.99) 5.49 25.33 18.90 9.16 8.45
Distributions
<CAPTION>
Sixth Month
Period Ended For the Years Ended March 31,
---------------------------------------------------
September 30,
2000/(c)/ 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
From Net Investment Income $ -- $ -- $ -- $ (.31) $ (.41) $ (.40)
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
From Net Realized Gain on Investments (6.65) (2.46) (1.41) (2.32) (1.53) (1.24)
Total Distributions (6.65) (2.46) (1.41) (2.63) (1.94) (1.64)
Net Asset Value, End of Period 69.88 77.52 74.49 50.57 34.30 27.08
</TABLE>
Ratios/Supplemental Data
<TABLE>
<CAPTION>
Sixth Month
Period Ended For the Years Ended March 31,
--------------------------------------------------
September 30,
2000/(c)/ 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Return % (1.11)/(a)/ 7.80 51.33 56.90 34.97 43.53
Expenses to Average Net Assets % .70/(b)/ .69 .72 .73 .77 .82
Net Investment Income (Loss) to .5/(b)/ .4 .6 .9 1.4 1.8
Average Net Assets %
Portfolio Turnover Rate % 29.8/(b)/ 19.7 19.3 12.9 10.5 19.6
Net Assets, End of Period (thousands-$) 1,262,801 1,210,632 814,403 179,664 83,752 52,332
</TABLE>
/(a)/ Not Annualized
/(b)/ Annualized
/(c)/ Unaudited
Required Vote. Approval of the proposal requires the affirmative vote
of a majority of the outstanding voting securities of Value Institutional
Portfolio at the Record Date for the Meeting. Each outstanding full share of
Value Institutional Portfolio is entitled to one vote, and each outstanding
fractional share thereof is entitled to a proportionate fractional share of one
vote. If the proposal is not approved by the requisite vote of shareholders of
Value Institutional Portfolio, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies.
THE BOARD UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS VOTE "FOR" THE PROPOSAL
-------------------------
OTHER BUSINESS
The Board knows of no other business to be brought before the Meeting.
If, however, any other matters properly come before the Meeting, it is the
intention that proxies that do not contain specific instructions to the contrary
will be voted on such matters in the discretion of the persons designated in the
proxies.
20
<PAGE>
MISCELLANEOUS
Available Information
Information about the Funds, including the Reorganization Statement of
Additional Information, can be reviewed and copied at the SEC's Public Reference
Room in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-202-942-8090. Reports and other
information about the Funds are available on the EDGAR database on the SEC's
Internet site at http://www.sec.gov. Investors may also obtain this information,
after paying a duplicating fee, by electronic request at the following e-mail
address: [email protected] or by writing the SEC's Public Reference Section,
Washington, DC 20549-0102.
Legal Matters
Certain legal matters in connection with the issuance of Value Trust shares
as part of the Reorganization will be passed upon by Value Trust's counsel,
Kirkpatrick & Lockhart LLP.
Experts
The audited financial statements of Value Trust and Value Institutional
Portfolio, incorporated by reference into the Reorganization Statement of
Additional Information and incorporated by reference or included in their
respective Statements of Additional Information, have been audited by
PricewaterhouseCoopers LLP and Ernst & Young LLP, respectively, independent
accountants/auditors for the Funds, whose reports thereon are included in each
Fund's Annual Reports to Shareholders for the fiscal year ended March 31, 2000.
The financial statements audited by PricewaterhouseCoopers LLP and Ernst & Young
LLP have been incorporated by reference into the Reorganization Statement of
Additional Information in reliance on their reports given on their authority as
experts in auditing and accounting matters.
21
<PAGE>
APPENDIX A
----------
PRINCIPAL SHAREHOLDERS
----------------------
The following table sets forth the record and beneficial ownership of
each Fund's outstanding equity securities as of January 22, 2001 by each owner
of 5% or more of (i) Value Trust Institutional Class shares; (ii) Value
Institutional Portfolio Institutional Class shares; or (iii) Value Institutional
Portfolio Financial Intermediary Class shares.
Value Trust
Name and Address Nature of Amount Percent
---------------- --------- ------ -------
Ownership
---------
Value Institutional Portfolio
Name and Address Nature of Amount Percent
---------------- --------- ------ -------
Ownership
---------
A-1
<PAGE>
APPENDIX B
----------
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of January 26, 2001, between LM INSTITUTIONAL FUND ADVISORS II, INC., a
Maryland corporation ("Corporation"), on behalf of LM Value Institutional
Portfolio, a segregated portfolio of assets ("series") thereof ("Target"), and
LEGG MASON VALUE TRUST, INC., a Maryland corporation ("Acquiring Fund"). (Target
and Acquiring Fund are sometimes referred to herein individually as a "Fund" and
collectively as the "Funds," and Acquiring Fund and Corporation are sometimes
referred to herein individually as an "Investment Company" and collectively as
the "Investment Companies.") All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by Target are
made and shall be taken or undertaken by Corporation on behalf of Target.
The Investment Companies wish to effect a reorganization described in
section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"),
and intend this Agreement to be a "plan of reorganization" within the meaning of
the regulations under the Code. The reorganization will involve the transfer to
Acquiring Fund of Target's assets in exchange solely for voting shares of common
stock in Acquiring Fund, par value $0.001 per share ("Acquiring Fund Shares"),
and the assumption by Acquiring Fund of Target's liabilities, followed by the
constructive distribution of the Acquiring Fund Shares pro rata to the holders
of shares of common stock in Target ("Target Shares") in exchange therefor, all
on the terms and conditions set forth herein. The foregoing transactions are
referred to herein collectively as the "Reorganization."
The Target Shares are divided into two classes, designated Institutional
Class and Financial Intermediary Class shares ("Institutional Class Target
Shares" and "Financial Intermediary Class Target Shares," respectively). The
Acquiring Fund Shares also are divided into two classes, designated Financial
Intermediary Class and Institutional Class shares ("Financial Intermediary Class
Acquiring Fund Shares" and "Institutional Class Acquiring Fund Shares,"
respectively). Each class of Acquiring Fund Shares is substantially similar to
the corresponding class of Target Shares (the Funds' Financial Intermediary
Class shares correspond to each other and Institutional Class shares correspond
to each other).
In consideration of the mutual promises contained herein, the parties agree
as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and fractional
(rounded to the third decimal place) (i) Financial Intermediary Class
Acquiring Fund Shares determined by dividing the net value of Target
(computed as set forth in paragraph 2.1) ("Target Value") attributable to
the Financial Intermediary Class Target Shares by the net asset value
("NAV") of a Financial Intermediary Class Acquiring Fund Share (computed as
set forth in paragraph 2.2), and (ii) Institutional Class Acquiring Fund
Shares determined by dividing
B-1
<PAGE>
the Target Value attributable to the Institutional Class Target Shares by
the NAV of an Institutional Class Acquiring Fund Share (as so computed),
and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include all cash, cash equivalents, securities,
receivables (including interest and dividends receivable), claims and rights of
action, rights to register shares under applicable securities laws, books and
records, deferred and prepaid expenses shown as assets on Target's books, and
other property owned by Target at the Effective Time (as defined in paragraph
3.1).
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement.
Notwithstanding the foregoing, Target agrees to use its best efforts to
discharge all its known Liabilities before the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without regard
to any deduction for dividends paid) and substantially all of its realized net
capital gain, if any, for the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall distribute the Acquiring Fund Shares received by it
pursuant to paragraph 1.1 to Target's shareholders of record, determined as of
the Effective Time (each a "Shareholder" and collectively "Shareholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by Acquiring Fund's transfer agent's opening accounts on Acquiring
Fund's share transfer books in the Shareholders' names and transferring such
Acquiring Fund Shares thereto. Each Shareholder's account shall be credited with
the respective pro rata number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares due that Shareholder, by class (i.e., the
account for a Shareholder of Financial Intermediary Class Target Shares shall be
credited with the respective pro rata number of Financial Intermediary Class
Acquiring Fund Shares due that Shareholder, and the account for a Shareholder of
Institutional Class Target Shares shall be credited with the respective pro rata
number of Institutional Class Acquiring Fund Shares due that Shareholder). All
outstanding Target Shares, including any represented by certificates, shall
simultaneously be canceled on Target's share transfer books. Acquiring Fund
shall not issue certificates representing the Acquiring Fund Shares issued in
connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, but in all events within twelve months
after the Effective Time, Target shall be terminated as a series of Corporation
and any further actions shall be taken in connection therewith as required by
applicable law.
B-2
<PAGE>
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the New York
Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"), using the
valuation procedures set forth in Target's then-current prospectus and statement
of additional information ("SAI") less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV per share of each class of
Acquiring Fund Shares shall be computed as of the Valuation Time, using the
valuation procedures set forth in Acquiring Fund's then-current prospectus and
SAI.
2.3. All computations pursuant to paragraph 2.1 shall be made by or under
the direction of LM Institutional Advisors, Inc. All computations pursuant to
paragraph 2.2 shall be made by or under the direction of Legg Mason Funds
Management, Inc. ("LMFM").
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to consummate
the same ("Closing"), shall occur at Corporation's principal office on or about
March 30, 2001, or at such other place and/or on such other date as to which the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the date thereof or at such
other time as to which the parties may agree ("Effective Time"). If, immediately
before the Valuation Time, (a) the NYSE is closed to trading or trading thereon
is restricted or (b) trading or the reporting of trading on the NYSE or
elsewhere is disrupted, so that accurate appraisal of the net value of Target
and the NAV per share of each class of Acquiring Fund Shares is impracticable,
the Effective Time shall be postponed until the first business day after the day
when such trading shall have been fully resumed and such reporting shall have
been restored.
3.2. Corporation or its fund accounting and pricing agent shall deliver at
the Closing a certificate of an authorized officer verifying that the
information (including adjusted basis and holding period, by lot) concerning the
Assets, including all portfolio securities, transferred by Target to Acquiring
Fund, as reflected on Acquiring Fund's books immediately following the Closing,
does or will conform to such information on Target's books immediately before
the Closing. Corporation's custodian shall deliver at the Closing a certificate
of an authorized officer stating that (a) the Assets held by the custodian will
be transferred to Acquiring Fund at the Effective Time and (b) all necessary
taxes in conjunction with the delivery of the Assets, including all applicable
federal and state stock transfer stamps, if any, have been paid or provision for
payment has been made.
B-3
<PAGE>
3.3. Corporation shall deliver to Acquiring Fund at the Closing a list of
the names and addresses of the Shareholders and the number of outstanding Target
Shares (by class) owned by each Shareholder, all as of the Effective Time,
certified by the Secretary or Assistant Secretary of Corporation. Acquiring
Fund's transfer agent shall deliver at the Closing a certificate as to the
opening on Acquiring Fund's share transfer books of accounts in the
Shareholders' names. Acquiring Fund shall issue and deliver a confirmation to
Corporation evidencing the Acquiring Fund Shares to be credited to Target at the
Effective Time or provide evidence satisfactory to Corporation that such
Acquiring Fund Shares have been credited to Target's account on Acquiring Fund's
books. At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, stock certificates, receipts, or other documents as the
other party or its counsel may reasonably request.
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Corporation is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Maryland, and its
Charter is on file with the Department of Assessments and Taxation of the
State of Maryland;
4.1.2. Corporation is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
("1940 Act"), and such registration will be in full force and effect at the
Effective Time;
4.1.3. Target is a duly authorized and classified series of
Corporation;
4.1.4. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances (except
securities that are subject to "securities loans" as referred to in section
851(b)(2) of the Code); and upon delivery and payment for the Assets,
Acquiring Fund will acquire good and marketable title thereto;
4.1.5. Target's current prospectus and SAI conform in all material
respects to the applicable requirements of the Securities Act of 1933, as
amended ("1933 Act"), and the 1940 Act and the rules and regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Maryland law or any provision of
Corporation's Charter or By-Laws or any
B-4
<PAGE>
provision of any agreement, instrument, lease, or other undertaking to
which Target is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, judgment, or decree to which Target is a party or by which it is
bound, except as otherwise disclosed in writing to and accepted by
Acquiring Fund;
4.1.7. Except as otherwise disclosed in writing to and accepted by
Acquiring Fund, all material contracts and other commitments of or
applicable to Target (other than this Agreement and investment contracts,
including options, futures, and forward contracts) will be terminated, or
provision for discharge of any liabilities of Target thereunder will be
made, at or prior to the Effective Time, without either Fund's incurring
any liability or penalty with respect thereto and without diminishing or
releasing any rights Target may have had with respect to actions taken or
omitted or to be taken by any other party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted by
Acquiring Fund, no litigation, administrative proceeding, or investigation
of or before any court or governmental body is presently pending or (to
Corporation's knowledge) threatened against Corporation with respect to
Target or any of its properties or assets that, if adversely determined,
would materially and adversely affect Target's financial condition or the
conduct of its business; Corporation knows of no facts that might form the
basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially or adversely affects its business or its ability to consummate
the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on
the part of Corporation's board of directors, which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and, subject
to approval by Target's shareholders, this Agreement constitutes a valid
and legally binding obligation of Target, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar laws relating
to or affecting creditors' rights and by general principles of equity;
4.1.10. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Target's
shareholders;
4.1.11. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934, as amended ("1934 Act"), or the 1940 Act for the execution or
performance of this Agreement by Corporation, except for (a) the filing
with the Securities and Exchange Commission ("SEC") of a registration
statement by Corporation on Form N-14 relating to the Acquiring Fund Shares
issuable hereunder, and any supplement or amendment thereto ("Registration
Statement"), including therein a prospectus/proxy statement ("Proxy
Statement"), and (b) such consents, approvals, authorizations, and filings
as have been made or received or as may be required subsequent to the
Effective Time;
B-5
<PAGE>
4.1.12. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Acquiring Fund for use therein;
4.1.13. The Liabilities were incurred by Target in the ordinary
course of its business and the Liabilities to which the Assets are subject
were incurred by Target in the ordinary course of its business; and there
are no Liabilities other than Liabilities disclosed or provided for in
Corporation's financial statements referred to in paragraph 4.1.18 and
Liabilities incurred by Target in the ordinary course of its business
subsequent to September 30, 2000, or otherwise previously disclosed to
Acquiring Fund, none of which has been materially adverse to the business,
assets, or results of Target operations;
4.1.14. For federal income tax purposes, Target qualifies as a
"regulated investment company" ("RIC"), and the provisions of Section 851
through 855 of the Code will apply to Target for the remainder of its
current taxable year and for its taxable year beginning on April 1, 2001,
if any;
4.1.15. Target is not under the jurisdiction of a court in a "title
11 or similar case" within the meaning of section 368(a)(3)(A) of the Code;
4.1.16. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in
the stock and securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock and securities of five or
fewer issuers;
4.1.17. Target's federal income tax returns, and all applicable state
and local tax returns, for all taxable years to and including the taxable
year ended March 31, 2000, have been timely filed and all taxes payable
pursuant to such returns have been timely paid; and
4.1.18. The audited financial statements of Corporation for the year
ended March 31, 2000 and the unaudited financial statements of Corporation
for the six months ended September 30, 2000, to be delivered to Acquiring
Fund, fairly represent the financial position of Target as of each such
date and the results of its operations and changes in its net assets for
the periods then ended.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Acquiring Fund is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Maryland, and
its Charter is on file with the Department of Assessments and Taxation of
the State of Maryland;
B-6
<PAGE>
4.2.2. Acquiring Fund is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.2.3. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.4. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein (including the receipt of
consideration in exchange therefor exceeding their par value), will be duly
and validly issued and outstanding shares of Acquiring Fund, fully paid and
non-assessable;
4.2.5. Acquiring Fund's current prospectus and SAI conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations thereunder and do not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
4.2.6. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Maryland law or any
provision of Acquiring Fund's Charter or By-Laws or any provision of any
agreement, instrument, lease, or other undertaking to which Acquiring Fund
is a party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Acquiring Fund is a party or by which it is
bound, except as otherwise disclosed in writing to and accepted by
Corporation;
4.2.7. Except as otherwise disclosed in writing to and accepted by
Corporation, no litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against Acquiring Fund or any of its
properties or assets that, if adversely determined, would materially and
adversely affect Acquiring Fund's financial condition or the conduct of its
business; Acquiring Fund knows of no facts that might form the basis for
the institution of any such litigation, proceeding, or investigation and is
not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially or adversely
affects its business or its ability to consummate the transactions
contemplated hereby;
4.2.8. The execution, delivery, and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on
the part of Acquiring Fund's board of directors (together with
Corporation's board of directors, the "Boards"), which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and this
Agreement constitutes a valid and legally binding obligation of Acquiring
Fund, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights and
by general principles of equity;
B-7
<PAGE>
4.2.9. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by Acquiring Fund, except
for (a) the filing with the SEC of the Registration Statement and a post-
effective amendment to Acquiring Fund's registration statement on Form N-1A
and (b) such consents, approvals, authorizations, and filings as have been
made or received or as may be required subsequent to the Effective Time;
4.2.10. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Corporation for use therein;
4.2.11. For federal income tax purposes, Acquiring Fund qualifies as
a RIC, and the provisions of Section 851 through 855 of the Code will apply
to Acquiring Fund for the remainder of its current taxable year and for its
taxable year beginning on April 1, 2001;
4.2.12. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as an open-end investment company;
nor does Acquiring Fund have any plan or intention to redeem or otherwise
reacquire any Acquiring Fund Shares issued to the Shareholders pursuant to
the Reorganization, except to the extent it is required by the 1940 Act to
redeem any of its shares presented for redemption at NAV in the ordinary
course of that business;
4.2.13. Following the Reorganization, Acquiring Fund (a) will
continue Target's "historic business" (within the meaning of section 1.368-
1(d)(2) of the Income Tax Regulations under the Code) or (b) will use a
significant portion of Target's "historic business assets" (within the
meaning of section 1.368-1(d)(3) of the Income Tax Regulations under the
Code) in a business; moreover, Acquiring Fund (c) has no plan or intention
to sell or otherwise dispose of any of the Assets, except for dispositions
made in the ordinary course of that business and dispositions necessary to
maintain its status as a RIC, and (d) expects to retain substantially all
the Assets in the same form as it receives them in the Reorganization,
unless and until subsequent investment circumstances suggest the
desirability of change or it becomes necessary to make dispositions thereof
to maintain such status;
4.2.14. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or a business trust or any
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization;
4.2.15. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities)
B-8
<PAGE>
will be invested in the stock and securities of any one issuer and (b) not
more than 50% of the value of such assets will be invested in the stock and
securities of five or fewer issuers;
4.2.16. Acquiring Fund does not directly or indirectly own, nor at
the Effective Time will it directly or indirectly own, nor has it directly
or indirectly owned at any time during the past five years, any shares of
Target;
4.2.17. Acquiring Fund's federal income tax returns, and all
applicable state and local tax returns, for all taxable years to and
including the taxable year ended March 31, 2000, have been timely filed and
all taxes payable pursuant to such returns have been timely paid;
4.2.18. The audited financial statements of Acquiring Fund for the
year ended March 31, 2000 and the unaudited financial statements of
Acquiring Fund for the six months ended September 30, 2000, to be delivered
to Corporation, fairly represent the financial position of Acquiring Fund
as of each such date and the results of its operations and changes in its
net assets for the periods then ended; and
4.2.19. If the Reorganization is consummated, Acquiring Fund will
treat each Shareholder that receives Acquiring Fund Shares in connection
with the Reorganization as having made a minimum initial purchase of
Acquiring Fund Shares for the purpose of making additional investments in
Acquiring Fund Shares, regardless of the value of the Acquiring Fund Shares
so received.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares received
by each Shareholder will be approximately equal to the fair market value of
its Target Shares constructively surrendered in exchange therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) any portion of
their Target Shares before the Reorganization to any person "related"
(within the meaning of section 1.368-1(e)(3) of the Income Tax Regulations
under the Code) to either Fund or (ii) any portion of the Acquiring Fund
Shares to be received by them in the Reorganization to any person related
(as so defined) to Acquiring Fund, (b) does not anticipate dispositions of
those Acquiring Fund Shares at the time of or soon after the Reorganization
to exceed the usual rate and frequency of dispositions of shares of Target
as a series of an open-end investment company, (c) expects that the
percentage of Shareholder interests, if any, that will be disposed of as a
result of or at the time of the Reorganization will be de minimis, and (d)
does not anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
B-9
<PAGE>
4.3.4. The fair market value of the Assets on a going concern basis
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.5. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.6. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except (a) redemptions in the
ordinary course of its business required by section 22(e) of the 1940 Act
and (b) regular, normal dividend distributions made to conform to its
policy of distributing all or substantially all of its income and gains to
avoid the obligation to pay federal income tax and/or the excise tax under
section 4982 of the Code) will be included as assets held thereby
immediately before the Reorganization;
4.3.7. None of the compensation received by any Shareholder who is an
employee of or service provider to Target will be separate consideration
for, or allocable to, any of the Target Shares held by such Shareholder;
none of the Acquiring Fund Shares received by any such Shareholder will be
separate consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and the
consideration paid to any such Shareholder will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;
4.3.8. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" of Acquiring Fund within the meaning
of section 304(c) of the Code; and
4.3.9. Neither Fund will be reimbursed for any expenses incurred by
it or on its behalf in connection with the Reorganization unless those
expenses are solely and directly related to the Reorganization (determined
in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B.
187) ("Reorganization Expenses").
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the ordinary
course between the date hereof and the Closing, it being understood that:
(a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and
(b) each Fund will retain exclusive control of the composition of its
portfolio until the Closing; provided that (1) Target shall not dispose of
more than an insignificant portion of its historic business assets (as
defined above) during such period without Acquiring
B-10
<PAGE>
Fund's prior consent and (2) if Target's shareholders approve this
Agreement (and the transactions contemplated hereby), then between the date
of such approval and the Closing, the Investment Companies shall coordinate
the Funds' respective portfolios so that the transfer of the Assets to
Acquiring Fund will not cause it to fail to be in compliance with all of
its investment policies and restrictions immediately after the Closing.
5.2. Target covenants to call a shareholders' meeting to consider and act
on this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist Acquiring Fund in obtaining such
information as Acquiring Fund reasonably requests concerning the beneficial
ownership of Target Shares.
5.5. Target covenants that its books and records (including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Acquiring Fund at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
B-11
<PAGE>
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by the Boards and shall have been approved by
Target's shareholders in accordance with applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Investment Company to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that either
Investment Company may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Corporation shall have received an opinion of Kirkpatrick & Lockhart
LLP substantially to the effect that:
6.4.1. Acquiring Fund is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Maryland with
the corporate power under the Maryland General Corporation Law (the "MGCL")
and its Charter to own all its properties and assets and, to the knowledge
of such counsel, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Acquiring Fund and (b) assuming due authorization, execution,
and delivery of this Agreement by Corporation on behalf of Target, is a
valid and legally binding obligation of Acquiring Fund, enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and remedies generally and
by general principles of equity, including principles of commercial
reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity);
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement and the receipt of consideration in exchange
therefor exceeding their par value, will be duly authorized and validly
issued and outstanding and fully paid and non-assessable;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Acquiring Fund's Charter or By-Laws or any provision of any
agreement (known to such
B-12
<PAGE>
counsel, without any independent inquiry or investigation) to which
Acquiring Fund is a party or by which it is bound or (to the knowledge of
such counsel, without any independent inquiry or investigation) result in
the acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Fund is a party or by
which it is bound, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by Corporation;
6.4.5. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order of
any court or governmental authority is required for the consummation by
Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act, and the 1940 Act and such
as may be required under state securities laws;
6.4.6. Acquiring Fund is registered with the SEC as an investment
company, and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Acquiring Fund or any of its properties or assets and (b)
Acquiring Fund is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially and
adversely affects Acquiring Fund's business, except as set forth in such
opinion or as otherwise disclosed in writing to and accepted by
Corporation.
In rendering such opinion, such counsel may (1) rely, as to matters governed by
the laws of the State of Maryland, on an opinion of competent Maryland counsel,
(2) make assumptions regarding the authenticity, genuineness, and/or conformity
of documents and copies thereof without independent verification thereof, (3)
limit such opinion to applicable federal and state law, (4) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the Reorganization, and (5) include other customary exceptions,
qualifications, limitations or assumptions.
6.5. Acquiring Fund shall have received an opinion of Ropes & Gray
substantially to the effect that:
6.5.1. Target is a duly authorized and classified series of
Corporation, a corporation duly organized, validly existing, and in good
standing under the laws of the State of Maryland with the corporate power
under the MGCL and its Charter to own all its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Corporation on behalf of Target and (b) assuming due
authorization, execution, and delivery of this Agreement by Acquiring Fund,
is a valid and legally binding obligation of Corporation with respect to
Target, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
B-13
<PAGE>
moratorium, and similar laws relating to or affecting creditors' rights and
remedies generally and by general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in a proceeding at law or in
equity);
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate the Charter or By-Laws of Corporation or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which Corporation (with respect to Target) is a party or
by which it is bound or (to the knowledge of such counsel, without any
independent inquiry or investigation) result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Corporation (with respect to Target) is a
party or by which it is bound, except as set forth in such opinion or as
otherwise disclosed in writing to and accepted by Acquiring Fund;
6.5.4. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order of
any court or governmental authority is required for the consummation by
Corporation on behalf of Target of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934 Act, and the
1940 Act and such as may be required under state securities laws;
6.5.5. Corporation is registered with the SEC as an investment
company, and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.5.6. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Corporation (with respect to Target) or any of its
properties or assets attributable or allocable to Target and (b)
Corporation (with respect to Target) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that materially and adversely affects Target's business, except as set
forth in such opinion or as otherwise disclosed in writing to and accepted
by Acquiring Fund.
In rendering such opinion, such counsel may (1) rely, as to matters governed by
the laws of the State of Maryland, on an opinion of competent Maryland counsel,
(2) make assumptions regarding the authenticity, genuineness, and/or conformity
of documents and copies thereof without independent verification thereof, (3)
limit such opinion to applicable federal and state law, (4) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the Reorganization, and (5) include other customary exceptions,
qualifications, limitations or assumptions.
6.6. Each Investment Company shall have received an opinion of Ropes &
Gray, addressed to and in form and substance reasonably satisfactory to it, as
to the federal income tax consequences mentioned below ("Tax Opinion"). In
rendering the Tax Opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made in
B-14
<PAGE>
this Agreement, which Counsel may treat as representations and warranties made
to it, in separate letters addressed to such counsel, and in the certificates
delivered pursuant to paragraph 3.4. The Tax Opinion shall be substantially to
the effect that, based on the facts and assumptions stated therein and
conditioned on consummation of the Reorganization in accordance with this
Agreement, for federal income tax purposes:
6.6.1. The Reorganization will constitute a reorganization within the
meaning of Section 368(a) of the Code, and Acquiring Fund and Target will
each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code;
6.6.2. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the Assets in exchange for Acquiring Fund Shares and the
assumption by Acquiring Fund of the Liabilities;
6.6.3. The basis in the hands of Acquiring Fund of the Assets
transferred to Acquiring Fund in the Reorganization will be the same as the
basis of the Assets in the hands of Target immediately prior to the
transfer;
6.6.4. The holding periods of the Assets in the hands of Acquiring
Fund will include the periods during which the Assets were held by Target;
6.6.5. No gain or loss will be recognized by Target upon the transfer
of the Assets to Acquiring Fund in exchange for Acquiring Fund Shares and
the assumption by Acquiring Fund of the Liabilities, or upon the
distribution of Acquiring Fund Shares by Target to Shareholders in
liquidation;
6.6.6. No gain or loss will be recognized by Shareholders upon the
exchange of their Target Shares for Acquiring Fund Shares;
6.6.7. The basis of Acquiring Fund Shares that a Shareholder receives
in connection with the Reorganization will be the same, in the aggregate,
as the aggregate basis of his or her Target Shares exchanged therefor;
6.6.8. A Shareholder's holding period for his or her Acquiring Fund
Shares will be determined by including the period for which he or she held
the Target Shares exchanged therefor, provided that he or she held such
Target Shares as capital assets; and
6.6.9. Acquiring Fund will succeed to and take into account the items
of Target described in Section 381(c) of the Code, subject to the
conditions and limitations specified in Sections 381, 382, 383, and 384 of
the Code and the Regulations thereunder.
Notwithstanding subparagraphs 6.6.2, 6.6.5 and 6.6.6, the Tax Opinion may state
that no opinion is expressed as to the effect of the Reorganization on the Funds
or any Shareholder with respect to any asset as to which any unrealized gain or
loss is required to be recognized for federal income tax purposes at the end of
a taxable year (or on the termination or transfer thereof) under a mark-to-
market system of accounting.
B-15
<PAGE>
At any time before the Closing, either Investment Company may waive in
writing any of the foregoing conditions (except that set forth in paragraph 6.1)
if, in the judgment of its Board or an officer, such waiver will not have a
material adverse effect on its Fund's shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
7.2. Except as otherwise provided herein, all the Reorganization Expenses
will be borne by Legg Mason Wood Walker, Incorporated or one of its affiliates.
8. ENTIRE AGREEMENT; NO SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall not
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed at
or prior to the Effective Time, (b) if a condition to its obligations has not
been met and it reasonably appears that such condition will not or cannot be
met, or (c) if the Closing has not occurred on or before June 29, 2001; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1(b), 9.1(c) or 9.2, there shall
be no liability for damages on the part of either Fund, or the directors,
employees or officers of either Investment Company, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Maryland; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
B-16
<PAGE>
11.2. Nothing expressed or implied herein is intended or shall be construed
to confer upon or give any person, firm, trust, or corporation other than the
parties and their respective successors and assigns any rights or remedies under
or by reason of this Agreement.
11.3. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Investment Company and
delivered to the other party hereto. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and
delivered by its duly authorized officers as of the day and year first written
above.
[SIGNATURE LINE OMITTED]
B-17
<PAGE>
APPENDIX C
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
(LEGG MASON VALUE TRUST, INC.)
Value Trust: 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
The cumulative results for your Fund at March 31, 2000 for the past three
months, one year, and longer periods are shown in the table below:
<TABLE>
<CAPTION>
First Since
Quarter 1 Year 3 Years 5 Years 10 Years 15 Years Inception*
------- ------ ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Value Trust -.01% +6.74% +148.60% +371.88% +629.05% +1,208.17% +3,128.91%
S&P 500 Composite Index +2.29% +17.94% +106.77% +227.29% +461.89% +1,160.99% +2,144.05%
Dow Jones Industrial Average -4.65% +13.39% +74.60% +189.61% +419.20% +1,244.38% +2,252.79%
Lipper Diversified Equity Funds +7.04% +35.64% +102.48% +182.61% +382.36% +851.20% +1,469.37%
Lipper Large-Cap Growth Funds +8.49% +38.08% +157.62% +270.26% +540.66% +1,130.17% +1,679.30%
</TABLE>
__________
* The Value Trust, S&P 500 Composite Index, and Dow Jones returns are for the
period April 16, 1982 (inception of the Fund) to March 31, 2000. The Lipper
Diversified Equity Funds and Lipper Large-Cap Growth Funds returns are for
the period April 30, 1982 to March 31, 2000.
As you can see, 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 data above show what we have done, not what we
will be able to do.
The best way to understand the twelve months ended March 31 is to put that
period in a broader context. As a result of the global financial crises 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.
C-1
<PAGE>
We can also describe the same period in terms of the ebb and flow of risk
preferences. Prior to the financial crises, 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 gained only about
4% through September. Then, in the fourth quarter, technology stocks exploded,
propelling the S&P 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 overweight in technology you outperformed the market, and if you were
underweight, you underperformed.
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
underperformance, 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 underperformance of funds that invested in them, and the apparent
inability of investors, the press, the fund boards to understand that all
investment styles and managers have periods of underperformance, led to the
firings or resignations 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 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 flat, the result of a tug of war
between our financial and our technology holdings. Several of our major
technology holdings fell during the
C-2
<PAGE>
quarter after posting strong fourth 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 first calendar
quarter of last year, when we were up 18.69%. Our calendar 1999 results, which
were well ahead of the indices, were obtained by strong results in the first and
fourth quarters, and comparatively weaker numbers in the second and third.
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 first quarter performance statistics. As the table shows, the average
general equity fund gained over 7% in the quarter, while the Dow was down almost
5% and the S&P was up over 2%. The NASDAQ was up 12.4% in the quarter. You
probably see the picture. After years of underperformance, the average fund
manager decided to get overweighted in technology and underweighted not-
technology. The stampede to tech was no doubt exacerbated by the high profile
firings or resignations of several prominent value investors. Just how
overweighted most funds are in tech can be glimpsed when one realizes that only
two of the eleven S&P sectors beat the 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 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 March 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 Value Trust shareholders
in the past several years 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.
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
C-3
<PAGE>
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 this 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 October
the long bond yielded 9% and inflation was 4.5%. Today bond yields are under 6%
and 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 investors.
Bill Miller, CFA
April 14, 2000
Performance Comparison of a $50,000 Investment as of March 31, 2000
The following graphs compare the total returns of the Institutional Class
(formerly Navigator Class) of Value Trust to the Value Line and S&P 500
Composite indices. The graphs illustrate the cumulative total return of an
initial $50,000 investment for the periods indicated. The line for Value Trust
represents the total return after deducting all fund investment
C-4
<PAGE>
management and other administrative expenses and the transaction costs of buying
and selling portfolio securities. The line representing each securities market
index does not include any transaction costs associated with buying and selling
securities in the index or other administrative expenses. Both Value Trust's
results and the indices' results assume reinvestment of all dividends and
distributions.
Value Trust -- Institutional Class
--------------------------------------------------
Cumulative Average Annual
Total Return Total Return
--------------------------------------------------
One Year +7.80% +7.80%
Five Years +395.84 +37.74
Life of Class* +436.03 +36.97
--------------------------------------------------
*Inception Date - December 1, 1994
-------------------------------------------------
[GRAPH APPEARS HERE -- SEE PLOT POINTS BELOW]
<TABLE>
<CAPTION>
Value Trust Standard & Poor's
Institutional Class 500 Composite Index/(1)/ Value Line Index/(2)/
<S> <C> <C> <C>
Years ended March 31, 1994 $ 50,000 $ 50,000 $50,000
$ 50,800 $ 50,740 $50,545
1995 $ 54,053 $ 55,680 $53,185
$ 62,026 $ 61,000 $56,660
$ 68,900 $ 65,845 $60,285
$ 72,225 $ 69,810 $60,295
1996 $ 77,583 $ 73,555 $62,830
$ 80,633 $ 76,855 $64,525
$ 87,938 $ 79,235 $64,895
$100,987 $ 85,840 $68,360
1997 $104,712 $ 88,140 $67,535
$123,907 $103,535 $76,475
$144,718 $111,280 $85,110
$139,859 $114,475 $82,755
1998 $164,295 $130,445 $91,055
$173,338 $134,755 $86,820
$153,463 $121,350 $69,800
$208,943 $147,190 $79,620
1999 $248,629 $154,530 $74,540
$247,755 $165,435 $84,830
$224,314 $155,085 $76,070
$267,428 $178,165 $78,510
2000 $268,015 $182,245 $78,075
</TABLE>
/(1)/ An unmanaged index of widely held common stocks.
/(2)/ An unmanaged index of approximately 1,700 common stocks.
C-5
<PAGE>
APPENDIX D
----------
COMPARISON OF INVESTMENT RESTRICTIONS
-------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
INVESTMENT VALUE INSTITUTIONAL
ACTIVITY VALUE TRUST PORTFOLIO
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Borrowing May not borrow money, except from banks 1. May borrow money to the
Money or through reverse repurchase agreements fullest extent permitted by the
for temporary purposes, in an aggregate 1940 Act, the rules or
amount not to exceed 10% of the value of regulations thereunder or
the total assets of the Fund at the time applicable order of the SEC, as
of borrowing; provided that borrowings, such statute, rules, regulations
including reverse repurchase agreements, or orders may be amended from
in excess of 5% of such value will be time to time ("Investment
only from banks (although not a Regulations")
fundamental policy subject to 2. Maximum borrowing is
shareholder approval, the Fund will not currently limited to one-third of
purchase securities if borrowings, the value of total assets by the
including reverse purchase agreements, 1940 Act
exceed 5% of its total assets)
---------------------------------------------------------------------------------------------------------------------
Issuer May not, with respect to 75% of total 1. Intends to remain diversified
Diversification assets, invest more than 5% of its total as defined by the 1940 Act
assets (taken at market value) in 2. A diversified fund under the
securities of any one issuer, other than 1940 Act currently may not, with
the U.S. Government, or its agencies and respect to 75% of total assets,
instrumentalities, or purchase more than invest more than 5% of its total
10% of the voting securities of any one assets (taken at market value) in
issuer securities of any one issuer, or
purchase more than 10% of the
voting securities of any one
issuer (in each case not
including securities issued by
the U.S. Government, or its
agencies and instrumentalities
and other investment companies)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
INVESTMENT VALUE INSTITUTIONAL
ACTIVITY VALUE TRUST PORTFOLIO
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchasing May not purchase securities on "margin", 1. May purchase securities on
Securities on except for short-term credits necessary margin to the fullest extent
Margin for clearance of portfolio transactions permitted by Investment
and except that the Fund may make margin Regulations
deposits in connection with the use of 2. Unless appropriate steps are
futures contracts and options on futures taken to segregate assets or
contracts otherwise cover the Fund's
obligations, such action would be
considered to be issuing a senior
security. See "Issuing Senior
Securities" below
---------------------------------------------------------------------------------------------------------------------
Industry May not invest 25% or more of its total 1. May not concentrate
Concentration assets (taken at market value) in any investments in a particular
one industry industry or group of industries
(U.S. Government, its agencies
and instrumentalities excepted)
as concentration is defined under
Investment Regulations
2. Concentration is currently
defined in the 1940 Act as 25% or
more of a Fund's total assets
---------------------------------------------------------------------------------------------------------------------
Commodities May not purchase or sell commodities and May purchase or sell commodities,
commodity contracts, but this limitation commodities contracts, futures
shall not prevent the Fund from contracts, options or forward
purchasing or selling options and contracts to the fullest extent
futures contracts permitted by Investment Regulations
---------------------------------------------------------------------------------------------------------------------
Underwriting May not underwrite the securities of 1. May underwrite securities to
other issuers, except insofar as the the fullest extent permitted by
Fund may be deemed an underwriter under Investment Regulations
the Securities Act of 1933, as amended, 2. The 1940 Act prohibits a
in disposing of a portfolio security diversified mutual fund from
underwriting securities in excess
of 25% of its total assets
---------------------------------------------------------------------------------------------------------------------
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
INVESTMENT VALUE INSTITUTIONAL
ACTIVITY VALUE TRUST PORTFOLIO
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Making Loans May not make loans, except loans of 1. May make loans to the fullest
portfolio securities and except to the extent permitted by Investment
extent that the purchase of a portion of Regulations
an issue of publicly distributed notes, 2. May not make loans to persons
bonds or other evidences of indebtedness who control or are under common
or deposits with banks and other control with the Fund
financial institutions may be considered
loans
---------------------------------------------------------------------------------------------------------------------
Real Estate May not purchase or sell real estate, May purchase or sell real estate to
except that the Fund may invest in the fullest extent permitted by
securities collateralized by real estate Investment Regulations
or interests therein or in securities
issued by companies that invest in real
estate or interests therein (as a
non-fundamental policy changeable
without a shareholder vote, the Fund
will not purchase or sell interests in
real estate limited partnerships)
---------------------------------------------------------------------------------------------------------------------
Short Sales May not make short sales of securities 1. May engage in short sales to
or maintain a short position, except the fullest extent permitted by
that the Fund may (a) make short sales Investment Regulations
and maintain short positions in 2. Unless appropriate steps are
connection with its use of options, taken to segregate assets or
futures contracts and options on futures otherwise cover its obligations,
contracts and (b) sell short "against such action would be considered
the box" to be issuing a senior security.
See "Issuing Senior Securities"
below
---------------------------------------------------------------------------------------------------------------------
Issuing Senior May not issue senior securities, except 1. May issue senior securities
Securities as permitted under the 1940 Act to the fullest extent permitted
by Investment Regulations
2. The ability to issue senior
securities is severely
circumscribed by complex
regulatory constraints under the
1940 Act
---------------------------------------------------------------------------------------------------------------------
</TABLE>
D-3
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
INVESTMENT VALUE INSTITUTIONAL
ACTIVITY VALUE TRUST PORTFOLIO
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Securities LMFM currently anticipates that Value No stated policy
Trust will invest no more than 25% of
its total assets in foreign securities,
not including ADRs
---------------------------------------------------------------------------------------------------------------------
Illiquid Securities Up to 10% of net assets Up to 15% of net assets
---------------------------------------------------------------------------------------------------------------------
Options and 1. No more than 5% of net assets May purchase or sell commodities,
Futures may be required as a futures commodities contracts, futures
contract deposit and/or premium contracts, options or forward
2. No more than 20% of total contracts to the fullest extent
assets may be invested in futures permitted by Investment Regulations
contracts or related options
---------------------------------------------------------------------------------------------------------------------
Repurchase May not enter into repurchase agreements May not enter into purchase agreements
Agreements of more than seven day's duration if more of more than seven day's duration if
than 10% of net assets would be invested in more than 15% of net assets would be
such agreements and other illiquid securities. invested in such agreements and other
illiquid securities.
---------------------------------------------------------------------------------------------------------------------
Loans of Portfolio Does not intend to lend more than 5% of 1. May make loans to the
Securities portfolio securities at any given time fullest extent permitted by
Investment Regulations
2. May not make loans to persons who
control or are under common control
with the Fund
---------------------------------------------------------------------------------------------------------------------
Municipal May not invest more than 5% of its net No stated policy
Obligations assets in municipal obligations
---------------------------------------------------------------------------------------------------------------------
Floating and May not invest more than 5% of net No stated policy
Variable Rate assets in floating and variable rate
Obligations obligations, respectively
---------------------------------------------------------------------------------------------------------------------
</TABLE>
D-4
<PAGE>
LEGG MASON VALUE TRUST, INC.
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
January 26, 2001
This Statement of Additional Information (the "SAI") relates to the
proposed reorganization (the "Reorganization") of Legg Mason Value Trust, Inc.
("Value Trust") and LM Value Institutional Portfolio ("Value Institutional
Portfolio"), a series of LM Institutional Fund Advisors II, Inc.
This SAI contains information which may be of interest to shareholders but
which is not included in the Prospectus/Proxy Statement dated January 26, 2001
(the "Prospectus/Proxy Statement") of Value Trust, which relates to the
Reorganization. As described in the Prospectus/Proxy Statement, pursuant to the
Reorganization, Value Trust would acquire all the assets of Value Institutional
Portfolio in exchange solely for shares of Value Trust and the assumption by
Value Trust of all of Value Institutional Portfolio's liabilities. Value
Institutional Portfolio would then distribute all the Value Trust shares it
receives to its shareholders, in complete liquidation of Value Institutional
Portfolio.
This SAI is not a prospectus and should be read in conjunction with the
Prospectus/Proxy Statement. The Prospectus/Proxy Statement has been filed with
the Securities and Exchange Commission and is available upon request and without
charge by writing to LM Institutional Advisors, Inc., 100 Light Street, P.O. Box
17635, Baltimore, MD, 21297-1635, or by calling toll-free 1-888-425-6432.
Table of Contents
<TABLE>
<S> <C>
I. Additional Information about Value Trust.......................... 2
----------------------------------------
II. Additional Information about Value Institutional Portfolio........ 2
----------------------------------------------------------
III. Financial Statements.............................................. 2
--------------------
</TABLE>
<PAGE>
I. Additional Information about Value Trust.
----------------------------------------
Incorporated by reference to Post-Effective Amendment No. 30 to Value
Trust's Registration Statement on Form N-1A (filed on January 19, 2001)
(Registration Nos. 2-75766 and 811-3380).
II. Additional Information about Value Institutional Portfolio.
----------------------------------------------------------
Incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A (filed on August 1, 2000) of LM
Institutional Fund Advisors II, Inc., as supplemented (Registration Nos. 333-
44423 and 811-8611).
III. Financial Statements.
--------------------
This SAI is accompanied by (i) the Annual Report for the Navigator Class
(subsequently renamed the "Institutional Class") of Value Trust for the year
ended March 31, 2000, (ii) the Semi-Annual Report for the Navigator Class of
Value Trust for the six months ended September 30, 2000, (iii) the Annual Report
for LM Institutional Fund Advisors II, Inc. for the year ended March 31, 2000,
and (iv) the Semi-Annual Report for LM Institutional Fund Advisors II, Inc. for
the six months ended September 30, 2000, all of which contain certain historical
financial data regarding Value Trust or Value Institutional Portfolio. Such
reports have been filed with the Securities and Exchange Commission and are
incorporated herein by reference.
-2-
<PAGE>
LEGG MASON VALUE TRUST, INC
FORM N-14
PART C
OTHER INFORMATION
Item 15. Indemnification
Incorporated by reference to Item 27 of Part C of Post-Effective Amendment
No. 25 to the Registrant's Registration Statement on Form N-1A (the
"Registration Statement"), Registration Nos. 2-75766 and 811-3380, filed May 29,
----------------------
1998.
Item 16. Exhibits
(1) (a) Articles of Incorporation. (1)
(b) Articles of Amendment dated April 24, 1992. (1)
(c) Articles Supplementary filed August 1, 1994. (1)
(d) Articles Supplementary dated August 8, 1997. (2)
(e) Articles Supplementary dated March 9, 1999. (3)
(f) Articles of Amendment dated September 14, 1999. (4)
(g) Articles of Amendment dated November 17, 2000. (5)
(2) (a) By-Laws as Amended and Restated. (1)
(b) Amendment to By-Laws. (1)
(3) Voting trust agreements affecting more than 5% of any class of equity
securities--None.
(4) Form of Agreement and Plan of Reorganization and Termination--Filed as
Appendix B to Part A hereof.
(5) Instruments defining the rights of security holders with respect to Legg
Mason Value Trust, Inc. are contained in the Articles of Incorporation and
subsequent amendments and By-Laws, which are incorporated by reference to
Exhibit (b) (1) to Post-Effective Amendment No. 24 to the Registration
Statement, Registration Nos. 2-75766 and 811-3380, filed July 31, 1997.
(6) Investment Advisory and Management Agreement. (1)
(7) (a) Underwriting Agreement. (6)
(b) Dealer Agreement with respect to Navigator Shares. (6)
<PAGE>
(8) Bonus, profit-sharing or pension plans--None.
(9) (a) Custodian Contract. (1)
(b) Addendum dated February 9, 1988. (1)
(c) Addendum dated February 25, 1988. (1)
(d) Addendum dated August 12, 1988. (1)
(e) Addendum dated May 28, 1996. (1)
(10) (a) Amended Distribution Plan pursuant to Rule 12b-1. (6)
(b) Form of Distribution Plan for Financial Intermediary class pursuant to
Rule 12b-1. (5)
(c) Form of Multi-Class Plan pursuant to Rule 18f-3. (5)
(11) Opinion and Consent of Counsel as to legality of securities being
registered. (5)
(12) Opinion and Consent of Counsel as to tax matters. (5)
(13) (a) Transfer Agency and Service Agreement. (1)
(b) Credit Agreement. (3)
(c) Amendment to Credit Agreement. (7)
(14) (a) Consent of PricewaterhouseCoopers LLP. (5)
(b) Consent of Ernst & Young LLP. (5)
(15) Financial Statements omitted pursuant to Item 14(a)(1)--None.
(16) Power of Attorney. (5)
(17) Form of Proxy. (5)
_________________
(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 24 to the Registration Statement, Registration Nos. 2-75766
and 811-3380, filed July 31, 1997.
(2) Incorporated here by reference to corresponding Exhibit of Post-Effective
Amendment No. 25 to the Registration Statement, Registration Nos. 2-75766
and 811-3380, filed May 29, 1998.
(3) Incorporated here by reference to corresponding Exhibit of Post-Effective
Amendment No. 26 to the Registration Statement, Registration Nos. 2-75766
and 811-3380, filed May 28, 1999.
(4) Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 28 to the Registration Statement, Registration Nos. 2-75766
and 811-3380, filed July 24, 2000.
(5) Filed herewith.
(6) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 22 to the Registration Statement, Registration Nos. 2-75766
and 811-3380, filed July 31, 1996.
(7) Incorporated here by reference to corresponding Exhibit of Post-Effective
Amendment No. 2 to the registration statement on Form N-1A of Legg Mason
Investment Trust, Inc., Registration Nos. 333-88715 and 811-9613, filed
March 28, 2000.
<PAGE>
Item 17. Undertakings
(1) The Registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act of 1933, the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The Registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment of the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of Baltimore and State of
Maryland on the 15th day of December, 2000.
LEGG MASON VALUE TRUST, INC.
By: /s/ John F. Curley, Jr.*
------------------------------
John F. Curley, Jr., President
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title(s) Date
---------- -------- ----
/s/ Raymond A. Mason* Chairman of the Board December 15, 2000
------------------------
Raymond A. Mason and Director
/s/ John F. Curley, Jr.* President and Director December 15, 2000
------------------------
John F. Curley, Jr.
/s/ Edward A. Taber III* Director December 15, 2000
------------------------
Edward A. Taber III
/s/ Richard G. Gilmore* Director December 15, 2000
------------------------
Richard G. Gilmore
/s/ Arnold L. Lehman* Director December 15, 2000
------------------------
Arnold L. Lehman
/s/ Jill E. McGovern* Director December 15, 2000
------------------------
Jill E. McGovern
/s/ T.A. Rodgers* Director December 15, 2000
------------------------
T.A. Rodgers
/s/ G. Peter O'Brien* Director December 15, 2000
------------------------
G. Peter O'Brien
<PAGE>
/s/ Nelson A. Diaz* Director December 15, 2000
------------------------
Nelson A. Diaz
/s/ Marie K. Karpinski Vice President December 15, 2000
------------------------
Marie K. Karpinski and Treasurer
*By: /s/ Marc R. Duffy
--------------------
Marc R. Duffy
Attorney in Fact, pursuant to
Powers of Attorney filed herewith
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit Name
------ ------------
1(g) Articles of Amendment dated November 17, 2000.
10(b) Form of Distribution Plan for Financial Intermediary Class
pursuant to Rule 12b-1.
10(c) Form of Multi-Class Plan pursuant to Rule 18f-3.
11 Opinion of Kirkpatrick & Lockhart LLP as to legality of
securities being registered.
12 Opinion of Ropes & Gray as to tax matters.
14(a) Consent of PricewaterhouseCoopers LLP.
14(b) Consent of Ernst & Young LLP.
16 Power of Attorney.
17 Form of Proxy.
