As filed with the Securities and Exchange Commission on June 2, 1999.
1933 Act File No. 33-34929
1940 Act File No. 811-06110
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 19 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 21 [X]
LM Institutional Fund Advisors I, Inc.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO BRYAN CHEGWIDDEN, ESQ.
100 Light Street Ropes & Gray
Baltimore, Maryland 21202 One International Place
(Name and Address of Boston, Massachusetts 02110
Agent for Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on June 1, 1998 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[X] on August 1, 1999 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)\
[ ] on pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
LM Institutional Fund Advisors I, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Table of Contents
Cross Reference Sheets
Part A
Prospectus for the following Portfolios:
Western Asset Limited Duration Portfolio, Western Asset Intermediate Portfolio,
Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western
Asset Core Plus Portfolio, Western Asset Non-U.S. Fixed Income Portfolio,
Western Asset Money Market Portfolio, Western Asset Government Money Market
Portfolio, Western Asset High Yield Portfolio, Western Asset Global Strategic
Income Portfolio and Western Asset Enhanced Equity Portfolio.
Part B
Statement of Additional Information for the following Portfolios:
Western Asset Limited Duration Portfolio, Western Asset Intermediate Portfolio,
Western Asset Intermediate Plus Portfolio, Western Asset Core Portfolio, Western
Asset Core Plus Portfolio, Western Asset Non-U.S. Fixed Income Portfolio,
Western Asset Money Market Portfolio, Western Asset Government Money Market
Portfolio, Western Asset High Yield Portfolio, Western Asset Global Strategic
Income Portfolio and Western Asset Enhanced Equity Portfolio.
Part C - Other Information
Signature Page
Exhibit Index
Exhibits
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LM Institutional Fund Advisors I, Inc.
Western Asset Limited Duration Portfolio
Western Asset Intermediate Portfolio
Western Asset Intermediate Plus Portfolio
Western Asset Core Portfolio
Western Asset Core Plus Portfolio
Western Asset Non-U.S. Fixed Income Portfolio
Western Asset Money Market Portfolio
Western Asset Government Money Market Portfolio
Western Asset High Yield Portfolio
Western Asset Global Strategic Income Portfolio
Western Asset Enhanced Equity Portfolio
Cross Reference Sheet
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Part A. Item No. Prospectus Caption
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1 Cover Page; Back Cover Page
2 Investment Objectives; Risk Summary;
Performance Information
3 Expense Information
4 Not Applicable
5 Not Applicable
6 Management of the Portfolios
7 Purchase of Shares; Redemption of Shares;
Exchange Privilege; Net Asset Value;
Dividends and Distributions to
Shareholders; Tax Information
8 Distribution Plans
9 Financial Highlights
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LM Institutional Fund Advisors I, Inc.
Western Asset Limited Duration Portfolio
Western Asset Intermediate Portfolio
Western Asset Intermediate Plus Portfolio
Western Asset Core Portfolio
Western Asset Core Plus Portfolio
Western Asset Non-U.S. Fixed Income Portfolio
Western Asset Money Market Portfolio
Western Asset Government Money Market Portfolio
Western Asset High Yield Portfolio
Western Asset Global Strategic Income Portfolio
Western Asset Enhanced Equity Portfolio
Cross Reference Sheet
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Statement of Additional
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Part B. Item No. Information Caption
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10 Cover Page and Table of Contents
11 Other Information
12 Additional Information About
Investment Limitations and
Policies
13 Management of the Portfolios
14 Principal Holders of Securities
15 Management of the Portfolios;
Other Information
16 Portfolio Transactions and
Brokerage
17 Other Information
18 Purchases and Redemptions
19 Additional Tax Information
20 Management of the Portfolios
21 Other Information
22 Financial Statements
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LM INSTITUTIONAL FUND ADVISORS I PROSPECTUS
August 1, 1999
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o Western Asset Government Money Market Portfolio
o Western Asset Money Market Portfolio
o Western Asset Limited Duration Portfolio
o Western Asset Intermediate Portfolio
o Western Asset Intermediate Plus Portfolio
o Western Asset Core Portfolio
o Western Asset Core Plus Portfolio
o Western Asset High Yield Portfolio
o Western Asset Non-U.S. Fixed Income Portfolio
o Western Asset Global Strategic Income Portfolio
o Western Asset Enhanced Equity Portfolio
As with all mutual funds, these securities have not been approved or disapproved
by the Securities and Exchange Commission nor has the Securities and Exchange
Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
[GRAPHIC]
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES ........................................................1
WESTERN ASSET GOVERNMENT MONEY MARKET PORTFOLIO......................1
WESTERN ASSET MONEY MARKET PORTFOLIO.................................1
WESTERN ASSET LIMITED DURATION PORTFOLIO.............................2
WESTERN ASSET INTERMEDIATE PORTFOLIO.................................2
WESTERN ASSET INTERMEDIATE PLUS PORTFOLIO............................2
WESTERN ASSET CORE PORTFOLIO.........................................2
WESTERN ASSET CORE PLUS PORTFOLIO....................................2
WESTERN ASSET HIGH YIELD PORTFOLIO...................................4
WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO........................4
WESTERN ASSET GLOBAL STRATEGIC INCOME PORTFOLIO......................5
WESTERN ASSET ENHANCED EQUITY PORTFOLIO..............................6
RISK SUMMARY..................................................................7
PERFORMANCE INFORMATION......................................................11
EXPENSE INFORMATION..........................................................11
WESTERN ASSET GOVERNMENT MONEY MARKET PORTFOLIO.....................12
WESTERN ASSET MONEY MARKET PORTFOLIO................................12
WESTERN ASSET LIMITED DURATION PORTFOLIO............................13
WESTERN ASSET INTERMEDIATE PORTFOLIO................................13
WESTERN ASSET INTERMEDIATE PLUS PORTFOLIO...........................14
WESTERN ASSET CORE PORTFOLIO........................................14
WESTERN ASSET CORE PLUS PORTFOLIO...................................15
WESTERN ASSET HIGH YIELD PORTFOLIO..................................15
WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO.......................16
WESTERN ASSET GLOBAL STRATEGIC INCOME PORTFOLIO.....................16
WESTERN ASSET ENHANCED EQUITY PORTFOLIO.............................17
MANAGEMENT OF THE PORTFOLIOS ..............................................17
MANAGER, ADVISERS AND PORTFOLIO MANAGERS............................18
BOARD OF DIRECTORS..................................................19
DISTRIBUTORS........................................................19
EXPENSES ...........................................................19
PURCHASE OF SHARES ..........................................................20
INITIAL INVESTMENT..................................................20
ADDITIONAL INVESTMENTS..............................................21
OTHER PURCHASE INFORMATION..........................................21
RETIREMENT PLANS....................................................21
ACCOUNT REGISTRATION CHANGES........................................22
DISTRIBUTION PLANS ..........................................................22
REDEMPTION OF SHARES ........................................................22
SIGNATURE GUARANTEE.................................................23
EXCHANGE PRIVILEGE ..........................................................23
NET ASSET VALUE .............................................................24
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DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS .................................24
TAX INFORMATION .............................................................25
FINANCIAL HIGHLIGHTS ........................................................26
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INVESTMENT OBJECTIVES
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LM Institutional Fund Advisors I, Inc. offers eleven series (each a "Portfolio"
or a "Fund"): Western Asset Government Money Market Portfolio, Western Asset
Money Market Portfolio, Western Asset Limited Duration Portfolio, Western Asset
Intermediate Portfolio, Western Asset Intermediate Plus Portfolio, Western Asset
Core Portfolio, Western Asset Core Plus Portfolio, Western Asset High Yield
Portfolio, Western Asset Non-U.S. Fixed Income Portfolio, Western Asset Global
Strategic Income Portfolio and Western Asset Enhanced Equity Portfolio.
LM Institutional Advisors, Inc. (the "Manager" or "LMIA") serves as the
investment manager to the Funds. Western Asset Management Company ("Western
Asset") and/or Western Asset Global Management Limited ("WAGM") are the
investment advisers to the Funds. Western Asset's and WAGM's approach in
managing these eleven Funds revolves around an investment outlook developed by
the Investment Strategy Group, a team of senior professionals that meets at
least twice a week to review developments in the economy and the markets. Based
on its consensus view of the economic outlook for the following six months,
where appropriate, this group arrives at a recommended portfolio structure,
including targets for duration, yield curve exposure, and sector allocation. The
Portfolio Management Group implements the strategy in a manner consistent with
the investment policies of each Fund, using information on the relative credit
strength, liquidity, issue structure, event risk, covenant protection and market
valuation of available securities developed by the Research Group. Western Asset
and WAGM are sometimes referred to in this Prospectus as "Advisers" or an
"Adviser." The Advisers manage each Fund in accordance with the investment
objective and policies described below.
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WESTERN ASSET GOVERNMENT
MONEY MARKET PORTFOLIO
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Adviser: Western Asset
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Investment Objective: High current income consistent with liquidity and
conservation of principal.
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The Portfolio is a money market fund that seeks to maintain a net asset value of
$1.00 per share by investing in government money market instruments. To achieve
its objective, the Fund generally adheres to the following practices:
o it invests only in U.S. government obligations, repurchase agreements
secured by such instruments and the debt obligations of "supranational
organizations." "Supranational organizations" are entities designated
or supported by a government or governmental entity to promote economic
development, such as the European Community, the International Monetary
Fund, the United Nations and the World Bank.
o it buys instruments maturing in 397 days or less. It can also buy
certain variable and floating rate securities to the extent permitted
by the SEC.
o it maintains a dollar-weighted average portfolio maturity of 90 days or
less.
o it may purchase or sell securities on a forward commitment basis.
o it may engage in reverse repurchase agreements and other borrowings as
permitted by applicable law.
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WESTERN ASSET
MONEY MARKET PORTFOLIO
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Adviser: Western Asset
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Investment Objective: High current income consistent with liquidity and
conservation of principal.
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The Portfolio is a money market fund that seeks to maintain a net asset value of
$1.00 per share. To achieve its objective, the Fund generally adheres to the
following practices:
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o it generally invests in money market instruments, such as:
(i) U.S. government obligations.
(ii) municipal obligations.
(iii) instruments such as certificates of deposit, demand and time
deposits, savings shares and bankers' acceptances issued by
domestic and foreign banks and savings and loan institutions
that have over $1 billion in total assets or where the
principal amount is insured by the Federal Deposit Insurance
Corporation.
(iv) repurchase agreements.
(v) reverse repurchase agreements and other borrowings.
(vi) commercial paper and other short-term investments.
o it invests only in "high quality" money market instruments. "High
quality" money market instruments are those that: (i) have received one
of the two highest ratings by two or more Nationally Recognized
Statistical Rating Organizations ("NRSRO"); (ii) receive one of the two
highest ratings by one NRSRO if only one has rated the security; or
(iii) if unrated, are determined by Western Asset to be of comparable
quality.
o it may not invest more than 5% of its total assets in the "first tier"
securities of any one issuer (except for U.S. government obligations).
"First tier" securities are those that: (i) have been rated in the
highest rating category by two NRSROs; (ii) receive the highest rating
by one NRSRO if only one has rated the security; or (iii) if unrated,
are determined by Western Asset to be of comparable quality.
o it may not invest more than 1% of its total assets or $1 million
(whichever is greater) in the "second tier" securities of any one
issuer. "Second tier" securities are all "high quality" securities that
are not "first tier" securities.
o it may not invest more than 5% of its total assets in "second tier"
securities.
o it may invest only in U.S. dollar-denominated securities. These include
foreign investments denominated in U.S. dollars.
o it buys money market securities maturing in 397 days or less. It can
also buy certain variable and floating rate securities to the extent
permitted by the SEC.
o it maintains a dollar-weighted average portfolio maturity of 90 days or
less.
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WESTERN ASSET LIMITED DURATION
PORTFOLIO
WESTERN ASSET INTERMEDIATE
PORTFOLIO
WESTERN ASSET INTERMEDIATE PLUS
PORTFOLIO
WESTERN ASSET CORE PORTFOLIO
WESTERN ASSET CORE PLUS PORTFOLIO
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Advisers: Western Asset and WAGM (non-U.S. portions of
Intermediate Plus and Core Plus Portfolios)
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Investment Objective: Maximize total return, consistent with prudent
investment management and liquidity needs, by
investing to obtain the average duration specified
for each Portfolio.
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Each of these Funds invests in a portfolio of fixed income securities of various
maturities to obtain the dollar-weighted average duration specified for that
Fund.
To achieve their objectives, the Portfolios invest primarily in:
o U.S. Government obligations.
o mortgage- and other asset-backed securities.
o U.S. dollar-denominated obligations of foreign governments,
international agencies or supranational organizations.
o U.S. dollar-denominated fixed income securities of non-governmental
domestic or foreign issuers.
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The Portfolios are permitted to:
o purchase other securities and instruments, including:
(i) preferred stocks.
(ii) structured notes.
(iii) municipal obligations.
(iv) convertible securities.
(v) pay-in-kind securities and zero coupon bonds.
(vi) certificates of deposit, time deposits and banker's
acceptances issued by domestic and foreign banks.
(vii) commercial paper and other short-term investments.
o invest up to 25% of their total assets in the securities of foreign
issuers.
o buy or sell futures contracts on fixed income instruments, options on
such futures contracts and options on securities for both hedging and
non-hedging purposes.
o buy or sell securities on a forward commitment basis.
o lend its portfolio securities.
o engage in foreign currency exchange transactions.
o engage in repurchase agreements and reverse repurchase agreements.
o borrow money for temporary or emergency purposes.
Each Portfolio in this group differs from the others in terms of its investment
policies regarding average duration, U.S. dollar-denominated securities and
credit quality of its investments. These differences are summarized in the
following table. "Duration" refers to the range within which the dollar weighted
average duration of a Portfolio is expected to fluctuate. With respect to Core
and Core Plus Portfolios, the average duration is expected to range within 20%
of the duration of the domestic bond market as a whole (normally four to six
years, although this may vary) as measured by Western Asset. "Foreign Currency
Exposure" refers to whether a Portfolio presently intends to limit its
investments to U.S. dollar-denominated securities. "Credit Quality" refers to
the percentage of a Portfolio's net assets that may be invested in debt
securities that are rated, at the time of purchase, below investment grade, but
at least B or higher by an NRSRO or, if unrated, determined by the Adviser to be
of comparable quality.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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PORTFOLIO DURATION FOREIGN CURRENCY CREDIT QUALITY
EXPOSURE
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Limited Duration 1-3 Years U.S. Dollar-Denominated Currently Anticipates No Securities
Only. Below Investment Grade
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Intermediate 2-4 Years U.S. Dollar-Denominated Currently Anticipates No Securities
Only. Below Investment Grade
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Intermediate Plus 2-4 Years The Portfolio may invest up 15%
to 20% of its total assets in Below Investment Grade
non-U.S. dollar-denominated
securities.
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Core 4-6 Years U.S. Dollar-Denominated Currently Anticipates No Securities
Only. Below Investment Grade
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Core Plus 4-6 Years The Portfolio may invest up 15%
to 20% of its total assets in Below Investment Grade
non-U.S. dollar-denominated
securities.
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</TABLE>
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WESTERN ASSET HIGH YIELD PORTFOLIO
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Adviser: Western Asset
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Investment Objective: Maximize total return, consistent with prudent investment
management.
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Under normal market conditions, the Portfolio will invest at least 75% of its
total assets in U.S. dollar-denominated debt or fixed income securities that are
rated below investment grade at the time of purchase by one or more NRSROs or
are of a comparable quality as determined by Western Asset. These securities are
commonly known as "junk bonds" or "high yield bonds." Western Asset expects
that, under normal market conditions, all or substantially all of the
Portfolio's assets will be invested in such securities.
To achieve its objective, the Fund may also make other investments, including:
o mortgage- and other asset-backed securities.
o municipal obligations.
o variable and floating rate debt securities.
o commercial paper and other short-term investments.
o corporate obligations. "Corporate obligations" include preferred
stock, convertible securities, zero coupon securities and pay-in-kind
securities.
o common stocks and warrants.
o certificates of deposit, fixed time deposits and bankers' acceptances
issued by domestic banks.
The Portfolio is also permitted to:
o invest up to 25% of its total assets in foreign currency-denominated
foreign securities.
o purchase or sell for hedging or non-hedging purposes: (i) interest rate
futures contracts, (ii) options on fixed income instruments and bond
indices, or (iii) options on interest rate futures contracts.
o engage in foreign currency exchange transactions.
o lend its securities.
o borrow money for temporary or emergency purposes.
o engage in repurchase agreements and reverse repurchase agreements.
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WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO
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Adviser: WAGM
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Investment Objective: Maximize total return, consistent with prudent
investment management.
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Under normal market conditions, the Portfolio invests at least 75% of its total
assets in securities denominated in major foreign currencies, however, the
Portfolio will generally attempt to maintain a minimum exposure of 75% to U.S.
dollars WAGM anticipates that, under normal market conditions, all or
substantially all of the Portfolio's assets will be invested in securities of
foreign issuers and that these foreign issuers will represent at least three
foreign countries.
To achieve its objective, the Portfolio may invest in a variety of securities,
including:
o U.S. dollar-denominated or foreign currency-denominated obligations of
foreign governments, international agencies or supranational entities.
o foreign currency exchange-related securities, including foreign
currency warrants.
o U.S. Government obligations.
o mortgage- and other asset-backed securities.
o variable and floating rate debt securities.
o commercial paper and other short-term investments.
o corporate obligations.
o certificates of deposit, fixed time deposits and bankers' acceptances.
o loan participations and assignments.
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o indexed securities and structured notes.
o repurchase agreements.
The Portfolio may also:
o engage in reverse repurchase agreements.
o borrow money for temporary or emergency purposes.
o buy or sell for hedging and non-hedging purposes: (i) interest rate
futures contracts and options on fixed income instruments and bond
indices and (ii) options on interest rate futures contracts.
o buy or sell foreign currencies, foreign currency options, or foreign
currency futures contracts and related options.
o enter into foreign currency forward contracts for hedging and
non-hedging purposes.
The Portfolio is "non-diversified" within the meaning of the Investment Company
Act. See "Risk Summary - Concentration and Non- Diversification." WAGM
anticipates that from time to time over 25% of the Portfolio's assets may be
invested in securities of issuers located in a single country.
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WESTERN ASSET GLOBAL STRATEGIC INCOME PORTFOLIO
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Advisers: WAGM (Non-U.S. portion) and Western Asset (U.S. portion)
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Investment Objective: Income and capital appreciation.
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To achieve its investment objective, the Portfolio invests primarily in various
types of U.S. dollar-denominated and foreign currency-denominated fixed income
securities, including:
o U.S. and foreign corporate securities.
o debt obligations of corporate and governmental issuers in emerging
market countries. These include "Brady Bonds"; bonds issued as a result
of a debt restructuring plan; Eurobonds; domestic and international
bonds issued under the laws of a developing country; and emerging
market loans.
o sovereign debt obligations of developed nations.
o debt obligations of "supranational organizations."
o mortgage-related securities.
o asset-backed securities.
The Portfolio may invest in a variety of other securities, including:
o foreign currency exchange-related securities, including foreign
currency warrants.
o variable and floating rate debt securities.
o commercial paper and other short-term investments.
o municipal obligations.
o certificates of deposit, fixed time deposits and bankers' acceptances.
o loan participations and assignments.
o indexed securities and structured notes.
o repurchase agreements.
The Portfolio may invest up to 60% of its net assets in securities that are
rated at the time of purchase below investment grade or are comparable quality
at the time of purchase as determined by WAGM or Western Asset. These securities
are commonly known as "junk bonds" or "high yield bonds."
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The Portfolio may also:
o engage in reverse repurchase agreements.
o borrow money for temporary or emergency purposes.
o loan its portfolio securities.
o buy or sell for hedging and non-hedging purposes: (i) bond or interest
rate futures contracts and options on fixed income instruments and bond
indices and (ii) options on bond or interest rate futures contracts.
o buy or sell foreign currencies, foreign currency options, or foreign
currency futures contracts and related options.
o enter into foreign currency forward contracts for hedging and
non-hedging purposes.
Under normal market conditions, the Portfolio will invest at least 80% of its
total assets in securities of issuers representing at least three countries (one
of which may be the U.S.) and at least 65% of its total assets in income
producing securities.
The Portfolio is "non-diversified" within the meaning of the Investment Company
Act. See "Risk Summary - Concentration and Non-Diversification."
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WESTERN ASSET ENHANCED EQUITY PORTFOLIO
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Adviser: Western Asset
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Investment Objective: Long-term total return.
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The Portfolio's assets will be comprised of two components: an equity component
and a fixed income component.
o The equity component will generally maintain full exposure to the U.S.
equity market as represented by the S&P 500 Index (the "Index").
o The fixed income component will try to generate interest and gains in
excess of the Portfolio's expenses, including transaction costs related
to its investments.
The Portfolio expects that its performance will approximate that of the Index,
with the extent to which the Portfolio outperforms or underperforms the Index
depending largely on whether the fixed income component has earned sufficient
amounts to offset the Portfolio's expenses. Up to 10% of the Portfolio's net
assets may be invested in securities rated below investment grade at the time of
purchase or unrated securities of comparable quality at the time of purchase
(commonly known as "junk bonds" or "high yield bonds") and up to 20% of its net
assets may be invested in foreign securities. The following information
summarizes the investment practices of the Portfolio's two components.
EQUITY COMPONENT.
The Portfolio's equity component invests primarily in: (i) common stocks that
are represented in the Index ("S&P stocks") and (ii) stock index futures,
options on stock indexes, options on stock index futures and other derivative
instruments that are based on the Index ("S&P derivatives").
The Equity Component of the Portfolio adheres to the following practices:
o it may invest in any combination of S&P stocks and S&P derivatives.
o it currently plans to invest predominantly, and likely exclusively, in S&P
derivatives.
o it will not be limited to purchasing S&P stocks in the same proportion as such
stocks are weighted in the Index.
o it will seek to remain invested in S&P stocks and S&P derivatives even when
the Index is declining.
The Index is composed of 500 selected common stocks, most of which are listed on
the New York Stock Exchange. Standard and Poor's ("S&P") chooses the stocks to
be included in the Index solely on a statistical basis. The weightings of stocks
in the Index are based on each stock's relative total market value, that is, its
market price per share times the number of shares outstanding. The Portfolio is
neither sponsored by nor affiliated with S&P.
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FIXED INCOME COMPONENT.
The fixed income component will invest primarily in the following types of
securities:
o U.S. Government obligations.
o fixed income securities of non-governmental domestic or foreign issuers.
o municipal securities.
o mortgage- and other asset-backed securities.
o preferred stocks.
o obligations of foreign governments, international agencies or
supranational entities.
The fixed income component may also:
o invest in other securities or instruments, including:
(i) certificates of deposit, time deposits and bankers'
acceptances issued by domestic and foreign banks.
(ii) commercial paper and other short-term investments.
o engage in repurchase agreements, reverse repurchase agreements and
other borrowings.
o purchase or sell futures contracts and options.
o engage in foreign currency exchange transactions.
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RISK SUMMARY
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In General -
At any time, your investment in a mutual fund may be worth more or less than the
price you originally paid for it. You may lose money by investing in any mutual
fund because: (i) the value of the investments it owns changes, sometimes
rapidly and unpredictably; (ii) the mutual fund is not successful in reaching
its goal because of its strategy or because it did not implement its strategy
properly; or (iii) unforeseen occurrences in the securities markets negatively
affect the mutual fund.
Although the Government Money Market and Money Market Portfolios seek to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in these Portfolios.
Interest Rate Risk -
Each Portfolio is subject to interest rate risk, which is the possibility that
the market prices of the Portfolio's investments may decline due to an increase
in market interest rates. Generally, the longer the maturity or duration of a
fixed-income security, the greater is the effect on its value when interest
rates increase.
Certain securities pay interest at variable or floating rates. Variable rate
securities reset at specified intervals, while floating rate securities reset
whenever there is a change in a specified index rate. In most cases, these reset
provisions reduce the effect of market interest rates on the value of the
security. However, some securities do not track the underlying index directly,
but reset based on formulas that can produce an effect similar to leveraging;
others may provide for interest payments that vary inversely with market rates.
The market prices of these securities may fluctuate significantly when interest
rates change.
Credit Risk -
Each Portfolio is also subject to credit risk. Credit risk is 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. Credit risk is broadly gauged by the credit ratings of the
securities in which each Portfolio invests. However, ratings are only the
opinions of the agencies issuing them and are not absolute guarantees as to
quality.
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Debt securities rated below Baa/BBB (or comparable) are deemed by the ratings
agencies to be speculative and may involve major risk of exposure to adverse
conditions. These ratings may indicate that the securities are highly
speculative and may be in default or in danger of default as to principal and
interest.
Not all government securities are backed by the full faith and credit of the
United States. Some are backed only by the credit of the issuing agency or
instrumentality. Accordingly, there is a chance of default on these securities.
Call Risk -
Many fixed income securities, especially those issued at high interest rates,
allow the issuer to repay them early. Issuers often exercise this right when
interest rates are low. Accordingly, holders of these callable securities may
not benefit fully from the increase in value that other fixed-income securities
experience when rates decline. Furthermore, the Portfolio will be forced to
reinvest the proceeds of the payoff at current yields, which are lower than
those paid by the security that was paid off.
Special Risks of High Yield Securities -
Securities rated below Baa/BBB, commonly known as junk bonds or high yield
securities, reflect a greater possibility that the issuers may be unable to make
timely payments of interest and principal and thus default. If this happens, or
is perceived as likely to happen, the values of those investments will usually
be more volatile. These securities may be less liquid than higher-rated
securities, which means a Portfolio may have difficulty selling them at times,
and may have to apply a greater degree of judgment in establishing a price.
Although Western Asset and WAGM consider credit ratings in making investment
decisions, they perform their own investment analysis and do not rely on ratings
assigned by the rating agencies. When a Portfolio buys lower rated debt, the
achievement of its goals depends more on the Advisers' ability than would be the
case if a Portfolio were buying investment grade debt.
Special Risks of Mortgage-Backed and Asset-Backed Securities -
Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and
mortgage-backed securities are paid off earlier than expected. Prepayments may
also occur on a scheduled basis or due to foreclosure. The effect on a
Portfolio's return is similar to that discussed above for call risk.
When market interest rates increase, the market values of mortgage-backed
securities decline. At the same time, however, mortgage refinancing slows, which
lengthens the effective maturities of these securities. As a result, the
negative effect of the rate increase on the market value of mortgage securities
is usually more pronounced than it is for other types of fixed-income
securities.
Certain Portfolios may also invest in asset-backed securities. Asset-backed
securities are structured like mortgage-backed securities, but instead of
mortgage loans or interests in mortgage loans, the underlying assets may include
such items as motor vehicle installment sales or installment loan contracts,
leases of various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed securities to
enforce its security interest in the underlying assets may be limited.
Asset-backed securities are subject to many of the same risks as mortgage-backed
securities.
Prepayments may cause losses on securities purchased at a premium. At times,
some of the mortgage-backed and asset-backed securities in which a Portfolio may
invest will have higher than market interest rates and therefore will be
purchased at a premium above their par value. Unscheduled prepayments, which are
made are par, will cause a Portfolio to experience a loss equal to any
unamortized premium. In addition, a reduction in prepayments may increase the
effective maturities of these securities, subjecting them to a greater risk of
decline in market value in response to rising interest rates than traditional
debt securities, and, therefore, potentially increasing the volatility of a
Portfolio.
Equity Securities -
Since the Enhanced Equity Portfolio may invest in equity securities, the
principal risks associated with that Portfolio include sudden, unpredictable
drops in value or long periods of decline in value. Equity securities may lose
value because of factors affecting the securities markets generally, an entire
industry or a particular company.
-8-
<PAGE>
Year 2000 -
Like other mutual funds (and most organizations around the world), the
Portfolios could be adversely affected by computer problems related to the year
2000. These could interfere with operations of the Portfolios, their Manager,
distributors or Advisers, or could impact companies in which the Portfolios
invest.
While no one knows if these problems will have any impact on the Portfolios or
on financial markets in general, the Manager and its affiliates are taking steps
to protect Portfolio investors. These include efforts to determine that the
problem will not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
Foreign Securities Risk -
Investments in foreign securities (including those denominated in U.S. dollars)
involve certain risks not typically associated with investments in domestic
issuers. The values of foreign securities are subject to economic and political
developments in the countries and regions where the companies operate, such as
changes in economic or monetary policies, and to changes in exchange rates.
Values may also be affected by restrictions on receiving the investment proceeds
from a foreign country.
In general, less information is publicly available about foreign companies than
about U.S. companies. Foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Some securities issued by foreign governments or their subdivisions, agencies
and instrumentalities may not be backed by the full faith and credit of the
foreign government. Even where a security is backed by the full faith and credit
of a foreign government, it may be difficult for a Portfolio to pursue its
rights against a foreign government in that country's courts. Some foreign
governments have defaulted on principal and interest payments.
In addition, a Portfolio's investments in foreign securities may be subject to
the risk of nationalization or expropriation of assets, imposition of currency
exchange controls or restrictions on the repatriation of foreign currency,
confiscatory taxation, political or financial instability and diplomatic
developments which could effect the value of a Portfolio's investments in
certain foreign countries. Dividends or interest on, or proceeds from the sale
of, foreign securities may be subject to foreign withholding taxes, and special
U.S. tax considerations may apply.
Emerging Markets Risk -
The risks of foreign investment are greater for investments in emerging markets.
Emerging market countries typically have economic and political systems that are
less fully developed, and can be expected to be less stable than those of more
advanced countries. Low trading volumes may result in a lack of liquidity and in
price volatility. Emerging market countries may have policies that restrict
investment by foreigners, or that prevent foreign investors from withdrawing
their money at will.
Because some of the Portfolios may invest a significant amount of their total
assets in emerging market securities, investors should be able to tolerate
sudden, sometimes substantial fluctuations in the value of their investments. An
investment in any Portfolio that invests in emerging market securities, which
includes the Western Asset High Yield, Non-U.S. Fixed Income and Global
Strategic Income Portfolios, should be considered speculative.
Currency Risk -
Because certain Portfolios may invest in securities denominated in foreign
currencies, their value can be affected by changes in the rates of exchange
between those currencies and the U.S. dollar. Currency exchange rates can be
volatile and affected by, among other factors, the general economics of a
country, the actions of the U.S. and foreign governments or central banks, the
imposition of currency controls, and speculation. A security may be denominated
in a currency that is different from the currency where the issuer is domiciled.
-9-
<PAGE>
Under normal market conditions the Portfolios may hedge a significant portion of
their currency risk, using a variety of techniques, including currency futures,
forwards, or options. However, these instruments may not always work as
intended, and in specific cases a Portfolio may be worse off than if had not
used a hedging instrument. For most emerging market currencies, there are not
suitable hedging instruments available.
Concentration and Non-Diversification -
A Portfolio concentrating a significant portion of its investments in a single
country, currency or industry will be more susceptible to factors adversely
affecting issuers within that country, currency or industry than would a more
diversified portfolio of securities.
The Western Asset Non-U.S. Fixed Income and Global Strategic Income Portfolios
are non-diversified, meaning each may invest a greater percentage of its total
assets in securities of any one issuer, or may invest in a smaller number of
different issuers, than it could if it were a "diversified" company under the
Investment Company Act. When the Portfolio's assets are invested in the
securities of a limited number of issuers, or in a limited number of countries
or currencies, the value of its shares will be more susceptible to any single
economic, political or regulatory event than shares of a more diversified fund.
Derivatives -
A Portfolio may engage in a variety of transactions using "derivatives," such as
futures, options, warrants and swaps. Derivatives are financial instruments
whose value depends upon, or is derived from, the value of something else, such
as one or more underlying investments, indexes or currencies. Derivatives may be
traded on organized exchanges, or in individually negotiated transactions with
other parties (these are known as "over the counter"). A Portfolio may use
derivatives both for hedging and non-hedging purposes. Although Western Asset
and WAGM have the flexibility to use these strategies, they may choose not to
for a variety of reasons, even under very volatile market conditions.
Derivatives involve special risks and costs and may result in losses to a
Portfolio. The successful use of derivatives requires sophisticated management
and a Portfolio will depend on Western Asset's and WAGM's ability to analyze and
manage derivatives transactions. The prices of derivatives may move in
unexpected ways, especially in abnormal market conditions. Some derivatives are
"leveraged" and therefore may magnify or otherwise increase investment losses to
a Portfolio. A Portfolio's use of derivatives may also increase the amount of
taxes payable by shareholders.
Other risks arise from the potential inability to terminate or sell derivatives
positions. A liquid secondary market may not always exist for a Portfolio's
derivatives positions at any time. In fact, many over-the-counter instruments
will not be liquid. Over-the-counter instruments also involve the risk that the
other party will not meet its obligations to a Portfolio.
Hedging -
The decision as to whether and to what extent a Portfolio will engage in hedging
transactions to hedge against such risks as credit risk, currency risk and
market risk will depend on a number of factors, including prevailing market
conditions, the composition of a Portfolio's portfolio and the availability of
suitable transactions. Accordingly, there can be no assurance that a Portfolio
will engage in hedging transactions at any given time or from time to time.
Turnover -
The investment strategies employed by the Portfolios often involve high turnover
rates. This results in higher trading costs and could cause a Portfolio to
realize higher levels of taxable gains.
Other Policies -
In addition to the main investment strategies described above, a Portfolio may
also make other types of investments, and therefore may be subject to other
risks. Some of these risks are described in the Portfolios' SAI.
At times Western Asset and WAGM may judge that market conditions make pursuing a
Portfolio's investment strategies inconsistent with the best interests of its
shareholders. Western Asset and WAGM then may temporarily use alternative
strategies that are mainly designed
-10-
<PAGE>
to limit a Portfolio's losses. Although Western Asset and WAGM have the
flexibility to use these strategies, it may choose not to for a variety of
reasons, even in very volatile market conditions. These strategies may cause a
Portfolio to miss out on investment opportunities, and may prevent a Portfolio
from achieving its goal.
Except for the investment objective of each of the Western Asset Core, Limited
Duration, Intermediate and Money Market Portfolios, the Directors may change a
Portfolio's investment objective, investment strategies and other policies
without shareholder approval.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The following information provides some indication of a Portfolio's risks. The
charts and tables show year-to-year changes in the performance of the
Institutional Class shares for the Western Asset Core, Western Asset
Intermediate and Western Asset Limited Duration Portfolios. The tables following
the charts compare each Portfolio's performance to that of broad measures of
market performance. No information is given on the Financial Intermediary Class
shares of these Portfolios because such Class has less than a full calendar year
of performance to report. However, the performance for this Class would be lower
for each Portfolio since this Class has higher expenses. In addition, there are
no charts and tables for the other Portfolios because they have no (or, in the
case of the Western Asset Core Plus and Western Asset Non-U.S. Fixed Income
Portfolios, less than a full calendar year of) performance to report. Of course,
a Portfolio's past performance is not an indication of future performance.
<TABLE>
<CAPTION>
CALENDAR-YEAR TOTAL RETURNS
CORE PORTFOLIO
<S> <C>
Best quarter: second quarter 1995, +6.91%
Worst quarter: first quarter 1994, -2.60%
More recent return information:
(January 1, 1999 - June 30, 1999) ___%
18.02 7.85 13.86 (4.33) 20.97 3.70 10.17 8.34
1991 1992 1993 1994 1995 1996 1997 1998
CALENDAR-YEAR TOTAL RETURNS
INTERMEDIATE PORTFOLIO
Best quarter: second quarter 1995, +5.17%
Worst quarter: first quarter 1996, -0.61%
More recent return information:
(January 1, 1999 - June 30, 1999) ___%
15.51 4.69 8.40 7.71
1995 1996 1997 1998
CALENDAR-YEAR TOTAL RETURNS
LIMITED DURATION PORTFOLIO
Best quarter: second quarter 1997, +2.36%
Worst quarter: fourth quarter 1998, +0.21%
More recent return information:
(January 1, 1999 - June 30, 1999) ___%
7.02 5.74
1997 1998
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1998)
Core Portfolio Portfolio Inception
1 Year 5 Years (September 4, 1990)
- --------------------------------------------------------------------------------------------------------
The Portfolio 8.34% 7.45% 9.89%
- --------------------------------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE>
Index*
- --------------------------------------------------------------------------------
* [index description]
Intermediate Portfolio Portfolio Inception
1 Year (July 1, 1994)
- --------------------------------------------------------------------------------
The Portfolio 7.71% 8.09%
- --------------------------------------------------------------------------------
Index *
- --------------------------------------------------------------------------------
* [index description]
Limited Duration Portfolio Portfolio Inception
1 Year (May 1, 1996)
- --------------------------------------------------------------------------------
The Portfolio 5.74% 6.70%
- --------------------------------------------------------------------------------
Index *
- --------------------------------------------------------------------------------
* [index description]
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Portfolio.
The examples following the tables are intended to help you compare the cost of
investing in a Portfolio with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
examples also assume that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Your actual costs may be higher
or lower.
- --------------------------------------------------------------------------------
WESTERN ASSET GOVERNMENT MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .20% .20%
12b-1 Fees None .10%
Other Expenses .15% .15%
---- ----
Total Operating Expenses .35% .45%
==== ====
Expense Reimbursement* (.05%) (.05%)
====== ======
Net Expenses .30% .40%
==== ====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 36 1 year $ 46
3 years $ 113 3 years $ 144
</TABLE>
-12-
<PAGE>
- --------------------------------------------------------------------------------
WESTERN ASSET MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .20% .20%
12b-1 Fees None .10%
Other Expenses .15% .15%
---- ----
Total Operating Expenses .35% .45%
==== ====
Expense Reimbursement* (.05%) (.05%)
Net Expenses .30% .40%
==== ====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 36 1 year $ 46
3 years $ 113 3 years $ 144
</TABLE>
- --------------------------------------------------------------------------------
WESTERN ASSET LIMITED DURATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .35% .35%
12b-1 Fees None .25%
Other Expenses .60% .60%
---- ----
Total Operating Expenses .75% 1.00%
==== =====
Expense Reimbursement* (.35%) (.35%)
Net Expenses .40% .65%
==== ====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 77 1 year $ 122
3 years $ 240 3 years $ 381
5 years $ 417 5 years $ 660
10 years $ 930 10 years $1,455
</TABLE>
-13-
<PAGE>
- --------------------------------------------------------------------------------
WESTERN ASSET INTERMEDIATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .40% .40%
12b-1 Fees None .25%
Other Expenses .12% .12%
---- ----
Total Operating Expenses .48% .73%
==== ====
Expense Reimbursement* (.03%) (.03%)
======
Net Expenses .45% .70%
==== ====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 49 1 year $ 75
3 years $ 154 3 years $ 233
5 years $ 269 5 years $ 406
10 years $ 604 10 years $ 906
</TABLE>
- --------------------------------------------------------------------------------
WESTERN ASSET INTERMEDIATE PLUS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .40% .40%
12b-1 Fees None .25%
Other Expenses .15% .15%
---- ----
Total Operating Expenses .55% .80%
==== ====
Expense Reimbursement* (.10%) (.10%)
Net Expenses .45% .70%
==== ====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 56 1 year $ 82
3 years $ 176 3 years $ 255
</TABLE>
-14-
<PAGE>
- --------------------------------------------------------------------------------
WESTERN ASSET CORE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .45% .45%
12b-1 Fees None .25%
Other Expenses .05% .05%
---- ----
Total Operating Expenses .50% .75%
==== ====
Expense Reimbursement* 0 0
Net Expenses .50% .75%
==== ====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 51 1 year $ 77
3 years $ 160 3 years $ 240
5 years $ 280 5 years $ 417
10 years $ 628 10 years $ 930
</TABLE>
- --------------------------------------------------------------------------------
WESTERN ASSET CORE PLUS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .45% .45%
12b-1 Fees None .25%
Other Expenses .20% .20%
---- ----
Total Operating Expenses .65% .90%
==== ====
Expense Reimbursement* (.15%) (.15%)
Net Expenses .50% .75%
==== ====
</TABLE>
-15-
<PAGE>
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 66 1 year $ 92
3 years $ 208 3 years $ 287
5 years $ 362 5 years $ 498
10 years $ 810 10 years $ 1,108
- --------------------------------------------------------------------------------
WESTERN ASSET HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .55% .55%
12b-1 Fees None .25%
Other Expenses .15% .15%
---- ----
Total Operating Expenses .70% .95%
==== ====
Expense Reimbursement* (.15%) (.15%)
Net Expenses .55% .80%
==== ====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 72 1 year $ 97
3 years $ 224 3 years $ 303
</TABLE>
- --------------------------------------------------------------------------------
WESTERN ASSET NON-U.S. FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .45% .45%
12b-1 Fees None .25%
Other Expenses .40% .40%
---- ----
Total Operating Expenses .85 1.10
==== ====
Expense Reimbursement* (.30%) (.30%)
Net Expenses .55% .80%
==== ====
</TABLE>
-16-
<PAGE>
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 87 1 year $ 112
3 years $ 271 3 years $ 350
5 years $ 471 5 years $ 606
10 years $ 1,049 10 years $ 1,340
- --------------------------------------------------------------------------------
WESTERN ASSET GLOBAL STRATEGIC INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .45% .45%
12b-1 Fees None .25%
Other Expenses .40% .40%
---- ----
Total Operating Expenses .85% 1.10%
==== =====
Expense Reimbursement* (.05%) (.05%)
Net Expenses .80% 1.05%
==== =====
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 87 1 year $ 112
3 years $ 271 3 years $ 350
</TABLE>
- --------------------------------------------------------------------------------
WESTERN ASSET ENHANCED EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INSTITUTIONAL FINANCIAL
CLASS INTERMEDIARY CLASS
----- ------------------
SHAREHOLDER FEES None None
(Fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .55% .55%
12b-1 Fees None .25%
Other Expenses .20% .20%
---- -----
Total Operating Expenses .75% 1.00%
===== =====
Expense Reimbursement* (.10%) (.10%)
Net Expenses .65% .90%
==== ====
</TABLE>
-17-
<PAGE>
FINANCIAL INTERMEDIARY
INSTITUTIONAL CLASS EXAMPLE CLASS EXAMPLE
--------------------------- -------------
1 year $ 77 1 year $ 102
3 years $ 240 3 years $ 318
* Reflects LMIA's contractual obligation to limit Portfolio expenses through
[date].
"Other expenses" are based on the one year period ended March 31, 1999 for the
Western Asset Limited Duration Portfolio, the Western Asset Intermediate
Portfolio and the Western Asset Core Portfolio, and on estimated amounts for the
current fiscal year in the case of each of the other Portfolios. As a result of
Rule 12b-1 fees, long-term shareholders of the Financial Intermediary Class may
pay more than the economic equivalent of the maximum sales charge permitted by
the National Association of Securities Dealers, Inc.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGER, ADVISERS AND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
LMIA serves as the investment manager to each Portfolio. Western Asset is the
investment adviser to each of the Portfolios other than the Western Asset
Non-U.S. Fixed Income Portfolio. With respect to the Western Asset Intermediate
Plus, Western Asset Core Plus, and Western Asset Global Strategic Income
Portfolios, Western Asset shares this responsibility with WAGM. WAGM also serves
as the investment adviser to the Western Asset Non-U.S. Fixed Income Portfolio.
The Portfolios are managed by the Manager. Each Portfolio pays the Manager a
monthly fee based on the average net assets of the Portfolio at the following
rates:
MANAGEMENT FEE
(ANNUAL PERCENTAGE OF
PORTFOLIO AVERAGE NET ASSETS)
- --------- -------------------
Western Asset Money Market Portfolio..................... 0.20%
Western Asset Government Money Market Portfolio.......... 0.20%
Western Asset Limited Duration Portfolio................. 0.35%
Western Asset Intermediate Portfolio..................... 0.40%
Western Asset Intermediate Plus Portfolio................ 0.40%
Western Asset Core Portfolio............................. 0.45%
Western Asset Core Plus Portfolio........................ 0.45%
Western Asset High Yield Portfolio....................... 0.55%
Western Asset Non-U.S. Fixed Income Portfolio............ 0.45%
Western Asset Global Strategic Income Portfolio.......... 0.45%
Western Asset Enhanced Equity Portfolio.................. 0.55%
The Manager is a Maryland corporation formed on February 20, 1998 and is a
wholly owned subsidiary of Legg Mason, Inc., a financial services holding
company. The Manager's address is 100 Light Street, Baltimore, Maryland 21202.
In order to assist it in carrying out its investment advisory responsibilities,
the Manager has retained the Advisers to render advisory services to the
Portfolios. The Manager pays the fees of the Advisers as follows:
-18-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[PORTFOLIO ADVISER ADVISORY FEE
- ---------- ------- ------------
Western Asset Money Market Portfolio Western Asset 0.15%
Western Asset Government Money Market Portfolio Western Asset 0.15%
Western Asset Limited Duration Portfolio Western Asset 0.30%
Western Asset Intermediate Portfolio Western Asset 0.35%
Western Asset Intermediate Plus Portfolio Western Asset/WAGM 0.35%
Western Asset Core Portfolio Western Asset 0.40%
Western Asset Core Plus Portfolio Western Asset/WAGM 0.40%
Western Asset High Yield Portfolio Western Asset 0.50%
Western Asset Non-U.S. Fixed Income Portfolio WAGM 0.40%
Western Asset Global Strategic Income Portfolio Western Asset/WAGM 0.40%
Western Asset Enhanced Equity Portfolio Western Asset 0.50%]
</TABLE>
EXPENSE LIMITATIONS. The Manager and Advisers have voluntarily agreed to waive
their fees and/or reimburse each Portfolio to the extent the Portfolio's
expenses (exclusive of taxes, interest, brokerage and other transaction expenses
and any other extraordinary expenses) exceed during any month an annual rate of
0.30% of the Portfolio's average daily net assets for such month for the Western
Asset Government Money Market and Western Asset Money Market Portfolios, 0.40%
of the Portfolio's average daily net assets for such month for the Western Asset
Limited Duration Portfolio, 0.45% of the Portfolio's average daily net assets
for such month for the Western Asset Intermediate and Western Asset Intermediate
Plus Portfolios, 0.50% of the Portfolio's average daily net assets for such
month for the Western Asset Core and Western Asset Core Plus Portfolios, 0.55%
of the Portfolio's average daily net assets for such month for the Western Asset
High Yield and Western Asset Non-U.S. Fixed Income Portfolios, 0.65% of the
Portfolio's average daily net assets for such month for the Western Asset
Enhanced Equity Portfolio, and 0.80% of the Portfolio's average daily net assets
for such month for the Western Asset Global Strategic Income Portfolio, [until
July 31, 2000.]
WESTERN ASSET. Western Asset, a wholly owned subsidiary of Legg Mason, Inc.,
acts as investment adviser to institutional accounts, such as corporate pension
plans, mutual funds and endowment funds, as well as to individual investors.
Total assets under management by Western Asset were approximately $49 billion
as of March 31, 1999. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, CA 91105.
WAGM. WAGM, a wholly owned subsidiary of Legg Mason, Inc., acts as investment
adviser to institutional accounts, such as corporate pension plans, mutual funds
and endowment funds, as well as to individual investors. Total assets under
management by WAGM were approximately $3.281 billion as of March 31, 1999. The
address of WAGM is 155 Bishopsgate, London, England.
PORTFOLIO MANAGERS. Neither Western Asset nor WAGM employs individual portfolio
managers to determine the investments of a Portfolio. Instead, the day-to-day
management of the Portfolios' investments will be the responsibility of their
respective investment strategy groups.
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
The business affairs of LM Institutional Fund Advisors I Inc. ("LMIFA I") are
managed under the direction of a Board of Directors, and the Directors of LMIFA
I are responsible for generally overseeing the conduct of each Portfolio's
business. Information about the Directors and executive officers of LMIFA I may
be found in the SAI.
The Board of Directors has retained the Manager and the Advisers to manage the
Portfolios' affairs, furnish a continuing investment program for the Portfolios
and make investment decisions on their behalf, subject to such policies as the
Directors may determine.
- --------------------------------------------------------------------------------
DISTRIBUTORS
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Legg Mason Wood Walker, Incorporated ("Legg Mason") is the distributor of each
Portfolio's shares. Legg Mason pays certain expenses in connection with the
offering of shares of each Portfolio, including any compensation to its
financial advisors, the printing and distribution of prospectuses, SAIs and
periodic reports used in connection with the offering to prospective investors,
and expenses relating
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to any supplementary sales literature or advertising. The Portfolios bear the
expenses of preparing, setting in type and mailing the prospectuses, SAIs and
periodic reports to existing shareholders.
Arroyo Seco, Inc. ("Arroyo Seco"), a wholly owned subsidiary of Western Asset,
is also authorized to offer the Portfolios' shares for sale to its customers.
The Portfolios make no payments to Arroyo Seco in connection with the offer or
sale of their shares, and Arroyo Seco does not collect any commissions or other
fees from customers in connection with the offer or sale of the Portfolios'
shares.
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EXPENSES
- --------------------------------------------------------------------------------
Each Portfolio pays its share of all expenses of LMIFA I that are not assumed by
the Manager, the relevant Adviser or other parties, including Directors',
auditing, legal, custodial, transfer agency and distribution fees (which are in
turn allocated to the Financial Intermediary Class of shares).
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PURCHASE OF SHARES
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The Portfolios offer two classes of shares: Institutional Class and Financial
Intermediary Class. Shares in the Financial Intermediary Class bear a 12b-1 fee.
See "Distribution Plans" below for more information.
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INITIAL INVESTMENT
- --------------------------------------------------------------------------------
Prior to or concurrent with the initial purchase of shares in any Portfolio,
each investor must open an account for that Portfolio by completing and signing
an Application and mailing it to LM Institutional Fund Advisors at the following
address: P.O. Box 17635, Baltimore, Maryland 21297-1635. The Portfolios have
established minimum investment criteria that vary depending upon which class of
shares you wish to purchase. For Institutional Class shares, investors must have
at least $50 million in assets and invest in the aggregate at least $1 million
in the portfolios of LMIFA I and the portfolios of LM Institutional Fund
Advisors II, Inc. For Financial Intermediary Class shares, investors must have
at least $30 million in assets and invest in the aggregate at least $1 million
in the portfolios of LMIFA I and the portfolios of LM Institutional Fund
Advisors II, Inc. The Portfolios reserve the right to revise the minimum
investment requirement and may waive it in their sole discretion.
A purchase order, together with payment in proper form, received by Boston
Financial Data Services (the "Transfer Agent" or "BFDS") prior to the close of
regular trading on the Exchange (ordinarily 4:00 p.m., Eastern time) ("close of
the Exchange") will be effected at that day's net asset value. An order received
after the close of the Exchange will generally be effected at the net asset
value determined on the next business day. However, orders received by certain
retirement plans and other financial intermediaries by the close of the Exchange
and communicated to the Transfer Agent by 9:00 a.m., Eastern time, on the
following business day will be effected at the net asset value determined on the
prior business day.
Purchases of shares can be made by wiring federal funds to State Street Bank and
Trust Company. Purchases of shares of the Western Asset Money Market Portfolio
or the Western Asset Government Money Market Portfolio may ONLY be made by
federal funds wire. Before wiring federal funds, the investor must first
telephone the Portfolio at 1-888-42-LMIFA to receive instructions for wire
transfer. On the telephone, the following information will be required:
shareholder name; name of the person authorizing the transaction; shareholder
account number; name of the Portfolio and class of shares to be purchased;
amount being wired; and name of the wiring bank.
Funds should be wired through the Federal Reserve System to:
State Street Bank and Trust Company
ABA #011-000-028 DDA #99046096
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LM Institutional Fund Advisors [insert name of Portfolio] [Insert your account
name and number]
The wire should state that the funds are for the purchase of shares of a
specific Portfolio and include the account name and number. With respect to
Portfolios whose policy is to declare dividends daily, if a purchase order for
shares is received prior to 12:00 noon, Eastern time, and payment in federal
funds is received by the Transfer Agent by the close of the federal funds wire
on the day the purchase order is received, dividends will accrue starting that
day. If a purchase order is received after 12:00 noon, Eastern time, and payment
in federal funds is received by the Transfer Agent by the close of the federal
funds wire on the day the purchase order is received, or as otherwise agreed to
by the relevant Portfolio, the order will be effected at that day's net asset
value, but dividends will not begin to accrue until the following business day.
Shares may also be purchased and paid for by the contribution of eligible
portfolio securities, subject in each case to approval by the Manager. Approval
will depend on, among other things, the nature and quality of the securities
offered and the current needs of the Portfolio in question. Securities offered
in payment for shares will be valued in the same way and at the same time the
Portfolio values its portfolio securities for purposes of determining net asset
value. See "Net Asset Value," below. Investors who wish to purchase Portfolio
shares through the contribution of securities should contact the Portfolio at
1-888-42-LMIFA for instructions. Investors should also realize that at the time
of contribution they may be required to recognize a gain or loss for tax
purposes on securities contributed. The Portfolio has full discretion to reject
any securities offered as payment for shares. As described below, each Portfolio
may offer Financial Intermediary Class shares that are offered primarily through
financial intermediaries. Each Portfolio may pay financial intermediaries for
their services out of that class's assets pursuant to the class's distribution
plan or otherwise. Legg Mason and its affiliates (including the Manager and the
Advisers) may also from time to time, at their own expense, make payments to
financial intermediaries that sell shares of the Portfolios or to other parties
in connection with the sale of shares. If investors effect transactions through
a broker or agent, investors may be charged a fee by that broker or agent.
Any shares purchased or received as a distribution will be credited directly to
the investor's account.
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ADDITIONAL INVESTMENTS
- --------------------------------------------------------------------------------
Additional investments may be made at any time at the relevant net asset value
for that class by following the procedures outlined above. Investors should
always furnish a shareholder account number when making additional purchases.
- --------------------------------------------------------------------------------
OTHER PURCHASE INFORMATION
- --------------------------------------------------------------------------------
Purchases will be made in full and fractional shares. In the interest of economy
and convenience, certificates for shares will not be issued.
Each Portfolio and Distributor reserves the right, in its sole discretion, to
suspend the offering of shares or to reject any purchase order, in whole or in
part, when, in the judgment of management, such suspension or rejection is in
the best interests of the Portfolio; to waive the minimum initial investment for
certain investors; and to redeem shares if information provided in the
Application should prove to be incorrect in any manner judged by a Portfolio to
be material (e.g., in a manner such as to render the shareholder ineligible to
purchase shares of a Portfolio). A Portfolio may suspend the offering of shares
at any time and resume it at any time thereafter.
Shares of the Portfolios may not be qualified or registered for sale in all
States. Prospective investors should inquire as to whether shares of a
particular Portfolio are available for offer and sale in their State of
residence. Shares of the Portfolio may not be offered or sold in any State
unless registered or qualified in that jurisdiction or unless an exemption from
registration or qualification is available.
Purchases and sales of Portfolio shares should be made for long-term investment
purposes only. Each Portfolio reserves the right to restrict purchases of shares
(including exchanges) when a pattern of frequent purchases and sales made in
response to short-term fluctuations in share price appears evident.
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- --------------------------------------------------------------------------------
RETIREMENT PLANS
- --------------------------------------------------------------------------------
Shares of the Portfolios are available for purchase by retirement plans,
including 401(k) plans, 403(b) plans and Individual Retirement Accounts
("IRAs"). The administrator of a plan or employee benefits office can provide
participants or employees with detailed information on how to participate in the
plan and how to elect a Portfolio as an investment option. Participants in a
retirement or savings plan may be permitted to elect different investment
options, alter the amounts contributed to the plan, or change how contributions
are allocated among investment options in accordance with the plan's specific
provisions. The plan administrator or employee benefits office should be
consulted for details. For questions about participant accounts, participants
should contact their employee benefits office, the plan administrator, or the
organization that provides recordkeeping services for the plan. Investors who
purchase shares through retirement plans should be aware that the plan
administrator may aggregate purchase and redemption orders of participants in
the plan. Therefore, there may be a delay between the time the investor places
an order with the plan administrator and the time the order is forwarded to LMIA
or the Transfer Agent for execution.
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION CHANGES
- --------------------------------------------------------------------------------
Changes in registration or account privileges may be made in writing to the
Portfolio. Signature guarantees may be required. See "Signature Guarantee"
below.
All correspondence must include the account number and must be sent to:
LM Institutional Fund Advisors P.O. Box 17635 Baltimore, Maryland 21297-1635
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Board of Directors has adopted Distribution Plans pursuant to Rule 12b-1
under the 1940 Act with respect to shares of the Financial Intermediary Class of
each Portfolio. Under the terms of each Plan, a Portfolio is permitted to pay,
out of the assets of the Financial Intermediary Class of the Portfolio, in an
amount up to 0.40% on an annual basis of the average daily net assets of that
class, Legg Mason, financial intermediaries and other parties that provide
services in connection with or are otherwise involved in the distribution of
shares or administration of plans or programs that use Portfolio shares as their
funding medium, and to reimburse certain other distribution-related expenses and
payments. Payments under the Plans are currently limited to an annual rate of
.25% of average daily net assets (.10% for the Western Asset Money Market
Portfolio and the Western Asset Government Money Market Portfolio). For more
information regarding the Plans and their terms, see the SAI.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Portfolio shares may be redeemed through three methods: (1) by sending a written
request for redemption to LM Institutional Fund Advisors at P.O. Box 17635,
Baltimore, Maryland 21297-1635; (2) by calling the Portfolio at 1-888-42-LMIFA;
or (3) by wire communication with the Transfer Agent. In each case, the investor
should first notify the Portfolio at 1-888-42-LMIFA of the intention to redeem.
No charge is made for redemptions. Shareholders who wish to be able to redeem by
telephone or wire communication must complete an authorization form in advance.
Redemptions over $10,000,000 may be initiated by telephone, but must be
confirmed in writing prior to processing. With respect to telephone redemptions
or transfers, the Transfer Agent will process orders based on instructions from
a shareholder, or any person claiming to act as his or her representative, who
can provide it with his or her account registration and address as it appears on
its records. The Transfer Agent will employ these and other reasonable
procedures to confirm that instructions communicated by telephone are genuine;
if it fails to employ reasonable procedures, the Transfer Agent may be liable
for any losses due to unauthorized or fraudulent instructions.
Upon receipt of a request in good order for redemption before the close of the
Exchange on any day when the Exchange is open, the
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<PAGE>
Transfer Agent will redeem Portfolio shares at that day's net asset value per
share. Requests for redemption received by the Transfer Agent after the close of
the Exchange will be executed at the net asset value next determined. However,
orders received by certain retirement plans and other financial intermediaries
by the close of the Exchange and communicated to the Transfer Agent by 9:00
a.m., Eastern time, on the following business day will be effected at the net
asset value determined on the prior business day. The Portfolios may refuse to
effect redemption requests during periods permitted by the federal securities
laws.
Requests for redemption should indicate:
1. The number of shares or dollar amount to be redeemed and the investor's
shareholder account number;
2. The investor's name and the names of any co-owner of the account, using
exactly the same name or names used in establishing the account;
3. Proof of authorization to request redemption on behalf of any co-owner
of the account (please contact the Portfolio for further details); and
4. The name, address, and account number to which the redemption payment
should be sent.
Payment of the redemption price normally will be made by wire the next business
day after receipt of a redemption request in good order. However, each Portfolio
reserves the right to postpone the payment date when the Exchange is closed,
when trading is restricted, or during other periods as permitted by federal
securities laws, or to take up to seven days to make payment upon redemption if
the Portfolio involved could be adversely affected by immediate payment.
Redemption proceeds may also be paid in kind at the discretion of the Portfolio.
Shareholders who receive a redemption in kind may incur costs to dispose of such
securities.
Shareholders of some investment companies have experienced difficulty contacting
their funds by telephone during periods of intense market activity. Shareholders
who are unable to contact a Portfolio by telephone and wish to make a redemption
should follow the instructions for redeeming by mail or by wire.
Other supporting legal documents, such as copies of the trust instrument or
power of attorney, may be required from corporations or other organizations,
fiduciaries or persons other than the shareholder of record making the request
for redemption or repurchase. If you have a question concerning the sale or
redemption of shares, please contact the Portfolio by calling 1-888-42-LMIFA.
Any Portfolio may elect to close any shareholder account with a current value of
less than $1 million by redeeming all of the shares in the account and mailing
the proceeds to the investor. If a Portfolio elects to redeem the shares in an
account, the shareholder will be notified that the account is below $1 million
and will be allowed 30 days in which to make an additional investment in order
to avoid having the account closed. Shares will be redeemed at the net asset
value calculated on the day of redemption. Any Portfolio may change the $1
million minimum account balance from time to time without notice to
shareholders.
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SIGNATURE GUARANTEE
- --------------------------------------------------------------------------------
When a signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and guaranteed by any of the following
entities: U.S. banks, foreign banks having a U.S. correspondent bank, credit
unions, savings associations, U.S. registered dealers and brokers, municipal
securities dealers and brokers, government securities dealers and brokers,
national securities exchanges, registered securities associations and clearing
agencies (each an "Eligible Guarantor Institution"). Each Portfolio and its
agents reserve the right to reject any signature guarantee pursuant to written
signature guarantee standards or procedures, which may be revised in the future
to permit them to reject signature guarantees from Eligible Guarantor
Institutions that do not, based on credit guidelines, satisfy such written
standards or procedures. Any Portfolio may change the signature guarantee
requirements from time to time without prior notice to shareholders.
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<PAGE>
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders in any Portfolio may exchange their shares for shares of the same
class of any of the other Portfolios or of any of the portfolios offered by LM
Institutional Fund Advisors II, Inc., provided that the shares of that class are
being offered at the time of the proposed exchange. Investments by exchange are
made at the per share net asset values next determined after the order for
exchange is received in good order.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where a Portfolio believes doing so would be
in its best interest, the Portfolio reserves the right to revise or terminate
the exchange privilege, limit the amount or number of exchanges or reject any
exchange. For further information concerning the exchange privilege, or to make
an exchange, please contact the Portfolio at 1-888-42-LMIFA.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value per share of each class of shares is determined daily for each
Portfolio as of the close of regular trading on the Exchange (normally 4:00
p.m., Eastern time), on every day that the Exchange is open, by subtracting the
Portfolio's liabilities attributable to a given class of shares from its total
assets attributable to the class and dividing the result by the number of shares
of that class outstanding. Net asset value will not be determined on days on
which the Exchange is closed.
Except for the Western Asset Money Market Portfolio and the Western Asset
Government Money Market Portfolio, portfolio securities and other assets for
which market quotations are readily available are valued at current market
value. Current market value means the last sale price of the day for a
comparable position, or, in the absence of any such sales, the mean between
representative bid and asked prices obtained from a quotation reporting system.
Securities with remaining maturities of 60 days or less are generally valued at
amortized cost. Fixed income securities, including those to be purchased under
firm commitment agreements, are normally valued on the basis of quotations
obtained from brokers and dealers or pricing services which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. Certain fixed income securities for which
daily market quotations are not readily available may be valued with reference
to fixed income securities whose prices are more readily available and whose
durations are comparable to those of the securities being valued.
Other assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Directors or persons
acting at their direction. The values of foreign securities quoted in foreign
currencies are translated into U.S. dollars at current exchange rates or at such
other rates as the Directors or persons acting at their direction may determine
in computing net asset value.
Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the Exchange and values of
foreign investments will be determined as of the earlier closing of such
exchanges and securities markets. However, events affecting the values of such
foreign securities may occasionally occur between the earlier closings of such
exchanges and securities markets and the closing of the Exchange which will not
be reflected in the computation of the net asset value. If an event materially
affecting the value of such foreign securities occurs during such period, then
such securities will be valued at fair value as determined in good faith by the
Directors or persons acting at their direction.
The Western Asset Money Market Portfolio and the Western Asset Government Money
Market Portfolio each attempts to maintain a per share net asset value of $1.00
by using the amortized cost method of valuation as permitted by SEC Rule 2a-7.
Neither Portfolio can guarantee that the net asset value will always remain at
$1.00 per share.
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DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Western Asset Money Market Portfolio and the Western Asset Government Money
Market Portfolio declare as a dividend at the close of regular trading on the
Exchange each business day, to shareholders of record as of 12:00 noon, Eastern
Time, that day, substantially all of their net investment income since the prior
business day's dividend. The Western Asset Money Market Portfolio and the
Western Asset Government Money Market Portfolio pay dividends monthly. The other
Portfolios declare and pay dividends quarterly out of their net investment
income for that quarter. Distributions of net realized capital gains are made
annually.
Shareholders may elect to receive dividends and distributions in one of four
ways:
1) Receive both dividends and other distributions in shares of the same
class of the distributing Portfolio;
2) Receive dividends in cash and other distributions in shares of the
same class of the distributing Portfolio;
3) Receive dividends in shares of the same class of the distributing
Portfolio and other distributions in cash; or
4) Receive both dividends and other distributions in cash.
If no election is made, both dividends and other distributions are credited to a
shareholder's Portfolio account in shares (of the same class as the shares
already held) at the net asset value of the shares determined as of the close of
the Exchange on the reinvestment date.
For the Western Money Market Portfolio and the Western Asset Government Money
Market Portfolio, reinvestment of dividends and other distributions occurs on
the payment date. A shareholder who redeems all shares in the Western Asset
Money Market Portfolio or the Western Asset Government Money Market Portfolio
will receive all dividends and other distributions declared for that monthly
cycle prior to the redemption date (i.e., all dividends and other distributions
from the first day of that monthly cycle, if invested on that first day, to the
date of the redemption). For the other Portfolios, reinvestment occurs on the
ex-dividend date. An election to receive dividends or other distributions in
cash rather than additional shares may be made by notifying the Portfolio in
writing.
If a shareholder has elected to receive dividends and/or other distributions in
cash and the postal or other delivery service is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks.
The Directors reserve the right to revise the dividend policy or postpone the
payment of dividends if warranted in their judgment due to unusual
circumstances, such as an unexpected large expense, loss or fluctuation in net
asset value.
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TAX INFORMATION
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements necessary for it
to be relieved of federal taxes on income and gains it distributes to
shareholders. Each Portfolio will distribute substantially all its net
investment income and net realized capital gains to its shareholders on a
current basis.
Distributions from a Portfolio (whether paid in cash or reinvested in shares of
the Portfolio) will be taxable to shareholders (other than IRAs, other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Distributions of net capital gains (that is, the excess of net gains from
capital assets held for more than one year over net losses from capital assets
held for not more than one year) will be taxable as long-term capital gains.
Special tax rules apply to investments through defined contributions plans and
other tax-qualified plans. Shareholders should consult their tax adviser to
determine the suitability of shares of a Portfolio as an investment through such
plans and the precise effect of an investment on their particular tax situation.
To the extent distributions consist of interest from securities of the U.S.
Government and certain of its agencies and instrumentalities, they may be exempt
from state and local income taxes. Interest from obligations that are merely
guaranteed by the U.S. Government or
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<PAGE>
one of its agencies, such as mortgage participation certificates guaranteed by
GNMA, generally is not entitled to this exemption. Although there is no
assurance that any such state and local exemptions will be available,
shareholders will be advised of the portion of Portfolio distributions that
might qualify for such an exemption.
A Portfolio's investments in foreign securities may be subject to withholding
taxes at the source on dividend or interest payments. In that case, a
Portfolio's yield on those securities would be decreased.
If at the end of a Portfolio's fiscal year more than 50% of the value of its
total assets represents securities of foreign corporations, the Portfolio may
make an election to treat any foreign taxes paid by it as paid by its
shareholders. In this case, shareholders who are U.S. citizens, U.S.
corporations and, in some cases, U.S. residents generally will be required to
include in U.S. taxable income their pro rata share of such taxes, but may then
generally be entitled to claim a foreign tax credit or deduction (but not both)
for their share of such taxes. A shareholder's ability to claim a foreign tax
credit or deduction in respect of foreign taxes paid by a Portfolio may be
subject to certain limitations (including a holding period requirement,
applicable to both a Portfolio and its shareholders, imposed by the Taxpayer
Relief Act of 1997).
A Portfolio's transactions in foreign currencies and hedging activities may give
rise to ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of a Portfolio's income
distributions to constitute a return of capital for tax purposes or require a
Portfolio to make distributions exceeding book income to qualify as a regulated
investment company for tax purposes.
Investment in an entity that qualifies as a "passive foreign investment company"
under the Code could subject a Portfolio to a U.S. federal income tax or other
charge on certain "excess distributions" with respect to the investment, and on
the proceeds from disposition of the investment.
Early each year each Portfolio will notify its shareholders of the amount and
tax status of distributions paid during that year.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Shareholders are urged to consult their tax advisers
with respect to the effects of this investment on their particular tax situation
(including possible liability for state and local taxes).
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolios' recent financial performance. Certain information reflects financial
results for a single fund share. The total returns represent the rate that an
investor would have earned or lost on an investment in the Portfolios, assuming
reinvestment of all dividends and distributions. This information has been
derived from the fund's financial statements, which have been audited by_______.
Its report and the Portfolios' financial statements are included in the
Portfolios' annual report to shareholders, which is available upon request.
[To be provided]
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LM INSTITUTIONAL FUND ADVISORS I
CUSTODIAN
State Street Bank and Trust Co.
P.O. Box 1713
Boston, Massachusetts 02105
TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
P.O. Box 953
Boston, Massachusetts 02103
COUNSEL
Ropes & Gray
One International Place
Boston, Massachusetts 02110
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
250 W. Pratt Street
Baltimore, Maryland 21201
DISTRIBUTORS
Legg Mason Wood Walker, Incorporated 100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
Arroyo Seco, Inc.
117 East Colorado Boulevard
Pasadena, California 91105
For investors who want more information about LM Institutional Advisors Fund I,
Inc. ("LMIFA I"), the following documents are available upon request.
ANNUAL REPORTS
The annual and semi-annual reports of LMIFA I provide additional information
about its or the Portfolios' investments. In the annual report, you will also
find a discussion of the market conditions and investment strategies that
significantly affected the performance of LMIFA I during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains additional detailed information about LMIFA I and is
incorporated by reference into (legally part of) this prospectus.
Investors can receive free copies of these materials, request other information
about the Funds and make shareholder inquiries by calling 1-888-42-LMIFA
(1-800-425-6432).
You can review, for a fee, the reports of the Portfolios and SAI by writing to
the SEC's Public Reference Section, Washington, D.C. 20459-6009, or by calling
the SEC at 1-800-SEC-0330. You can get copies of this information for free on
the SEC's Internet site at http://www.sec.gov. The Portfolios' Investment
Company Act of 1940 file number is 811-06110.
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<PAGE>
LM INSTITUTIONAL FUND ADVISORS I, INC. August 1, 1999
- --------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
LM Institutional Fund Advisors I, Inc. (the "Fund") is a no-load, open-end
management investment company. LM Institutional Fund Advisors I, Inc. currently
consists of eleven separate professionally managed investment portfolios. These
eleven portfolios are described in this Statement of Additional Information
("SAI"). Each of these portfolios is referred to herein as a "Portfolio".
This SAI is not a prospectus and should be read in conjunction with the
Prospectus for the Portfolios, dated August 1, 1999, which has been filed with
the Securities and Exchange Commission ("SEC"). Copies of the Portfolios'
Prospectus are available without charge from Legg Mason Wood Walker, Inc. at
1-800-822-5544.
<PAGE>
TABLE OF CONTENTS
[To be Generated]
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DEFINITIONS
"Adviser" means the investment advisory firm that manages a Portfolio's assets.
Western Asset and WAGM are each Advisers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Distributor" means the broker-dealer that is responsible for the distribution
or sale of the Fund's shares. Legg Mason is the Fund's Distributor. Arroyo
Secco, Inc. also serves as a Distributor to the Fund.
"Exchange" means the New York Stock Exchange.
"Fundamental Investment Limitation" means an investment limitation of a
Portfolio that may be changed only with the affirmative vote of the lesser of
(a) more than 50% of the outstanding shares of the relevant Portfolio or (b) 67%
or more of the shares of the relevant Portfolio present at a shareholders'
meeting if more than 50% of the outstanding shares of that Portfolio are
represented at the meeting in person or by proxy. Only those policies or
limitations expressly designated as such are fundamental investment limitations.
All other policies and restrictions may be changed without shareholder approval.
"Independent Director" means a Director of the Fund who is not an "interested
person" (as defined in the 1940 Act) of the Fund.
"Legg Mason" means Legg Mason Wood Walker, Inc.
"Manager" means LM Institutional Fund Advisors, Inc., 100 Light Street,
Baltimore, MD 21202.
"1940 Act" means the Investment Company Act of 1940, as amended.
"NRSROs" means nationally recognized (or foreign) statistical rating
organizations, including Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P").
"Plan" means the Fund's Distribution and Shareholder Services Plan.
"SEC" means the Securities and Exchange Commission.
"12B-1 Director" means a Director of the Fund who is an Independent Director and
who has no direct or indirect financial interest in the operation of the Fund's
Plan or the Fund's Underwriting Agreement.
"WAGM" means Western Asset Global Management Limited, 155 Bishopsgate, London,
England. WAGM is the Adviser to the Western Asset Non-U.S. Fixed Income
Portfolio and to the non-U.S. portion of the Western Asset Intermediate Plus
Portfolio, the Western Asset Core Plus Portfolio, and the Western Asset Global
Strategic Income Portfolio.
"Western Asset" means Western Asset Management Company, 117 East Colorado
Boulevard, Pasadena, CA 91105. Western Asset is the Adviser to each Portfolio
other than the Western Asset Non-U.S. Fixed Income Portfolio and to the U.S.
portion of the Western Asset Global Strategic Income Portfolio.
ADDITIONAL INFORMATION ABOUT
INVESTMENT LIMITATIONS AND POLICIES
Each Portfolio has adopted certain fundamental investment limitations that are
set forth below.
The Western Asset Limited Duration Portfolio may not:
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(1) Borrow money or issue senior securities, except that it may borrow
from banks or enter into reverse repurchase agreements, provided that,
immediately after such borrowing, the total amount borrowed by the
Portfolio, including reverse repurchase agreements, does not exceed 33
1/3% of its total assets (including the amount borrowed) less
liabilities (other than the borrowings); and provided further that it
may enter into transactions in options, futures, options on futures and
forward foreign currency contracts as described in the Prospectus and
this Statement of Additional Information;
(2) Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Portfolio, except as may be necessary in connection with permitted
borrowings, provided that this limitation does not prohibit escrow,
collateral or margin arrangements in connection with the Portfolio's
use of options, futures contracts, options on futures contracts,
forward foreign currency contracts, when-issued securities or reverse
repurchase agreements;
(3) Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, or buy 10% or more of all the securities
of any one issuer, except that up to 25% of the Portfolio's total
assets may be invested without regard to this limitation, and provided
that this limitation does not apply to securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities;
(4) Purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions and except that the
Portfolio may make margin deposits in connection with its use of
options, futures contracts, options on futures contracts and forward
foreign currency contracts;
(5) Invest 25% or more of its total assets (taken at market value) in
any one industry, provided that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or repurchase agreements thereon; and provided
further that, for purposes of this limitation, U.S. branches of foreign
banks are considered U.S. banks if they are subject to substantially
the same regulation as domestic banks, and foreign branches of U.S.
banks are considered U.S. banks if the domestic parent would be
unconditionally liable in the event that the foreign branch failed to
pay on the instruments for any reason;
(6) Purchase or sell commodities or commodity contracts, except that
the Portfolio may purchase or sell futures on fixed income instruments
and foreign currencies and options thereon, may engage in transactions
in foreign currencies and may purchase or sell options on securities
and on foreign currencies and forward foreign currency contracts;
(7) Underwrite securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio may be deemed an underwriter under federal securities laws;
(8) Make loans, except loans of portfolio securities and except to the
extent that the purchase of a portion of an issue of publicly
distributed notes, bonds or other evidences of indebtedness or deposits
with banks and other financial institutions may be considered loans;
(9) Purchase or sell real estate, provided that the Portfolio may
invest in securities secured by, or issued by companies that invest in,
real estate or interests therein, including real estate investment
trusts; or
(10) Invest in oil, gas or mineral-related programs or leases, provided
that the Portfolio may invest in securities issued by companies that
engage in such activities.
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The Western Asset Core Portfolio may not:
(1) Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Portfolio, except as may be necessary in connection with permitted
borrowings, provided that this limitation does not prohibit escrow,
collateral or margin arrangements in connection with the Portfolio's
use of options, futures contracts, options on futures contracts,
forward foreign currency contracts, when-issued securities or reverse
repurchase agreements;
(2) Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, or buy 10% or more of all the securities
of any one issuer, except that up to 25% of the Portfolio's total
assets may be invested without regard to this limitation, and provided
that this limitation does not apply to securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities;
(3) Purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions and except that the
Portfolio may make margin deposits in connection with its use of
options, futures contracts, options on futures contracts and forward
foreign currency contracts;
(4) Invest 25% or more of its total assets (taken at market value) in
any one industry, provided that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or repurchase agreements thereon; and provided
further that, for purposes of this limitation, U.S. branches of foreign
banks are considered U.S. banks if they are subject to substantially
the same regulation as domestic banks, and foreign branches of U.S.
banks are considered U.S. banks if the domestic parent would be
unconditionally liable in the event that the foreign branch failed to
pay on the instruments for any reason;
(5) Purchase or sell commodities or commodity contracts, except that
the Portfolio may purchase or sell futures on fixed income instruments
and foreign currencies and options thereon, may engage in transactions
in foreign currencies and may purchase or sell options on securities
and on foreign currencies and forward foreign currency contracts;
(6) Underwrite securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio may be deemed an underwriter under federal securities laws;
(7) Purchase or sell real estate, provided that the Portfolio may
invest in securities secured by, or issued by companies that invest in,
real estate or interests therein, including real estate investment
trusts; or
(8) Invest in oil, gas or mineral-related programs or leases, provided
that the Portfolio may invest in securities issued by companies that
engage in such activities.
In addition, the Western Asset Core Portfolio may:
(9) Lend or borrow money or issue senior securities to the fullest
extent permitted by the 1940 Act, the rules or regulations thereunder
or applicable orders of the SEC, as such statute, rules, regulations or
orders may be amended from time to time.
Each Portfolio, other than the Western Asset Core Portfolio and the
Western Asset Limited Duration Portfolio and, with respect to
limitations numbered (2) and (3), other than the Western Asset Money
Market Portfolio and the Western Asset Intermediate Portfolio, may:
(1) lend or borrow money or issue senior securities to the fullest
extent permitted by the 1940 Act, the rules or regulations thereunder
or applicable orders of the SEC, as such statute, rules, regulations or
orders may be amended from time to time.
(2) not concentrate investments in a particular industry or group of
industries as concentration is defined under the 1940 Act, the rules or
regulations thereunder or applicable orders of the SEC, as such
statute, rules, regulations or orders may be amended from time to time.
Securities issued or guaranteed by the U.S. Government, or its agencies
or instrumentalities will not be considered to represent an industry.
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(3) underwrite securities to the fullest extent permitted by the 1940
Act, the rules or regulations thereunder or applicable orders of the
SEC, as such statute, rules, regulations or orders may be amended from
time to time.
(4) purchase or sell commodities, commodities contracts, futures
contracts, options, forward contracts or real estate to the fullest
extent permitted by the 1940 Act, the rules or regulations thereunder
or applicable orders of the SEC, as such statute, rules, regulations or
orders may be amended from time to time.
In addition, the Western Asset Money Market Portfolio and the Western
Asset Intermediate Portfolio may not:
(5) Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, or buy 10% or more of all the securities
of any one issuer, except that up to 25% of the Portfolio's total
assets may be invested without regard to this limitation, and provided
that this limitation does not apply to securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities;
(6) Invest 25% or more of its total assets (taken at market value) in
any one industry, provided that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or repurchase agreements thereon; and provided
further that investments by the Western Asset Money Market Portfolio in
U.S. bank instruments (such as bankers' acceptances, certificates of
deposits and time or demand deposits) shall not be considered
investments in any one industry for purposes of this policy; and
provided further that, for purposes of this limitation, U.S. branches
of foreign banks are considered U.S. banks if they are subject to
substantially the same regulation as domestic banks, and foreign
branches of U.S. banks are considered U.S. banks if the domestic parent
would be unconditionally liable in the event that the foreign branch
failed to pay on the instruments for any reason;
(7) Underwrite securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio may be deemed an underwriter under federal securities laws.
Additional Information
With respect to fundamental investment limitations numbered (1) through (4) of
each Portfolio, other than the Western Asset Limited Duration Portfolio and the
Western Asset Core Portfolio, and fundamental investment limitation numbered (9)
of the Western Asset Core Portfolio, the fundamental investment limitations set
forth above limit a Portfolio's ability to engage in certain investment
practices and purchase securities to the extent permitted by, or consistent
with, the 1940 Act. Relevant limitations of the 1940 Act are described below,
which are based either on the 1940 Act itself, the rules or regulations
thereunder, or interpretations promulgated by the SEC. As such, these
limitations of the 1940 Act are not "fundamental," that is, the limitations will
change as the statute, rules, regulations or interpretations change, and no
shareholder vote will be required or sought.
Fundamental investment restriction (1). The 1940 Act presently limits a
Portfolio's ability to borrow up to one-third of the value of its total assets.
Borrowing by a Portfolio allows it to leverage its portfolio, which exposes it
to certain risks. Leveraging increases the effect of any increase or decrease in
the value of portfolio securities on a Portfolio's net asset value, and money
borrowed will be subject to interest costs (which may include commitment fees
and/or the cost of maintaining minimum average balances) which may or may not
exceed the return from the securities purchased with borrowed funds.
The 1940 Act also restricts the ability of any mutual fund to lend. Under the
1940 Act, a Portfolio may only make loans if expressly permitted to do so by the
Portfolio's investment policies, and a Portfolio may not make loans to persons
who control or are under common control with the Portfolio. Thus, the 1940 Act
effectively prohibits a Portfolio from making loans to certain persons when
conflicts of interest or undue influence are most likely present. The Portfolios
may, however, make other loans which if made would expose shareholders to
additional risks, such as the failure of the other party to repay the loan.
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The ability of a mutual fund to issue senior securities is severely
circumscribed by complex regulatory constraints under the 1940 Act that
restrict, for instance, the amount, timing, and form of senior securities that
may be issued. Certain portfolio management techniques such as the purchase of
securities on margin, short sales, or the writing of puts on portfolio
securities, may be considered senior securities unless appropriate steps are
taken to segregate a Portfolio's assets or otherwise cover its obligations.
Fundamental investment restriction (2). "Concentration" is interpreted under the
1940 Act to mean investment of 25% or more of a Portfolio's total assets in a
single industry. If a Portfolio were to "concentrate" its investments in a
particular industry, investors would be exposed to greater risks because the
Portfolio's performance would be largely dependent on that industry's
performance. None of the Portfolios has reserved the right to concentrate in any
industry. For purposes of this limitation, the Portfolios do not consider
certificates of deposit or banker's acceptances issued by domestic branches of
U.S. or foreign banks to be in a single industry. If, in the future, these
instruments are considered to be in the same industry, the Portfolios reserve
the freedom of action to concentrate in such an industry.
Fundamental investment restriction (3). The 1940 Act prohibits a diversified
mutual fund from underwriting securities in excess of 25% of its total assets.
Fundamental investment restriction (4). This restriction would permit investment
in commodities, commodities contracts (e.g., futures contracts or options),
forward contracts or real estate to the extent permitted under the 1940 Act.
However, it is unlikely that the Portfolios would make such investments, other
than the use of futures contracts, options, forward contracts and certain real
estate-related securities as explained in the Prospectus and this Statement of
Additional Information. Each Portfolio, however, would like the ability to
consider using these investment techniques in the future. Commodities, as
opposed to commodity futures, represent the actual underlying bulk goods, such
as grains, metals and food stuffs. Real estate-related instruments include real
estate investment trusts, commercial and residential mortgage-backed securities,
and real estate financings, and such instruments are generally sensitive to
factors such as changes in real estate values and property taxes, interest
rates, cash flow of underlying real estate assets, overbuilding, and the
management skill and creditworthiness of the issuer.
ADDITIONAL INFORMATION ABOUT SECURITIES,
INVESTMENT TECHNIQUES AND RELATED RISKS
FOREIGN SECURITIES
Investing in the securities of issuers in any foreign country, or in securities
denominated in a foreign currency, involves special risks and considerations not
typically associated with investing in U.S. issuers or U.S. dollar-denominated
securities. These include risks resulting from differences in accounting,
auditing and financial reporting standards; lower liquidity than U.S.
securities; the possibility of nationalization, expropriation or confiscatory
taxation; adverse changes in investment or exchange control regulations (which
may include suspension of the ability to transfer currency out of a country);
and political instability. In many cases, there is less publicly available
information concerning foreign issuers than is available concerning U.S.
issuers. Additionally, purchases and sales of foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes and tax
withholding. Foreign securities generally exhibit greater price volatility and a
greater risk of illiquidity.
To the extent a Portfolio purchases securities denominated in a foreign
currency, a change in the value of any such currency against the U.S. dollar
will result in a change in the U.S. dollar value of the Portfolio's assets and
the Portfolio's income available for distribution. In addition, a Portfolio is
required to compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for a foreign currency declines after a Portfolio's income has
been earned and translated into U.S. dollars (but before payment), the Portfolio
could be required to liquidate portfolio securities to make such distributions.
Similarly, if an exchange rate declines between the time a Portfolio incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred.
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The relative performance of various countries' securities markets historically
has reflected wide variations relating to the unique characteristics of each
country's economy. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Bank deposit insurance, if any, may be subject to
widely varying regulations and limits in foreign countries.
Foreign securities purchased by a Portfolio may be listed on foreign exchanges,
traded over-the-counter or purchased in private transactions. Transactions on
foreign exchanges are usually subject to mark-ups or commissions higher than
negotiated commissions on U.S. transactions. There is less government
supervision and regulation of exchanges and brokers in many foreign countries
than in the United States. Additional costs associated with an investment in
foreign securities may include higher custodial fees than apply to domestic
custodial arrangements and transaction costs of foreign currency conversions.
Certain of the foregoing risks may also apply to some extent to securities of
U.S. issuers that are denominated in foreign currencies or that are traded in
foreign markets, or to securities of U.S. issuers having significant foreign
operations.
EMERGING MARKET ISSUERS. The risks of foreign investment, described above, are
greater for investments in emerging market issuers, and such investments should
therefore be considered speculative. Debt securities of governmental and other
issuers in emerging market countries will typically be rated below investment
grade or be of comparable quality. For more information about lower-rated
securities, see "Debt and Fixed Income Securities -- Lower-Rated Securities"
below.
Investors are strongly advised to consider carefully the special risks involved
in emerging markets, which are in addition to the usual risks of investing in
developed markets around the world. Emerging market countries may experience
substantial rates of inflation or deflation. Inflation, deflation and rapid
fluctuations in such rates have had, and may continue to have, very negative
effects on the economies and securities markets of certain emerging market
countries. While some emerging market countries have sought to develop a number
of corrective mechanisms to reduce inflation or deflation or mitigate their
effects, inflation and deflation may continue to have significant effects both
on emerging market countries and their securities markets. In addition, many of
the currencies of emerging market countries have experienced steady devaluations
relative to the U.S. dollar, and major devaluations have occurred in certain
countries.
Economies in emerging market countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by economic conditions, trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade.
Because of the high levels of foreign-denominated debt owed by many emerging
market countries, fluctuating exchange rates can significantly affect the debt
service obligations of those countries. This could, in turn, affect local
interest rates, profit margins and exports, which are a major source of foreign
exchange earnings. Hedging instruments are not typically available with respect
to investments in emerging market countries and, to the extent they are
available, the ongoing and indeterminate nature of the foregoing risks (and the
costs associated with hedging transactions) would make it virtually impossible
to hedge effectively against such risks.
To the extent an emerging market country faces a liquidity crisis with respect
to its foreign exchange reserves, it may increase restrictions on the outflow of
any foreign exchange. Repatriation is ultimately dependent on the ability of a
Portfolio to liquidate its investments and convert the local currency proceeds
obtained from such liquidation into U.S. dollars. Where this conversion must be
done through official channels (usually the central bank or certain authorized
commercial banks), the ability to obtain U.S. dollars is dependent on the supply
of such U.S. dollars through those channels and, if available, upon the
willingness of those channels to allocate those U.S. dollars to the Portfolio.
In such a case, a Portfolio's ability to obtain U.S. dollars may be adversely
affected by any increased restrictions imposed on the outflow of foreign
exchange. If the Portfolio is unable to repatriate any amounts due to exchange
controls, it may be required to accept an obligation payable at some future date
by the central bank or other governmental entity of the jurisdiction involved.
If such conversion can legally be done outside official channels, either
directly or indirectly, a
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Portfolio's ability to obtain U.S. dollars may not be affected as much by any
increased restrictions except to the extent of the price which may be required
to be paid for the U.S. dollars.
Many emerging market countries have little experience with the corporate form of
business organization, and may not have well developed corporation and business
laws or concepts of fiduciary duty in the business context. The securities
markets of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the securities markets of the U.S. and other
more developed countries. Disclosure and regulatory standards in many respects
are less stringent than in the U.S. and other major markets. There also may be a
lower level of monitoring and regulation of an emerging market country's
securities markets and the activities of investors in such markets; enforcement
of existing regulations has been extremely limited.
Some emerging markets have different settlement and clearance procedures, which,
for example, may not call for delivery of a security to a Portfolio until well
after the Portfolio has paid for such security. In certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of a Portfolio to make intended securities purchases due to settlement
problems could cause that Portfolio to miss attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems could
result either in losses to the Portfolio due to subsequent declines in value of
the portfolio security or, if the Portfolio has entered into a contract to sell
the security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging market countries as a result of which trading of securities may cease
or may be substantially curtailed and prices for a Portfolio's portfolio
securities in such markets may not be readily available.
SOVEREIGN DEBT SECURITIES. Sovereign debt is subject to risks in addition to
those relating to foreign investments generally. As a sovereign entity, the
issuing government may be immune from lawsuits in the event of its failure or
refusal to pay the obligations when due. The debtor's willingness or ability to
repay in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which the
sovereign debtor may be subject. Sovereign debtors also may be dependent on
expected disbursements from foreign governments or multinational agencies, the
country's access to trade and other international credits, and the country's
balance of trade. Some emerging market sovereign debtors have in the past
rescheduled their debt payments or declared moratoria on payments, and similar
occurrences may happen in the future.
DEPOSITARY RECEIPTS. American Depositary Receipts, or "ADRs," are securities
issued by a U.S. depositary (usually a bank) and represent a specified quantity
of underlying non-U.S. securities on deposit with a custodian bank as
collateral. A foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a domestic
issuer. Accordingly, the information available to a U.S. investor will be
limited to the information the foreign issuer is required to disclose in its own
country and the market value of an ADR may not reflect undisclosed material
information concerning the issuer or the underlying security. ADRs may also be
subject to exchange rate risks if the underlying securities are denominated in
foreign currency. The Portfolios may also invest in similar non-U.S. instruments
issued by foreign banks or trust companies such as "GDRs" and "EDRs." For
purposes of its investment policies, each Portfolio will treat ADRs and similar
instruments as equivalent to investment in the underlying securities.
OPTIONS ON SECURITIES
Under an option contract, one party generally has the right to require the other
to buy or sell a specified amount of securities, units of an index, currencies
or futures contracts, and may exercise that right if the market price of the
underlying instrument moves in a direction advantageous to the holder of the
option. Options with respect to securities indices typically call for cash
settlement instead of delivery of the securities that comprise the index.
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A Portfolio may purchase call options on securities for any purpose. For
example, a call option may be purchased by a Portfolio on a security that its
Adviser intends to include in the Portfolio's investment portfolio in order to
fix the cost of a future purchase. Call options also may be used as a means of
participating in an anticipated price increase of a security on a more limited
risk basis than would be possible if the security itself were purchased. In the
event of a decline in the price of the underlying security, use of this strategy
would serve to limit the Portfolio's potential loss to the option premium paid;
conversely, if the market price of the underlying security increases above the
exercise price and the Portfolio either sells or exercises the option, any
profit realized would be reduced by the premium.
A Portfolio may purchase put options on securities for any purpose. For example,
a put option may be purchased by a Portfolio in order to hedge against a decline
in the market value of securities held in its portfolio. The put option enables
a Portfolio to sell the underlying security at the predetermined exercise price;
thus the potential for loss to the Portfolio below the exercise price is limited
to the option premium paid. If the market price of the underlying security is
higher than the exercise price of the put option, any profit the Portfolio
realizes on the sale of the security would be reduced by the premium paid for
the put option less any amount for which the put option may be sold.
A Portfolio may also write call and put options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A futures contract is an agreement between the parties to buy or sell a
specified amount of one or more securities, units of an index or currencies at a
specified price and date; futures contracts are generally closed out by the
parties in advance of that date for a cash settlement.
Each Portfolio will limit its use of futures contracts and futures options to
hedging transactions or other circumstances permitted to registered investment
companies by regulatory authorities. For example, a Portfolio might use futures
contracts to attempt to hedge against anticipated changes in interest rates that
might adversely affect either the value of the Portfolio's securities or the
price of the securities which the Portfolio intends to purchase. A Portfolio's
hedging may include sales of futures contracts as an offset against the effect
of expected increases in interest rates, and purchases of futures contracts as
an offset against the effect of expected declines in interest rates. Although
other techniques could be used to reduce exposure to interest rate fluctuations,
a Portfolio may be able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and options on futures contracts.
Futures contracts may also be used for non-hedging purposes, such as to simulate
full investment in underlying securities while retaining a cash balance for
Portfolio management purposes, as a substitute for direct investment in a
security, to facilitate trading, to reduce transaction costs, or to seek higher
investment returns when a futures contract or option is priced more attractively
than the underlying security or index.
A futures contract on a security or foreign currency is a bilateral agreement
pursuant to which one party agrees to make, and the other party agrees to
accept, delivery of the specified type of security or foreign currency called
for in the contract at a specified future time and at a specified price. A
Portfolio may, for example, purchase a futures contract on a security or foreign
currency when it intends to purchase securities or foreign currency but has not
yet done so. This strategy may minimize the effect of all or part of an increase
in the market price of the security or the relative value of the foreign
currency that a Portfolio intends to purchase in the future. A rise in the price
of the security or foreign currency prior to its purchase may either be offset
by an increase in the value of the futures contract purchased by a Portfolio or
avoided by taking delivery of the security or foreign currency under the futures
contract. Conversely, a fall in the market price of the underlying security or
foreign currency may result in a corresponding decrease in the value of the
futures position. A Portfolio may sell a futures contract on a security or
foreign currency, for example, in order to continue to receive the income from a
security or foreign currency, while endeavoring to avoid part or all of the
decline in the market value of that security that would accompany an increase in
interest rates.
A Portfolio may also purchase a call option on a futures contract to hedge
against a market advance in securities or foreign currency which the Portfolio
plans to acquire at a future date. The purchase of a call option on a futures
contract is analogous to the purchase of a call option on an individual security
or foreign currency which can be used as a
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temporary substitute for a position in the security itself. A Portfolio also may
write covered call options on futures contracts as a partial hedge against a
decline in the price of securities or foreign currency held in the Portfolio's
investment portfolio, or purchase put options on futures contracts in order to
hedge against a decline in the value of securities or foreign currency held in
the Portfolio's investment portfolio. A Portfolio may write a covered put option
as a partial anticipatory hedge.
When a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Under certain circumstances, such as during periods of high
volatility, a Portfolio may be required by an exchange to increase the level of
its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. Each Portfolio expects
to earn interest income on its initial margin deposits. A futures contract held
by a Portfolio is valued daily at the official settlement price of the exchange
on which it is traded. Each day the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Portfolio but is instead settlement between
the Portfolio and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, each Portfolio
will mark to market its open futures positions.
A Portfolio is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements) and the current market value of the option and
other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the
underlying securities or currencies, generally those contracts are closed out
prior to delivery by offsetting purchases or sales of matching futures contracts
(involving the same currency or underlying security and delivery month). If an
offsetting purchase price is less than the original sale price, the Portfolio
realizes a gain, or if it is more, the Portfolio realizes a loss. If an
offsetting sale price is more than the original purchase price, the Portfolio
realizes a gain, or if it is less, the Portfolio realizes a loss. The Portfolio
will also bear transaction costs for each contract which will be included in
these calculations.
A Portfolio will not enter into futures contracts or option positions if,
immediately thereafter, the initial margin deposits plus premiums paid by it,
less the amount by which any such options positions are "in-the-money" at the
time of purchase, would exceed 5% of the fair market value of the Portfolio's
total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
The requirements for qualification as a regulated investment company also may
limit the extent to which a Portfolio may enter into futures or options on
futures. See "Additional Tax Information."
RISKS ASSOCIATED WITH FUTURES AND OPTIONS
In considering the Portfolios' use of futures contracts and options, particular
note should be taken of the following:
(1) Positions in futures contracts and options may be closed out only
on an exchange or board of trade which provides a secondary market for
such futures contracts or options. Futures exchanges may limit the
amount of fluctuation permitted in certain futures contract and option
prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract or option may vary
either up or down from the previous day's settlement price at the end
of the current trading session. Once the daily limit has been reached
in a futures contract or option subject to the limit, no more trades
may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to
prevent
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the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures
contracts to substantial losses.
(2) The ability to establish and close out positions in either futures
contracts or exchange-listed options is also subject to the maintenance
of a liquid secondary market. Consequently, it may not be possible for
a Portfolio to close a position and, in the event of adverse price
movements, the Portfolio would have to make daily cash payments of
variation margin (except in the case of purchased options). However, in
the event futures contracts or options have been used to hedge
portfolio securities, such securities generally will not be sold until
the contracts can be terminated. In such circumstances, an increase in
the price of the securities, if any, may partially or completely offset
losses on the futures contract. However, there is no guarantee that the
price of the securities will, in fact, correlate with the price
movements in the contracts and thus provide an offset to losses on the
contracts. The inability to close out a futures or option position may
also restrict the Portfolio's ability to sell the underlying security
or currency at a time when the Adviser might otherwise do so.
(3) Successful use by a Portfolio of futures contracts and options will
depend upon its Adviser's ability to predict market movements, which
may require different skills and techniques than predicting changes in
the prices of individual securities. Moreover, futures contracts relate
not to the current level of the underlying instrument but to
anticipated levels at some point in the future. There is, in addition,
the risk that movements in the price of the futures contract or option
will not correlate with movements in the prices of the securities or
currencies being hedged. If the price of the securities or currencies
being hedged has moved in a favorable direction, this advantage may be
partially offset by losses in the futures or option position. In
addition, if the Portfolio has insufficient cash, it may have to sell
assets from its investment portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices
that reflect the rising market; consequently, a Portfolio may need to
sell assets at a time when such sales are disadvantageous to the
Portfolio. If the price of the futures or option contract moves more
than the price of the underlying securities or currencies, the
Portfolio will experience either a loss or a gain on the futures
contract or option that may or may not be completely offset by
movements in the price of the securities or currencies that are the
subject of the hedge.
(4) The value of an option position will reflect, among other things,
the current market price of the underlying security, currency or
futures contract, the time remaining until expiration, the relationship
of the exercise price to the market price, the historical price
volatility of the underlying security, currency or futures contract and
general market conditions. For this reason, the successful use of
options as a hedging strategy depends upon the Adviser's ability to
forecast the direction of price fluctuations in the underlying market.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the
futures and options position and the securities or currencies being
hedged, movements in the prices of futures and options contracts may
not correlate perfectly with movements in the prices of the hedged
securities or currencies due to price distortions in the futures and
options markets. There may be several reasons unrelated to the value of
the underlying securities or currencies which cause this situation to
occur. First, as noted above, all participants in the futures market
are subject to initial and variation margin requirements. If, to avoid
meeting additional margin deposit requirements or for other reasons,
investors choose to close a significant number of futures contracts
through offsetting transactions, distortions in the normal price
relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in
the futures market are less onerous than margin requirements in the
securities market, there may be increased participation by speculators
in the futures market; such speculative activity in the futures market
also may cause temporary price distortions. Third, participants could
make or take delivery of the underlying securities or currencies
instead of closing out their contracts. As a result, a correct forecast
of general market trends may not result in successful hedging through
the use of futures or options contracts over the short term. In
addition, activities of large traders involving arbitrage and other
investment strategies may result in temporary price distortions.
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(6) Options normally have expiration dates of up to nine months. The
exercise price of the options may be below, equal to or above the
current market value of the underlying security, currency or futures
contract. Options that expire unexercised have no value, and the
Portfolio will realize a loss in the amount paid and any transaction
costs.
(7) Like options on securities, options on futures contracts have a
limited life. The ability to establish and close out options on futures
will be subject to the development and maintenance of liquid secondary
markets on the relevant exchanges or boards of trade. There can be no
certainty that liquid secondary markets for all options on futures
contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs are all
that is at risk. Sellers of options on futures contracts, however, must
post an initial margin and are subject to additional margin calls which
could be substantial in the event of adverse price movements. In
addition, although the maximum amount at risk when the Portfolio
purchases an option is the premium paid for the option and the
transaction costs, there may be circumstances when the purchase of an
option on a futures contract would result in a loss to the Portfolio
when the use of a futures contract would not, such as when there is no
movement in the value of the securities or currencies being hedged.
(9) A Portfolio's activities in the futures and options markets may
result in a higher portfolio turnover rate and additional transaction
costs in the form of added brokerage commissions; however, a Portfolio
also may save on commissions by using such contracts as a hedge rather
than buying or selling individual securities in anticipation or as a
result of market movements.
(10) A Portfolio may purchase and write both exchange-traded options
and options traded on the OTC market. Exchange markets for options on
debt securities exist but are relatively new, and the ability to
establish and close out positions on the exchanges is subject to the
maintenance of a liquid secondary market. Although the Portfolios
intend to purchase or write only those exchange-traded options for
which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular
option at any specific time. Closing transactions may be effected with
respect to options traded in the OTC markets only by negotiating
directly with the other party to the option contract, or in a secondary
market for the option if such market exists. Although the Portfolios
will enter into OTC options only with dealers which agree to enter
into, and which are expected to be capable of entering into, closing
transactions with the Portfolios, there can be no assurance that a
Portfolio will be able to liquidate an OTC option at a favorable price
at any time prior to expiration. In the event of insolvency of the
contra-party, a Portfolio may be unable to liquidate an OTC option.
Accordingly, it may not be possible to effect closing transactions with
respect to certain options, with the result that the Portfolio would
have to exercise those options which it has purchased in order to
realize any profit. With respect to options written by a Portfolio, the
inability to enter into a closing transaction may result in material
losses to the Portfolio. For example, because a Portfolio must maintain
a covered position with respect to any call option it writes on a
security or futures contract the Portfolio may not sell the underlying
security or futures contract or invest any cash, U.S. Government
securities or short-term debt securities used as cover during the
period it is obligated under such option. This requirement may impair a
Portfolio's ability to sell a portfolio security or make an investment
at a time when such a sale or investment might be advantageous.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS TRADED ON FOREIGN EXCHANGES
Options on securities, options on currencies, futures contracts and options on
futures contracts may be traded on foreign exchanges. Such transactions may not
be regulated as effectively as similar transactions in the United States, may
not involve a clearing mechanism and related guarantees and are subject to the
risk of governmental actions affecting trading in, or the price of, foreign
securities. The value of such positions also could be adversely affected by (1)
other complex foreign political, legal and economic factors, (2) lesser
availability than in the United States of data on which to make trading
decisions, (3) delays in the Portfolios' ability to act upon economic events
occurring in foreign markets
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during non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lesser trading volume.
COVER FOR HEDGING STRATEGIES
Each Portfolio will comply with guidelines established by the SEC with respect
to coverage of hedging strategies by mutual funds, and, if the guidelines so
require, will set aside cash or liquid securities in a segregated account with
its custodian in the amount prescribed, as marked to market daily. Securities,
options or futures positions used for cover and securities held in a segregated
account cannot be sold or closed out while the hedging strategy is outstanding,
unless they are replaced with similar assets. As a result, there is a
possibility that the use of cover or segregation involving a large percentage of
a Portfolio's assets could impede portfolio management or a Portfolio's ability
to meet redemption requests or other current obligations.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Each Portfolio that may invest in securities that are denominated in foreign
currencies may engage in a variety of foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. These
transactions may be engaged in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the value of
specific portfolio positions ("position hedging").
A Portfolio may engage in transaction hedging to protect against a change in the
foreign currency exchange rates between the date on which the Portfolio
contracts to purchase or sell the security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate. If conditions warrant, for transaction
hedging purposes, a Portfolio may also enter into contracts to purchase or sell
foreign currencies at a future date ("forward contracts") and may purchase and
sell foreign currency futures contracts. A foreign currency forward contract is
a negotiated agreement to exchange currency at a future time at a rate or rates
that may be higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have margin
requirements. Each Portfolio may also purchase, sell and write exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies.
A Portfolio may engage in "position hedging" to protect against a decline in the
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of the
currency in which securities the Portfolio intends to buy are denominated).
For position hedging purposes, each Portfolio may purchase, sell or write
foreign currency futures contracts, foreign currency forward contracts, and
options on exchanges or over-the-counter markets. In connection with position
hedging, a Portfolio may also purchase or sell foreign currency on a spot basis.
A Portfolio's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times
involve currencies other than those in which its portfolio securities are then
denominated. "Cross hedging" activities will be used when a Portfolio's Adviser
believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by a Portfolio involve the further
risk of imperfect correlation between changes in the values of the currencies to
which such transactions relate and changes in the values of such currencies and
of the currency or other asset or liability which is the subject of the hedge.
The decision as to whether and to what extent a Portfolio will engage in foreign
currency exchange transactions will depend on a number of factors, including
prevailing market conditions, the composition of a Portfolio's investments and
the availability of suitable transactions. Accordingly, there can be no
assurance that a Portfolio will engage in foreign currency exchange transactions
at any given time or from time to time.
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For a further discussion of the risks associated with purchasing and selling
futures contracts and options, see "Options and Futures" above. A Portfolio may
also use other foreign currency exchange instruments and techniques when
available and deemed appropriate by its Adviser.
PREFERRED STOCKS AND CONVERTIBLE SECURITIES
A preferred stock pays dividends at a specified rate and has preference over
common stock in the payment of dividends and the liquidation of an issuer's
assets but is junior to the debt securities of the issuer in those same
respects. The market prices of preferred stocks are subject to changes in
interest rates and are more sensitive to changes in an issuer's creditworthiness
than are the prices of debt securities. Shareholders of preferred stock may
suffer a loss of value if dividends are not paid. Under ordinary circumstances,
preferred stock does not carry voting rights.
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock (or another equity security) of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stream of income with generally higher yields
than those of common stocks of the same or similar issuers. Convertible
securities are usually subordinated to comparable-tier nonconvertible securities
but rank senior to common stock in a corporation's capital structure.
The value of a convertible security is a function of (1) its yield in comparison
with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege and (2) its worth, at market value, if converted
into the underlying common stock. A convertible security may be subject to
redemption at the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by a Portfolio
is called for redemption, the Portfolio will be required to (1) permit the
issuer to redeem the security, (2) convert it into the underlying common stock
or (3) sell it to a third party. Any of these actions could have an adverse
effect on a Portfolio's ability to achieve its investment objective.
DEBT AND FIXED INCOME SECURITIES
The Portfolios may invest in a variety of debt and fixed income securities.
These securities share one principal risk: their values fluctuate with changes
in interest rates. Thus, a decrease in interest rates will generally result in
an increase in the value of a Portfolio's fixed income investments. Conversely,
during periods of rising interest rates, the value of a Portfolio's fixed income
investments will generally decline. The magnitude of these fluctuations will
generally be greater when a Portfolio's duration or average maturity is longer.
Changes in the value of portfolio securities will not affect interest income
from those securities, but will be reflected in a Portfolio's net asset value.
The most common types of these instruments, and the associated risks, are
described below. Subject to its investment policies and applicable law, each of
the Portfolios may invest in these and other instruments.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government securities include (1) U.S.
Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of
one to ten years) and U.S. Treasury bonds (maturities generally greater than ten
years) and (2) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government (such as GNMA certificates); (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government (such as obligations of the Federal Home Loan Banks);
(c) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities (such as securities issued by
Fannie Mae); or (d) only the credit of the instrumentality (such as securities
issued by Freddie Mac). In the case of obligations not backed by the full faith
and credit of the United States, a Portfolio must look principally to the agency
or instrumentality issuing or guaranteeing the obligation for ultimate repayment
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitments. Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees the
market value of the securities they issue. Therefore, the market value of such
securities will fluctuate in response to changes in interest rates.
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INFLATION-INDEXED SECURITIES. The Portfolios may also invest in
inflation-indexed U.S. Treasury securities (also known as "Treasury
Inflation-Protection Securities"). The principal value of Treasury
Inflation-Protection Securities is adjusted daily in accordance with changes in
the Consumer Price Index, while interest is calculated on the basis of the
adjusted principal value on the payment date. The principal value of these
securities declines in periods of deflation, but holders at maturity receive no
less than par. If inflation is lower than expected during the period a Portfolio
holds the security, the Portfolio may earn less on the security than on a
conventional bond. Any increase in principal value is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase at that time. Changes in market interest rates from causes other than
inflation will likely affect the price of these securities in the same manner as
more traditional obligations.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent an interest
in a pool of mortgages made by lenders such as commercial banks, savings and
loan institutions, mortgage bankers and others. Mortgage-related securities may
be issued by governmental, government-related or non-governmental entities, and
provide regular payments which consist of interest and, in most cases,
principal. In contrast, other forms of debt securities normally provide for
periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. In effect, payments on mortgage-related
securities are a "pass-through" of the payments made by the individual borrowers
on their mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments to holders of mortgage-related securities are
caused by repayments resulting from the sale of the underlying property,
refinancing or foreclosure, net of fees or costs which may be incurred.
As prepayment rates of individual pools of mortgage loans vary widely, it is not
possible to predict accurately the average life of a particular security.
Although mortgage-related securities are issued with stated maturities of up to
forty years, unscheduled or early payments of principal and interest on the
underlying mortgages may shorten considerably the securities' effective
maturities. The volume of prepayments of principal on a pool of mortgages
underlying a particular mortgage-related security will influence the yield of
that security, and the principal returned to a Portfolio may be reinvested in
instruments whose yield may be higher or lower than that which might have been
obtained had such prepayments not occurred. When interest rates are declining,
such prepayments usually increase, and reinvestments of such principal
prepayments will be at a lower rate than that on the original mortgage-related
security. An increase in mortgage prepayments could cause the Portfolio to incur
a loss on a mortgage-related security that was purchased at a premium. On the
other hand, a decrease in the rate of prepayments, resulting from an increase in
market interest rates or other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in market
interest rates and potentially increasing the volatility of a Portfolio's
shares. The rate of prepayment may also be affected by general economic
conditions, the location and age of the mortgages, and other social and
demographic conditions. In determining the average maturity or duration of a
mortgage-related security, a Portfolio's Adviser must apply certain assumptions
and projections about the maturity and prepayment of such security; actual
prepayment rates may differ. Because of prepayments, mortgage-related securities
may have less potential for capital appreciation during periods of declining
interest rates than other securities of comparable maturities, although they may
have a similar risk of decline in market value during periods of rising interest
rates.
Most issuers or poolers provide guarantees of payments, regardless of whether
the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are often backed by various forms of credit, insurance and collateral,
although these may be in amounts less than the full obligation of the pool to
its shareholders.
Pools often consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Portfolios may purchase pools of variable-rate
mortgages, growing-equity mortgages, graduated-payment mortgages and other
types.
All poolers apply standards for qualification to lending institutions which
originate mortgages for the pools. Poolers also establish credit standards and
underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
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The average life of mortgage-related securities varies with the maturities and
the nature of the underlying mortgage instruments. For example, securities
issued by the Government National Mortgage Association ("GNMA") tend to have a
longer average life than participation certificates ("PCs") issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency for
the conventional and privately-insured mortgages underlying FHLMC PCs to repay
at faster rates than the Federal Housing Administration and Veterans
Administration loans underlying GNMAs. In addition, the term of a security may
be shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
In determining the dollar-weighted average maturity of a Portfolio, the
Portfolio's Adviser will follow industry practice in assigning an average life
to the mortgage-related securities held by each Portfolio unless the interest
rate on the mortgages underlying the securities is such that a different
prepayment rate is likely. For example, if a GNMA has a high interest rate
relative to the market, that GNMA is likely to have a shorter overall maturity
than a GNMA with a market rate coupon. Moreover, Western Asset may deem it
appropriate to change the projected average life for a Portfolio's
mortgage-related securities as a result of fluctuations in market interest rates
and other factors.
Yields on mortgage-related securities are typically quoted based on the maturity
of the underlying instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ from the yield expected on
the basis of average life. Reinvestment of the prepayments may occur at higher
or lower interest rates than the original investment, thus affecting the yield
of the Portfolio. The compounding effect from reinvestments of monthly payments
received by each Portfolio will increase the yield to shareholders compared to
bonds that pay interest semi-annually.
GOVERNMENT MORTGAGE-RELATED SECURITIES. GNMA is the principal federal government
guarantor of mortgage-related securities. GNMA is a wholly owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
pass-through securities are considered to have a relatively low risk of default
in that (1) the underlying mortgage loan portfolio is comprised entirely of
government-backed loans and (2) the timely payment of both principal and
interest on the securities is guaranteed by the full faith and credit of the
U.S. Government, regardless of whether they have been collected. GNMA
pass-through securities are, however, subject to the same market risk as
comparable debt securities. Therefore, the effective maturity and market value
of a Portfolio's GNMA securities can be expected to fluctuate in response to
changes in interest rate levels.
Residential mortgage loans are also pooled by Freddie Mac, a corporate
instrumentality of the U.S. Government. The mortgage loans in Freddie Mac's
portfolio are not government backed; Freddie Mac, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of principal
on Freddie Mac securities. Freddie Mac also issues guaranteed mortgage
certificates, on which it guarantees semiannual interest payments and a
specified minimum annual payment of principal.
Fannie Mae is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. Fannie Mae purchases residential mortgages from a list of
approved seller/servicers, which include savings and loan associations, savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by Fannie Mae are guaranteed as to timely payment of principal
and interest only by Fannie Mae, not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related securities
offered by private issuers include pass-through securities comprised of pools of
residential mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs") which
are collateralized by mortgage-related securities issued by Freddie Mac, Fannie
Mae or GNMA or by pools of mortgages.
CMOs are typically structured with classes or series which have different
maturities and are generally retired in sequence. Each class of obligations
receives periodic interest payments according to the coupon rate on the
obligations. However, all monthly principal payments and any prepayments from
the collateral pool are generally paid first to the
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"Class 1" holders. Thereafter, all payments of principal are generally allocated
to the next most senior class of obligations until that class of obligations has
been fully repaid. Although full payoff of each class of obligations is
contractually required by a certain date, any or all classes of obligations may
be paid off sooner than expected because of an increase in the payoff speed of
the pool. Other allocation methods may be used. Payment of interest or principal
on some classes or series of a CMO may be subject to contingencies or some
classes or series may bear some or all of the risk of default on the underlying
mortgages.
Mortgage-related securities created by non-governmental issuers generally offer
a higher rate of interest than government and government-related securities
because there are no direct or indirect government guarantees of payment in the
former securities, resulting in higher risks. Where privately issued securities
are collateralized by securities issued by Freddie Mac, Fannie Mae or GNMA, the
timely payment of interest and principal is supported by the government-related
securities collateralizing such obligations. The market for conventional pools
is smaller and less liquid than the market for the government and
government-related mortgage pools.
Certain private mortgage pools are organized in such a way that the SEC staff
considers them to be closed-end investment companies. Each Portfolio's
investment in such pools is constrained by federal statute, which restricts
investments in the shares of other investment companies.
The private mortgage-related securities in which the Portfolios may invest
include foreign mortgage pass-through securities ("Foreign Pass-Throughs"),
which are structurally similar to the pass-through instruments described above.
Such securities are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers, specialized financial institutions and special purpose
subsidiaries of the foregoing. Foreign Pass-Throughs usually are backed by a
pool of fixed rate or adjustable-rate mortgage loans. Certain Foreign
Pass-Throughs in which the Portfolios invest typically are not guaranteed by an
entity having the credit status of GNMA, but generally utilize various types of
credit enhancement.
ASSET-BACKED SECURITIES. Asset-backed securities refer to securities that
directly or indirectly represent a participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements.
Such assets are securitized through the use of trusts or special purpose
corporations. Asset-backed securities are backed by a pool of assets
representing the obligations often of a number of different parties. Certain of
such securities may be illiquid.
The principal on asset-backed securities, like that on mortgage-backed
securities, may be prepaid at any time. As a result, if such securities are
purchased at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect. Conversely, if the securities are purchased at a
discount, prepayments faster than expected will increase yield to maturity and
prepayments slower than expected will decrease it. Accelerated prepayments also
reduce the certainty of the yield because the Portfolio must reinvest the assets
at the then-current rates. Accelerated prepayments on securities purchased at a
premium also impose a risk of loss of principal. On the other hand, a decrease
in the rate of prepayments may extend the effective maturities of the
securities, increasing their sensitivity to changes in market interest rates and
potentially increasing the volatility of a Portfolio's shares. The rate of
prepayment may also be affected by general economic conditions and other social
and demographic conditions.
Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. In some transactions, the value of the asset-backed security
is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the
securitization of vehicle loans or leases) it may be administratively
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burdensome to perfect the interest in the underlying collateral, and the
underlying collateral may become damaged or stolen.
Most issuers of automobile receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities. Because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of the market cycle is
not certain.
MUNICIPAL OBLIGATIONS. Municipal obligations include obligations issued to
obtain funds for various public purposes, including constructing a wide range of
public facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which municipal
obligations may be issued include the refunding of outstanding obligations, the
obtaining of funds for general operating expenses and the making of loans to
other public institutions and facilities. In addition, certain types of
industrial development bonds ("IDBs") and private activity bonds ("PABs") are
issued by or on behalf of public authorities to finance various privately
operated facilities, including certain pollution control facilities, convention
or trade show facilities, and airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes, bond
anticipation notes, revenue anticipation notes and other forms of short-term
debt obligations. Such notes may be issued with a short-term maturity in
anticipation of the receipt of tax payments, the proceeds of bond placements or
other revenues. Municipal obligations also include municipal lease obligations
and certificates of participation. Municipal lease obligations, which are issued
by state and local governments to acquire land, equipment and facilities,
typically are not fully backed by the municipality's credit, and, if funds are
not appropriated for the following year's lease payments, a lease may terminate,
with the possibility of default on the lease obligation and significant loss to
the Portfolio. Certificates of participation are participations in municipal
lease obligations or installment sales contracts. Each certificate represents a
proportionate interest in or right to the payments made.
The two principal classifications of municipal obligations are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by the
issuer's pledge of its faith, credit and taxing power. "Revenue" bonds are
payable only from the revenues derived from a particular facility or class of
facilities or from the proceeds of a special excise tax or other specific
revenue source such as the corporate user of the facility being financed. IDBs
and PABs are usually revenue bonds and are not payable from the unrestricted
revenues of the issuer. The credit quality of IDBs and PABs is usually directly
related to the credit standing of the corporate user of the facilities.
The ability of state, county or local governments to meet their obligations will
depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. The amounts of tax and
other revenues available to governmental issuers may be affected from time to
time by economic, political and demographic conditions within or outside of the
particular state. In addition, constitutional or statutory restrictions may
limit a government's power to raise revenues or increase taxes. The availability
of federal, state and local aid to issuers of municipal securities may also
affect their ability to meet their obligations. Payments of principal and
interest on revenue bonds will depend on the economic condition of the facility
or specific revenue source from whose revenues the payments will be made. The
facility's economic status, in turn, could be affected by economic, political
and demographic conditions affecting the particular state.
CORPORATE DEBT SECURITIES. A Portfolio may invest in debt securities (i.e.,
bonds, debentures, notes and other similar debt instruments) of domestic or
foreign non-governmental issuers which meet the minimum credit quality criteria,
if any, set forth for the Portfolio. Corporate debt securities may pay fixed or
variable rates of interest, or interest at a rate contingent upon some other
factor, such as the price of some commodity. These securities may include
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warrants, may be convertible into preferred or common equity, or may be bought
as part of a unit containing common stock.
LOWER-RATED SECURITIES. Non-investment grade securities, i.e., securities rated
below Baa by Moody's or BBB by S&P or comparable ratings of other NRSROs or
unrated securities of comparable quality, are described as "speculative" by
Moody's and S&P and may be subject to greater market fluctuations and greater
risk of loss of income or principal, including a greater possibility of default
or bankruptcy of the issuer of such securities, than are more highly rated debt
securities. Such securities are commonly referred to as "junk bonds." A
Portfolio's Adviser seeks to minimize the risks of investing in all securities
through diversification, in-depth credit analysis and attention to current
developments in interest rates and market conditions and will monitor the
ratings of securities held by the Portfolios and the creditworthiness of their
issuers. If the rating of a security in which a Portfolio has invested falls
below the minimum rating in which the Portfolio is permitted to invest, the
Portfolio will either dispose of that security within a reasonable time or hold
the security for so long as the Portfolio's Adviser determines appropriate for
that Portfolio, having due regard for market conditions, tax implications and
other applicable factors. See the Appendix to the Prospectus for a description
of the ratings assigned to fixed income securities by the rating agencies.
A debt security may be callable, i.e., subject to redemption at the option of
the issuer at a price established in the security's governing instrument. If a
debt security held by a Portfolio is called for redemption, the Portfolio will
be required to permit the issuer to redeem the security or sell it to a third
party. Either of these actions could have an adverse effect on a Portfolio's
ability to achieve its investment objective because, for example, the Portfolio
may be able to reinvest the proceeds only in securities with lower yields or may
receive a price upon sale that is lower than it would have received in the
absence of the redemption.
The market for lower-rated securities has expanded rapidly in recent years. This
growth has paralleled a long economic expansion. At certain times in the past,
the prices of many lower-rated securities declined, indicating concerns that
issuers of such securities might experience financial difficulties. At those
times, the yields on lower-rated securities rose dramatically, reflecting the
risk that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur.
The ratings of Moody's and S&P represent the opinions of those agencies as to
the quality of the debt securities which they rate. Such ratings are relative
and subjective, and are not absolute standards of quality. Unrated debt
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers. If securities are rated investment
grade by one rating organization and below investment grade by the other, a
Portfolio's investment adviser may rely on the rating that it believes is more
accurate. Each Portfolio's Adviser will consider a security's quality and credit
rating when determining whether such security is an appropriate investment.
Subject to its investment objective, policies and applicable law, a Portfolio
may purchase a security with the lowest rating.
Where one of the NRSROs has assigned an investment grade rating to an instrument
and others have given it a lower rating, the Portfolios may consider the
instrument to be investment grade. The market for lower-rated securities may be
thinner and less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be sold, and may make
it difficult for a Portfolio to obtain market quotations daily. If market
quotations are not available, these securities will be valued by a method that
the Portfolios' Boards of Directors believe accurately reflects fair market
value. Judgment may play a greater role in valuing lower-rated debt securities
than is the case with respect to securities for which a broader range of dealer
quotations and last-sale information is available. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower-rated securities, especially in a
thinly traded market.
Although the prices of lower-rated bonds are generally less sensitive to
interest rate changes than are higher-rated bonds, the prices of lower-rated
bonds may be more sensitive to adverse economic changes and developments
regarding the individual issuer. Although the market for lower-rated debt
securities is not new, and the market has previously weathered economic
downturns, there has been in recent years a substantial increase in the use of
such securities to fund corporate acquisitions and restructurings. Accordingly,
the past performance of the market for such securities may not be an accurate
indication of its performance during future economic downturns or periods of
rising interest rates. When
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economic conditions appear to be deteriorating, medium- to lower-rated
securities may decline in value due to heightened concern over credit quality,
regardless of the prevailing interest rates. Investors should carefully consider
the relative risks of investing in high yield securities and understand that
such securities are not generally meant for short-term investing.
Adverse economic developments can disrupt the market for lower-rated securities,
and severely affect the ability of issuers, especially highly leveraged issuers,
to service their debt obligations or to repay their obligations upon maturity
which may lead to a higher incidence of default on such securities. Lower-rated
securities are especially affected by adverse changes in the industries in which
the issuers are engaged and by changes in the financial condition of the
issuers. Highly leveraged issuers may also experience financial stress during
periods of rising interest rates. In addition, the secondary market for
lower-rated securities, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated securities.
As a result, a Portfolio could find it more difficult to sell these securities
or may be able to sell the securities only at prices lower than if such
securities were widely traded. Therefore, prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating a Portfolio's net asset value.
Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls an obligation for redemption, the Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of lower-rated
securities.
STRIPPED SECURITIES. Stripped securities are created by separating bonds into
their principal and interest components and selling each piece separately
(commonly referred to as IOs and POs). The yield to maturity on an IO or PO
class of stripped mortgage-backed securities is extremely sensitive not only to
changes in prevailing interest rates but also to the rate of principal payments
(including prepayments) on the underlying assets. A rapid rate of principal
prepayments may have a measurably adverse effect on a Portfolio's yield to
maturity to the extent it invests in IOs. If the assets underlying the IOs
experience greater than anticipated prepayments of principal, the Portfolio may
fail to recoup fully its initial investment in these securities. Conversely, POs
tend to increase in value if prepayments are greater than anticipated and
decline if prepayments are slower than anticipated. The secondary market for
stripped mortgage-backed securities may be more volatile and less liquid than
that for other mortgage-backed securities, potentially limiting a Portfolio's
ability to buy or sell those securities at any particular time.
ZERO COUPON AND PAY-IN-KIND SECURITIES. A zero coupon bond is a security that
makes no fixed interest payments but instead is sold at a discount from its face
value. The bond is redeemed at its face value on the specified maturity date.
Zero coupon bonds may be issued as such, or they may be created by a broker who
strips the coupons from a bond and separately sells the rights to receive
principal and interest. The prices of zero coupon bonds tend to fluctuate more
in response to changes in market interest rates than do the prices of
interest-paying debt securities with similar maturities. A Portfolio investing
in zero coupon bonds generally accrues income on such securities prior to the
receipt of cash payments. Since each Portfolio must distribute substantially all
of its income to shareholders to qualify as a regulated investment company under
federal income tax law, a Portfolio investing in zero coupon bonds may have to
dispose of other securities to generate the cash necessary for the distribution
of income attributable to its zero coupon bonds. Pay-in-kind securities have
characteristics similar to those of zero coupon securities, but interest on such
securities may be paid in the form of obligations of the same type rather than
cash.
COMMERCIAL PAPER AND OTHER SHORT-TERM INVESTMENTS
Each of the Portfolios may invest or hold cash or other short-term investments,
including commercial paper. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. The Portfolios may purchase commercial paper
issued pursuant to the private placement exemption in Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
federal securities laws in that any resale must similarly be made in an exempt
transaction. The Portfolios may or may not regard such securities as illiquid,
depending on the circumstances of each case.
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Any Portfolio may also invest in obligations (including certificates of deposit,
demand and time deposits and bankers' acceptances) of U.S. banks and savings and
loan institutions. While domestic bank deposits are insured by an agency of the
U.S. Government, the Portfolios will generally assume positions considerably in
excess of the insurance limits.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The purchase of loan participations and assignments entails special risks. A
Portfolio's ability to receive payments of principal and interest and other
amounts in connection with loan participations and assignments will depend
primarily on the financial condition of the borrower. The failure by the
Portfolio to receive scheduled interest or principal payments on a loan
participation or assignment would adversely affect the income of the Portfolio
and would likely reduce the value of its assets. Because loan participations are
not generally rated by independent credit rating agencies, a decision by a
Portfolio to invest in a particular loan participation will depend almost
exclusively on its Adviser's credit analysis of the borrower. In addition to the
other risks associated with investments in debt securities, participations and
assignments involve the additional risk that the insolvency of any financial
institution interposed between the Portfolio and the borrower could delay or
prevent the flow of payments from the borrower on the underlying loan. A
Portfolio may have limited rights to enforce the terms of the underlying loan,
and the liquidity of loan participations and assignments may be limited.
The borrower of a loan in which a Portfolio holds a participation interest may,
either at its own election or pursuant to terms of the loan documentation,
prepay amounts of the loan from time to time. There is no assurance that the
Portfolio will be able to reinvest the proceeds of any loan prepayment at the
same interest rate or on the same terms as those of the original loan
participation.
Corporate loans in which a Portfolio may purchase a loan participation or
assignment are made generally to finance internal growth, mergers, acquisitions,
stock repurchases, leveraged buy-outs, and other corporate activities. The
highly leveraged capital structure of the borrowers in certain of these
transactions may make such loans especially vulnerable to adverse changes in
economic or market conditions.
Certain of the loan participations or assignments acquired by a Portfolio may
involve unfunded commitments of the lenders or revolving credit facilities under
which a borrower may from time to time borrow and repay amounts up to the
maximum amount of the facility. In such cases, the Portfolio would have an
obligation to advance its portion of such additional borrowings upon the terms
specified in the loan documentation.
INDEXED SECURITIES AND STRUCTURED NOTES
The values of indexed securities and structured notes are linked to currencies,
other securities, interest rates, commodities, indices or other financial
indicators ("reference instruments"). These instruments differ from other types
of debt securities in several respects. The interest rate or principal amount
payable at maturity may vary based on changes in one or more specified reference
instruments, such as a floating interest rate compared with a fixed interest
rate or the currency exchange rates between two currencies (neither of which
need be the currency in which the instrument is denominated). An indexed
security or structured note may be positively or negatively indexed; that is,
its value or interest rate may increase or decrease if the value of the
reference instrument increases. Further, the change in the principal amount
payable with respect to, or the interest rate of, an indexed security or
structured note may be a multiple of the percentage change (positive or
negative) in the value of the underlying reference instrument(s).
Investment in indexed securities and structured notes involves certain risks,
including the credit risk of the issuer and the normal risks of price changes in
response to changes in interest rates. Further, in the case of certain indexed
securities or structured notes, a decline in the reference instrument may cause
the interest rate to be reduced to zero, and any further declines in the
reference instrument may then reduce the principal amount payable on maturity.
Finally, these securities may be less liquid than other types of securities, and
may be more volatile than their underlying reference instruments.
FORWARD COMMITMENTS
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Each Portfolio may enter into commitments to purchase securities on a "forward
commitment" basis, including purchases on a "when-issued" basis or a "to be
announced" basis. When such transactions are negotiated, certain terms may be
fixed at the time the commitment is made, but delivery and payment for the
securities takes place at a later date. Such securities are often the most
efficiently priced and have the best liquidity in the bond market. During the
period between a commitment and settlement, no payment is made by the purchaser
for the securities purchased and, thus, no interest accrues to the purchaser
from the transaction. In a "to be announced" transaction, a Portfolio commits to
purchase securities for which all specific information is not yet known at the
time of the trade, particularly the exact face amount in forward commitment
mortgage-backed securities transactions.
A Portfolio may sell the securities subject to a forward commitment purchase,
which may result in a gain or loss. When a Portfolio purchases securities on a
forward commitment basis, it assumes the risks of ownership, including the risk
of price fluctuation, at the time of purchase, not at the time of receipt.
Purchases of forward commitment securities also involve a risk of loss if the
seller fails to deliver after the value of the securities has risen. Depending
on market conditions, a Portfolio's forward commitment purchases could cause its
net asset value to be more volatile.
Each Portfolio may also enter into a forward commitment to sell securities it
owns and will generally do so only with the intention of actually delivering the
securities. The use of forward commitments enables a Portfolio to hedge against
anticipated changes in interest rates and prices. In a forward sale, a Portfolio
does not participate in gains or losses on the security occurring after the
commitment date. Forward commitments to sell securities also involve a risk of
loss if the seller fails to take delivery after the value of the securities has
declined.
Forward commitment transactions involve additional risks similar to those
associated with investments in options and futures contracts. See "Options and
Futures Contracts." It is not expected that any Portfolio's purchases of forward
commitments will at any time exceed, in the aggregate, 20% of that Portfolio's
total assets.
RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when the sale would
otherwise be desirable. No securities for which there is not a readily available
market ("illiquid securities") will be acquired by any Portfolio if such
acquisition would cause the aggregate value of illiquid securities to exceed 15%
of the Portfolio's net assets (10% of net assets for the Western Asset Money
Market Portfolio and the Western Asset Government Money Market Portfolio).
Under SEC regulations, certain securities acquired through private placements
can be traded freely among qualified purchasers. The SEC has stated that an
investment company's board of directors, or its investment adviser acting under
authority delegated by the board, may determine that a security eligible for
trading under this rule is "liquid." The Portfolios intend to rely on this rule,
to the extent appropriate, to deem specific securities acquired through private
placement as "liquid." The Boards have delegated to a Portfolio's Adviser the
responsibility for determining whether a particular security eligible for
trading under this rule is "liquid." Investing in these restricted securities
could have the effect of increasing a Portfolio's illiquidity if qualified
purchasers become, for a time, uninterested in buying these securities.
Restricted securities may be sold only (1) pursuant to SEC Rule 144A or other
exemption, (2) in privately negotiated transactions or (3) in public offerings
with respect to which a registration statement is in effect under the Securities
Act of 1933, as amended. Rule 144A securities, although not registered in the
U.S., may be sold to qualified institutional buyers in accordance with Rule 144A
under the Securities Act of 1933, as amended. Each Portfolio's Adviser, acting
pursuant to guidelines established by its Board of Directors, may determine that
some Rule 144A securities are liquid for purposes of limitations on the amount
of illiquid investments a Portfolio may own. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Portfolio might obtain a less favorable price than prevailed
when it decided to sell.
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Illiquid securities may be difficult to value, and a Portfolio may have
difficulty disposing of such securities promptly. The Portfolios do not consider
foreign securities to be restricted if they can be freely sold in the principal
markets in which they are traded, even if they are not registered for sale in
the U.S.
SECURITIES OF OTHER INVESTMENT COMPANIES
Investments in other investment companies may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities, and
the total return on such investments will be reduced by the operating expenses
and fees of such investment companies, including advisory fees. The Portfolios
may invest in both closed-end and open-end investment companies.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which securities are acquired from
a securities dealer or bank subject to resale at an agreed upon price and date.
The securities are held by a Portfolio as collateral until retransferred and
will be supplemented by additional collateral if necessary to maintain a total
market value equal to or in excess of the value of the repurchase agreement. The
Portfolio bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Portfolio is delayed or prevented
from exercising its rights to dispose of the collateral securities. A Portfolio
also bears the risk that the proceeds from any sale of collateral will be less
than the repurchase price.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING
A reverse repurchase agreement is a portfolio management technique in which a
Portfolio temporarily transfers possession of a portfolio instrument to another
person, such as a financial institution or broker-dealer, in return for cash. At
the same time, the Portfolio agrees to repurchase the instrument at an agreed
upon time (normally within seven days) and price, including interest payment.
While engaging in reverse repurchase agreements, each Portfolio will maintain
cash or securities in a segregated account at its custodian bank with a value at
least equal to the Portfolio's obligation under the agreements, adjusted daily.
Reverse repurchase agreements may expose a Portfolio to greater fluctuations in
the value of its assets and renders the segregated assets unavailable for sale
or other disposition.
The Portfolios may also enter into dollar roll transactions in which a Portfolio
sells a fixed income security for delivery in the current month and
simultaneously contracts to purchase substantially similar (same type, coupon
and maturity) securities at an agreed upon future time. By engaging in the
dollar roll transaction the Portfolio foregoes principal and interest paid on
the security that is sold, but receives the difference between the current sales
price and the forward price for the future purchase. The Portfolio would also be
able to earn interest on the income that is received from the initial sale.
The obligation to purchase securities on a specified future date involves the
risk that the market value of the securities that a Portfolio is obligated to
purchase may decline below the purchase price. In addition, in the event the
other party to the transaction files for bankruptcy, becomes insolvent or
defaults on its obligation, a Portfolio may be adversely affected.
Each Portfolio will limit its investments in reverse repurchase agreements and
other borrowing (including dollar roll transactions) to no more than one-third
of its total assets. To avoid potential leveraging effects of such borrowing, a
Portfolio will not make investments while its borrowing (including reverse
repurchase agreements but excluding dollar rolls) is in excess of 5% of its
total assets. To avoid potential leveraging effects of dollar rolls, each
Portfolio will segregate assets as required by the Investment Company Act of
1940.
The 1940 Act requires a Portfolio to maintain continuous asset coverage (that
is, total assets including borrowings, less liabilities exclusive of borrowings)
of at least 300% of the amount borrowed. If the asset coverage should decline
below 300% as a result of market fluctuations or for other reasons, a Portfolio
may be required to sell some of its holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from
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an investment standpoint to sell securities at that time. Borrowing may increase
the effect on net asset value of any increase or decrease in the market value of
the Portfolio.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. A Portfolio also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. The Portfolios may enter into reverse repurchase agreements and dollar
roll transactions as a method of borrowing.
LOANS OF PORTFOLIO SECURITIES
A Portfolio may lend its portfolio securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities loaned,
is continuously maintained by the borrower with the Portfolio. During the time
securities are on loan, the borrower will pay the Portfolio an amount equivalent
to any dividends or interest paid on such securities, and the Portfolio may
invest the cash collateral and earn additional income, or it may receive an
agreed upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the option of
the Portfolio or the borrower. A Portfolio may pay administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.
No Portfolio presently expects to have on loan at any given time securities
totaling more than one-third of its net assets. A Portfolio runs the risk that
the counterparty to a loan transaction will default on its obligation and that
the value of the collateral received may decline before the Portfolio can
dispose of it.
DURATION
Duration is a measure of the expected life of a fixed income security on a cash
flow basis. Duration takes the time intervals over which the interest and
principal payments are scheduled and weights each by the present values of the
cash to be received at the corresponding future point in time. For any fixed
income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, a current coupon
bond with a maturity of 3.5 years will have a duration of approximately three
years. In general, the lower the stated or coupon rate of interest of a fixed
income security, the longer its duration; conversely, the higher the stated or
coupon rate of interest of a fixed income security, the shorter its duration.
There may be circumstances under which even duration calculations do not
properly reflect the interest rate exposure of a security. For example, floating
variable rate securities may have final maturities of ten or more years;
however, their interest exposure corresponds to the frequency of the coupon
reset. Similarly, many mortgage pass-through securities may have stated final
maturities of 30 years, but current prepayment rates are more critical in
determining the security's interest rate exposure. In these situations, the
Adviser may consider other analytical techniques that incorporate the economic
life of a security into its determination of interest rate exposure.
PORTFOLIO TURNOVER
The turnover rates of the Western Asset Limited Duration Portfolio, the Western
Asset Intermediate Portfolio, the Western Asset Core Portfolio, and the Western
Asset Core Plus Portfolio and the Western Asset Non-U.S. Fixed Income Portfolio
for the fiscal year ended March 31, 1999 on an annualized basis were ____%,
____%, ____%, ____% and ____%, respectively. While it is impossible to predict
portfolio turnover rates, the Western Asset Enhanced Equity Portfolio, the
Western Asset Intermediate Plus Portfolio, the Western Asset High Yield
Portfolio, and the Western Asset Global Strategic Income Portfolio expect that
their average turnover rate will not exceed 400%, 400%, 200% and 200%,
respectively.
The length of time a Portfolio has held a particular security is not generally a
consideration in investment decisions. A change in the securities held by a
Portfolio is known as "portfolio turnover." As a result of a Portfolio's
investment policies, under certain market conditions a Portfolio's portfolio
turnover rate may be higher than that of other mutual funds. Portfolio turnover
generally involves some expense to a Portfolio, including brokerage commissions
or dealer
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mark-ups and other transaction costs on the sale of securities and reinvestment
in other securities. These transactions may result in realization of taxable
capital gains. Higher portfolio turnover rates, such as those above 100%, are
likely to result in higher brokerage commissions or other transactions costs and
could give rise to a greater amount of taxable capital gains.
ALTERNATIVE INVESTMENT STRATEGIES
At times a Portfolio's Adviser may judge that conditions in the securities
markets make pursuing the Portfolio's typical investment strategy inconsistent
with the best interests of its shareholders. At such times, the Adviser may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
defensive strategies, a Portfolio may invest without limit in a variety of
securities that the Adviser believes present less risk to a Portfolio, including
equity securities, debt securities, preferred stocks, U.S. Government and agency
obligations, cash or money market instruments, or in other securities the
Adviser considers consistent with such defensive strategies. As a result of
these strategies, the Portfolios may invest up to 100% of their assets in
securities of U.S. issuers. It is impossible to predict when, or for how long, a
Portfolio will use these alternative strategies.
NEW INVESTMENT PRODUCTS
New types of mortgage-backed and asset-backed securities, derivative instruments
and hedging instruments are developed and marketed from time to time. Consistent
with its investment limitations, each Portfolio expects to invest in those new
types of securities and instruments that its Adviser believes may assist the
Portfolio in achieving its investment objective.
INVESTMENT POLICIES
The investment objective of each of the Western Asset Core, the Western Asset
Limited Duration, the Western Asset Intermediate and the Western Asset Money
Market Portfolio are "fundamental." Except for investment policies designated as
fundamental in this Prospectus or the SAI, the investment policies described in
this Prospectus and in the SAI are not fundamental policies. Changes to
fundamental investment policies require shareholder approval; the Directors may
change any non-fundamental investment policy without shareholder approval.
RATINGS OF DEBT OBLIGATIONS
Moody's, S&P and NRSROs are private organizations that provide ratings of the
credit quality of debt obligations. A description of the ratings assigned to
corporate debt obligations by Moody's and S&P is included as Appendix A to the
Prospectus. A Portfolio may consider these ratings in determining whether to
purchase, sell or hold a security. Ratings are not absolute assurances of
quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. Credit rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than the rating
indicates.
VALUATION OF PORTFOLIO SHARES
As described in the Prospectus, securities owned by any of the Portfolios (other
than the Money Market Portfolios) for which market quotations are readily
available are valued at current market value. Securities are valued at the last
sale price for a comparable position on the day the securities are being valued
or, lacking any sales on such day, at the last available bid price. In cases
where securities are traded on more than one market, the securities are
generally valued on the market considered by the Adviser as the primary market.
Occasionally, events affecting the value of foreign investments occur between
the time at which they are determined and the close of trading on the Exchange,
which events will not be reflected in a computation of a Portfolio's net asset
value on that day. If events materially affecting the value of such investments
occur during such time period, the
-24-
<PAGE>
investments will be valued at their fair value as determined in good faith by,
or under the direction of, the Board of Directors.
USE OF THE AMORTIZED COST METHOD BY THE MONEY MARKET PORTFOLIOS
The Board of Directors of the Money Market Portfolios has decided that the best
method for determining the value of securities held by the Money Market
Portfolios is amortized cost. Under this method, portfolio instruments are
valued at acquisition cost as adjusted for amortization of premium or accrual of
discount rather than at current market value. The Board of Directors continually
assesses this method of valuation and recommends changes where necessary to
assure that the Money Market Portfolios' investments are valued at their fair
value as determined in good faith by, or under the direction of, the Directors.
The Money Market Portfolios' use of the amortized cost method of valuing
portfolio instruments held by it depends on its compliance with Rule 2a-7 under
the 1940 Act. Under that Rule, the Board of Directors must establish procedures
reasonably designed to stabilize the net asset value per share at $1.00 per
share, taking into account current market conditions and the Portfolio's
investment objective.
MONITORING PROCEDURES
The Board of Directors' procedures include monitoring the relationship between
the amortized cost value per share and a net asset value per share based upon
available indications of market value. The Board will take any steps it
considers appropriate if there is a difference of more than 0.5% between the two
(such as redeeming in kind or shortening the average portfolio maturity) to
minimize any material dilution or other unfair results arising from differences
between the two methods of determining net asset value.
INVESTMENT RESTRICTIONS
Rule 2a-7 requires each Money Market Portfolio to limit its investments to
instruments that present minimal credit risk, in the opinion of the Board, and
are of high quality. The Rule also requires each Money Market Portfolio to
maintain a dollar-weighted average portfolio maturity of not more than 90 days
that is appropriate to the objective of maintaining a stable net asset value of
$1.00 per share. In addition, no instrument considered under SEC rules to have a
remaining maturity of more than 397 days can be purchased by the Money Market
Portfolios. The Money Market Portfolios may hold securities with maturities
greater than 397 days as collateral for repurchase agreements and other
collateralized transactions of short duration. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the relevant Money Market Portfolio will invest its available
cash to reduce the average maturity to 90 days or less as soon as possible.
In periods of declining interest rates, the indicated daily yield on shares of
each Money Market Portfolio computed by dividing the annualized daily income on
the portfolio by the net asset value computed as above may tend to be higher
than a similar computation made by using a method of valuation based upon market
prices and estimates. In periods of rising interest rates, the indicated daily
yield on shares of each Money Market Portfolio computed the same way may tend to
be lower than a similar computation made by using a method of calculation based
upon market prices and estimates.
MANAGEMENT OF THE PORTFOLIOS
DIRECTORS AND OFFICERS
The Fund's officers are responsible for the operation of the Fund under the
direction of its Board of Directors. The officers and Directors of the Fund and
their principal occupations during the past five years are set forth below. An
asterisk (*) indicates Interested Directors.
DIRECTORS AND OFFICERS; LM INSTITUTIONAL FUND ADVISORS I, INC.
-25-
<PAGE>
The address of each officer and Director of LM Institutional Fund Advisors I,
Inc. is 117 East Colorado Blvd., Pasadena, CA 91105, unless otherwise stated.
William G. McGagh, 67(1,2,3), Chairman of the Board and Director; Consultant,
McGagh Associates (corporate financial consulting), January 1989-present;
Director of Pacific American Income Shares, Inc.; formerly: Senior
Vice-President, Chief Financial Officer and Director of Northrop Corporation
(military aircraft).
*W. Curtis Livingston, III, 53(1), Director; Director of Western Asset
(investment management firm), March 1999-present; President, Director and Chief
Executive Officer of Western Asset, December 1980 - March 1999; President,
Pacific American Income Shares, Inc.
*Ronald L. Olson, 55(2, 4), Director; Senior Partner, Munger, Tolles & Olson (a
law partnership); Director of Pacific American Income Shares, Inc.
Louis A. Simpson, 59, Director; President and CEO Capital Operations of
Government Employees Insurance Company (GEICO Corporation) since May 1993; Vice
Chairman of GEICO (1985- 1993); Senior Vice President and Chief Investment
Officer of GEICO (1979-1985). Director of Pacific American Income Shares, Inc.,
Potomac Electric Power Company, Potomac Capital Investment Corporation, and U.S.
West Formerly: President and CEO of Western Asset.
Ronald J. Arnault; 54, Director; President of RJA Consultants (energy industry
financial consulting); member, Board of Governors of The Music Center of Los
Angeles and the Center Theatre Group. Formerly: Executive Vice President, Chief
Financial Officer and Director of ARCO; Director of Pacific American Income
Shares, Inc.
William E. B. Siart, 50, Director; Director of Pacific American Income Shares,
Inc. Formerly: Chairman (1995-1996), Chief Executive Officer (1995-1996),
President (1990- 1996) of First Interstate Bancorp. Member of the Board of
Trustees of the University of Southern California.
John E. Bryson, 54, Director; Chairman and Chief Executive Officer of Edison
International and its principal subsidiary, Southern California Edison, since
October 1990. Also a director of Pacific American Income Shares, Inc., The
Boeing Company, The Times Mirror Company, H.F. Ahmanson & Co., and the W.M. Keck
Foundation, and a trustee of Stanford University.
Anita L. DeFrantz, 45, Director; President of the Amateur Athletic Foundation of
Los Angeles, since, 1985; President of Kids in Sports, since 1994; Vice
President of the International Olympic Committee, since 1997. Also, a director
of Pacific American Income Shares, Inc., and a board member of the Amateur
Athletic Foundation of Los Angeles, since 1985, International Olympic Committee,
since 1996, and the United States Olympic Committee Executive Board, since 1977.
Edward A. Taber III, 54, Director; Senior Executive Vice President and Head of
Asset Management, Legg Mason, Inc., since 1992. Formerly, Director and Head of
Taxable Fixed Income Division, T. Rowe Price Associates (1973-1992). Also, a
director of Western Asset Management Company, Western Asset Global Management
Limited, Bartlett & Co., Batterymarch Financial Management, Inc., Gray, Seifert
& Co., Inc., GSH & Co., Inc., Fairfield Group, Inc., and Legg Mason Fund
Advisors, Inc.
Donna E. Barnes, 36, Secretary; Secretary, Pacific American Income Shares, Inc.,
since April 1996; Compliance Officer of Western Asset, 1991 - present. Formerly:
Assistant Secretary of the Fund and Pacific American Income Shares, Inc.,
1993-1996.
Carl L. Eichstaedt, 36, Vice-President; Portfolio Manager of Western Asset since
1994; formerly: Senior Partner, Portfolio Manager of Harris Investment
Management, 1993-1994; Portfolio Manager of Pacific Investment Management
Company, 1992-1993; Director Fixed Income of Security Pacific Investment
Managers, 1990-1992; and Vice President of Chemical Securities, Inc., 1986-1990.
-26-
<PAGE>
Kent S. Engel, 49, Vice-President; Director and Chief Investment Officer of
Western Asset, 1969-present; Vice-President and Portfolio Manager of Pacific
American Income Shares, Inc.
Keith J. Gardner, 39, Vice-President; Portfolio Manager of Western Asset since
1994; formerly: Senior Portfolio Manager of Legg Mason, Inc., 1992-1994;
Portfolio Manager of T. Rowe Price Associates, Inc., 1985-1992.
Scott F. Grannis, 47, Vice-President; Director and Economist, Western Asset,
1989 - present; Director, Supershares Services Corp. (investment company
services); formerly: Vice-President, Leland O'Brien Rubinstein (investment
advisory firm), 1986-89.
Ilene S. Harker, 41, Vice-President; Director of Administration and Controls,
Western Asset, 1978-present; Vice President, Pacific American Income Shares,
Inc., since April 1996; Formerly: Assistant Secretary of the Fund and Secretary
of Pacific American Income Shares, Inc., 1993-1996.
James W. Hirschmann, III, 36, President; President and Chief Executive Officer,
Western Asset, March 1999 present; Director of Marketing, Western Asset, April
1989-March 1999; formerly: Vice-President and Director of Marketing, Financial
Trust Corporation (bank holding company), January 1988 - April 1989;
Vice-President of Marketing, Atalanta/Sosnoff Capital (investment management
company), January 1986 - January 1988.
Randolph L. Kohn, 49, Vice-President; Director of Client Services, Western
Asset, 1984-present.
S. Kenneth Leech, 42, Vice-President; Director of Portfolio Management, Western
Asset, May 1990-present; formerly: Senior Trader of Greenwich Capital,
1988-1990; Fixed Income Manager of The First Boston Corporation (holding
company; stock and bond dealers), 1985-1987.
Edward A. Moody, 46, Vice-President; Director and Portfolio Manager, Western
Asset.
Joseph L. Orlando, 36, Vice-President; Marketing Executive of Western Asset;
formerly: Regional Manager of T. Rowe Price Associates (investment management
firm), January 1988 - July 1992.
Marie K. Karpinski, 49, Vice President and Treasurer; Vice President and
Treasurer of twenty-one Legg Mason/Bartlett funds (open-end investment
companies), 1986-present: Vice President and Treasurer of LM Institutional Fund
Advisors I, Inc.; Assistant Treasurer of Pacific American Income Shares, Inc.
(closed-end investment company), 1988-present; Treasurer of Legg Mason Fund
Adviser, Inc., March 1986-present; Vice-President of Legg Mason Wood Walker,
Incorporated., 1992-present; Assistant Vice-President of Legg Mason Wood Walker,
Incorporated, 1989-1992.
Steven T. Saruwatari, 31, Assistant Treasurer; Senior Financial Officer, Western
Asset; formerly: Controller-Finance for LaSalle Paper Company/Spicers Paper,
Inc. (distributor of fine printing papers), June 1991-November 1994; and Senior
Auditor for Coopers and Lybrand (international public accounting firm),
September 1988 - May 1991.
Stephen A. Walsh, 37, Vice-President; Director and Portfolio Manager, Western
Asset; formerly: Portfolio Manager and Trader of Security Pacific Investment
Managers, Inc. (investment management company), 1989-1991.
- --------------------------------------------------------------------------------
(1) Member of the Executive Committee of the Board. When the full Board
is not in session, the Executive Committee may exercise all the powers
held by the Board in the management of the business and affairs of the
Fund that may be lawfully exercised by the full Board, except the power
to declare a dividend, to authorize the issuance of stock, to recommend
to stockholders any matter requiring stockholders' approval, to amend
the By-Laws, or to approve any merger or share exchange which does not
require shareholder approval.
(2) Member of the Audit Committee of the Board. The Audit Committee
meets with the Fund's independent accountants to review the financial
statements of the Fund, the arrangements for special and annual audits,
the adequacy of internal controls, the Fund's periodic reporting
process, material contracts entered into by the Fund, the services
provided by the accountants, any proposed changes in accounting
practices or principles, the independence of the accountants; and to
report on such matters to the Board.
The Fund has no compensation committee.
-27-
<PAGE>
(3) Member of the Nominating Committee of the Board. The Nominating
Committee is responsible for the selection and nomination of
Disinterested Directors.
(4) Mr. Olson may be deemed an interested person because the law firm
in which he is a partner has provided certain services to the Fund and
Western Asset.
Officers and Directors of the Fund who are affiliated persons of the Manager,
Western Asset, LMFA or Legg Mason receive no salary or fees from the Fund. Each
Independent Director of the Fund receives a fee of $2,000 annually for serving
as a Director, and a fee of $500 and related expenses per Portfolio for each
meeting of the Board of Directors attended by them. The Chairman of the Board
receives an additional $1,000 per year for serving in that capacity.
The following table provides certain information relating to the compensation of
the Fund's Directors and senior executive officers for the fiscal year ended
March 31, 1999.
<TABLE>
<CAPTION>
Aggregate Compensation
Total Compensation From the Fund and Complex
Name of Person and Position From the Fund* Paid to Directors**
- --------------------------- -------------- -------------------
<S> <C> <C>
William G. McGagh -
Chairman of the Board and Director $ $
- ---------------------------------- ---------------------- --------------------------
Ronald J. Arnault - Director $ $
- ---------------------------- ---------------------- --------------------------
Norman Barker, Jr. - Director $ $
- ----------------------------- ---------------------- --------------------------
Ronald L. Olson - Director $ $
- -------------------------- ---------------------- --------------------------
W. Curtis Livingston, III -
Director and President none none
Louis A. Simpson - Director $ $
- --------------------------- --------------------- --------------------------
William E. B. Siart - Director $ $
- ------------------------------ --------------------- --------------------------
John E. Bryson $ $
- -------------- ---------------------- --------------------------
Anita L. DeFranti $ $
- ----------------- ---------------------- --------------------------
Ilene S. Harker - Vice President none none
- -------------------------------- ---- ----
Steve T. Saruwatari - Assistant Treasurer none none
- ----------------------------------------- ---- ----
</TABLE>
*Represents fees paid to each person during the fiscal year ended March 31,
1999.
**Represents aggregate compensation paid to each person during the calendar year
ended December 31, 1998 for serving as a Director of the Company and of a
closed-end investment company advised by Western Asset.
MANAGER AND ADVISERS
THE MANAGER. The Manager, a wholly owned subsidiary of Legg Mason, Inc., a
financial services holding company, serves as investment manager to the Fund
under the Investment Management Agreement dated May 29, 1998 between
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<PAGE>
the Manager and the Fund (the "Management Agreement"). The Management Agreement
was most recently approved by the Board of Directors, including a majority of
Independent Directors, on March 6, 1998.
Under the Management Agreement, the Manager is responsible, subject to the
general supervision of the Fund's Board of Directors, for the actual management
of the Fund's assets, including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security, consistent with the
investment objectives and policies described in the Prospectus and this
Statement of Additional Information. The Manager also is responsible for the
compensation of Directors and officers of the Fund who are employees of the
Manager or its affiliates. The Manager receives for its services a fee as
described in the Prospectus. As noted below, the Manager has delegated
responsibility for the selection of the Fund's investments to the Advisers.
Each Portfolio pays all of its other expenses which are not assumed by the
Manager. These expenses include, among others, expenses of preparing and
printing prospectuses, statements of additional information, proxy statements
and reports and of distributing them to existing shareholders, custodian
charges, transfer agency fees, organizational expenses, compensation of the
Directors who are not "interested persons" of the Manager, or its affiliates, as
that term is defined in the 1940 Act, legal and audit expenses, insurance
expenses, expenses of registering and qualifying shares of the Portfolios for
sale under federal and state law, Rule 12b-1 fees, governmental fees, expenses
incurred in connection with membership in investment company organizations,
interest expense, taxes and brokerage fees and commissions. The Portfolios also
are liable for such nonrecurring expenses as may arise, including litigation to
which a Portfolio or the Fund may be a party. The Fund may also have an
obligation to indemnify its Directors and officers with respect to litigation.
Under the Management Agreement, the Manager will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolios in
connection with the performance of the Management Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.
The Management Agreement terminates automatically upon assignment and is
terminable with respect to any Portfolio at any time without penalty by vote of
the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by the Manager, on not less than 60 days'
notice to the Fund, and may be terminated immediately upon the mutual written
consent of the Manager and the Fund.
For the Western Asset Core Portfolio, the Manager received $_________ (prior to
fees waived of $______), $_________ (prior to fees waived of $______),
$_________ (prior to fees waived of $_______) and $_______ (prior to fees waived
of $______) for the fiscal year ended March 31, 1999, the nine month period
ended March 31, 1998, and the years ended June 30, 1997 and 1996, respectively.
For the Western Asset Intermediate Portfolio, the Manager received $_______
(prior to fees waived of $_______), $_______ (prior to fees waived of $_______),
$_______ (prior to fees waived of $_______) and $______ (prior to fees waived of
$______) for the fiscal year ended March 31, 1999, the nine month period ended
March 31, 1998, and the years ended June 30, 1997 and 1996, respectively. For
the Western Asset Limited Duration Portfolio, the Manager waived all advisory
fees for the fiscal year ended March 31, 1999, the nine month period ended March
31, 1998, and the year ended June 30, 1997 and for the period May 1, 1996
(commencement of operations) to June 30, 1996. For the Western Asset Core Plus
Portfolio, the Manager received $_______ (prior to fees waived of $_______),
$_______ (prior to fees waived of $_______), $_______ (prior to fees waived of
$_______) and $______ (prior to fees waived of $______) for the fiscal year
ended March 31, 1999, the nine month period ended March 31, 1998, and the years
ended June 30, 1997 and 1996, respectively. For the Western Asset Non-U.S. Fixed
Income Portfolio, the Manager received $_______ (prior to fees waived of
$_______), $_______ (prior to fees waived of $_______), $_______ (prior to fees
waived of $_______) and $______ (prior to fees waived of $______) for the fiscal
year ended March 31, 1999, the nine month period ended March 31, 1998, and the
years ended June 30, 1997 and 1996, respectively.
ADVISERS
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<PAGE>
WESTERN ASSET. Western Asset, a wholly owned subsidiary of Legg Mason, Inc.,
serves as Adviser to the Western Asset Enhanced Equity Portfolio, the Western
Asset Money Market Portfolio, the Western Asset Government Money Market
Portfolio, the Western Asset Limited Duration Portfolio, the Western Asset
Intermediate Portfolio, the Western Asset Intermediate Plus Portfolio, the
Western Asset Core Portfolio, the Western Asset Core Plus Portfolio, the Western
Asset High Yield Portfolio and the Western Asset Global Strategic Income
Portfolio (U.S. portion) under an Investment Advisory Agreement dated May 26,
1998 between Western Asset and the Manager (the "Western Asset Advisory
Agreement"). The Western Asset Advisory Agreement was most recently approved by
the Board of Directors, including a majority of the Independent Directors, on
March 6, 1998.
Under the Western Asset Advisory Agreement, Western Asset is responsible,
subject to the general supervision of the Fund's Board of Directors and the
Manager, for the actual management of the Portfolios' assets, including the
responsibility for making decisions and placing orders to buy, sell or hold a
particular security, consistent with the investment objectives and policies
described in the Prospectus and this Statement of Additional Information.
Western Asset receives from the Manager for its services an advisory fee as
described in the Prospectus.
Under the Western Asset Advisory Agreement, Western will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Portfolios
in connection with the performance of the Western Asset Advisory Agreement,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless disregard by it of
its obligations or duties thereunder.
The Western Asset Advisory Agreement terminates automatically upon assignment
and is terminable with respect to any Portfolio at any time without penalty by
vote of the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by Western Asset, on not less than 60 days'
notice, and may be terminated immediately upon the mutual written consent of the
parties.
Western Asset served as investment adviser to LM Institutional Fund Advisors I,
Inc. under an Investment Advisory Agreement dated August 24, 1990, and as
amended on February 8, 1996, between Western Asset and the Fund covering the
Western Asset Limited Duration Portfolio and Western Asset Core Portfolio
("Advisory Agreement I"), an Investment Advisory Agreement dated February 10,
1994, and as amended on February 8, 1996, between Western Asset and the LM
Institutional Fund Advisors I, Inc. covering the Western Asset Intermediate
Portfolio ("Advisory Agreement II"), and an Investment Advisory Agreement dated
June 30, 1992, between Western Asset and the LM Institutional Fund Advisors I,
Inc. covering the Western Asset International Securities Portfolio. The rate of
compensation payable to Western Asset under Advisory Agreement I and Advisory
Agreement II was the same as that payable to the Manager with respect to the
relevant Portfolios.
WAGM. WAGM, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to
the Western Asset Non-U.S. Fixed Income Portfolio, and to the non-U.S. portion
of the Western Asset Intermediate Plus Portfolio, the Western Asset Core Plus
Portfolio and the Western Asset Global Strategic Income Portfolio under an
Investment Advisory Agreement dated May 26, 1998 between the Manager and WAGM
(the "WAGM Advisory Agreement"). The WAGM Advisory Agreement was most recently
approved by the Board of Directors, including a majority of the Independent
Directors, on March 6, 1998.
Under the WAGM Advisory Agreement, WAGM is responsible, subject to the general
supervision of the Fund's Board of Directors and the Manager, for the actual
management of the Portfolio's assets, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security,
consistent with the investment objective and policies described in the
Prospectus and this Statement of Additional Information. WAGM also is
responsible for the compensation of Directors and officers of the Fund who are
employees of WAGM or its affiliates. WAGM receives from the Manager for its
services to the Portfolio an advisory fee as described in the Prospectus.
Under the WAGM Advisory Agreement, WAGM will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolio in
connection with the performance of the WAGM Advisory Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.
-30-
<PAGE>
The WAGM Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Fund's Board of Directors,
by vote of a majority of the Portfolio's outstanding voting securities, or by
WAGM, on not less than 60 days' notice, and may be terminated immediately upon
the mutual written consent of the parties.
DISTRIBUTORS
Legg Mason, 100 Light Street, P. O. Box 1476, Baltimore, MD 21203-1476, acts as
a distributor of the shares of LM Institutional Fund Advisors I, Inc. pursuant
to an Underwriting Agreement with the Fund dated August 24, 1990 and amended May
26, 1998 (the "Underwriting Agreement").
Legg Mason is not obligated to sell any specific amount of Fund shares and
receives no compensation pursuant to the Underwriting Agreement. The
Underwriting Agreement is terminable with respect to any Portfolio without
penalty, at any time, by vote of a majority of the Fund's Independent Directors,
or by vote of the holders of a majority of the shares of that Portfolio, or by
Legg Mason upon 60 days' notice to the Fund.
The Fund has adopted a Plan which, among other things, permits the Fund to pay
Legg Mason fees for its services related to sales and distribution of Financial
Intermediary Class shares and the provision of ongoing services to Financial
Intermediary Class shareholders. Payments are made only from assets attributable
to Financial Intermediary Class shares. Under the Plan, the aggregate fees may
not exceed an annual rate of 0.40% (currently limited to 0.25%) of each
Portfolio's average daily net assets attributable to Financial Intermediary
Class shares. Fees for the Western Asset Money Market Portfolio and the Western
Asset Government Money Market Portfolio are additionally currently limited to
the annual rate of 0.10% of average daily net assets attributable to 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.
The Plan was approved by Legg Mason Fund Adviser, Inc., as sole shareholder of
the Financial Intermediary Class of each Portfolio on May 17, 1999. Legg Mason
may pay all or a portion of the fee to its investment executives.
The Plan will continue in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting securities of the Financial Intermediary Class shares. Any change in the
Plan that would materially increase the distribution cost to a Portfolio
requires shareholder approval; otherwise the Plan may be amended by the
Directors, including a majority of the 12b-1 Directors, as previously described.
In accordance with Rule 12b-1, the Plan provides that Legg Mason will submit to
the Fund's Board of Directors, and the Directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.
For the fiscal year ended March 31, 1999, the Western Asset Limited
Duration Portfolio, Western Asset Intermediate Portfolio, Western Asset Core
Portfolio, Western Asset Core Plus Portfolio and Western Asset Non-U.S. Fixed
Income Portfolio paid Legg Mason $____________, $____________, $___________,
$_________ and $____________, respectively in distribution and service fees
under the Plan from assets attributable to Financial Intermediary Class shares.
During the year ended March 31, 1999 Legg Mason incurred the following expenses
with respect to Financial Intermediary Class shares:
-31-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Limited Intermediate Core Core Plus Non-U.S.
Duration Fixed
Income
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advertising, printing and
mailing prospectuses to
prospective shareholders $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Compensation to underwriters
$ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Compensation to
broker-dealers $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Compensation to sales
personnel $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Interest, carrying or other
financial charges $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Other $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Total Expenses $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Arroyo Seco, Inc. ("Arroyo Seco"), 117 East Colorado Boulevard, Pasadena, CA
91105, a wholly owned subsidiary of Western Asset, is also authorized to offer
the shares of LM Institutional fund Advisors I, Inc. for sale to its customers
pursuant to an Agreement dated November 9, 1995. This Agreement was most
recently approved by the Board of Directors of LM Institutional Fund Advisors I,
Inc., including a majority of the Independent Directors, on May 17, 1998.
LM Institutional Fund Advisors I, Inc. makes no payments to Arroyo Seco in
connection with the offer or sale of the Fund's shares, and Arroyo Seco does not
collect any commissions or other fees from customers in connection with the
offer or sale of the Fund's shares. Arroyo Seco is not obligated to sell any
specific amount of Fund shares. The Agreement is terminable without penalty, at
any time, by vote of a majority of the Fund's Directors, a majority of the
Fund's Independent Directors, or a majority of the Fund's outstanding shares, or
by Arroyo Seco upon 60 days' notice to the Fund.
PURCHASES AND REDEMPTIONS
The Fund reserves the right to modify or terminate the mail, telephone or wire
redemption services described in the Prospectus at any time. The Fund also
reserves the right to suspend or postpone redemptions (1) for any period during
which the Exchange is closed (other than for customary weekend and holiday
closings), (2) when trading in markets the Fund normally utilizes is restricted
or an emergency, as defined by rules and regulations of the SEC, exists, making
disposal of the Fund's investments or determination of its net asset value not
reasonably practicable, or (3) for such other periods as the SEC by regulation
or order may permit for the protection of the Fund's shareholders. In the case
of any such suspension, an investor may either withdraw the request for
redemption or receive payment based upon the net asset value next determined
after the suspension is lifted.
The Fund agrees to redeem shares of each Portfolio solely in cash up to the
lesser of $250,000 or 1% of the relevant Portfolio's net assets during any
90-day period for any one shareholder. In consideration of the best interests of
the remaining shareholders, the Fund reserves the right to pay any redemption
price exceeding this amount in whole or in
-32-
<PAGE>
part by a distribution in kind of readily marketable securities held by a
Portfolio in lieu of cash. It is highly unlikely that shares would ever be
redeemed in kind. If shares are redeemed in kind, however, the redeeming
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the distribution.
EXCHANGE PRIVILEGE
Shareholders in any of the Portfolios are entitled to exchange their shares for
shares of the other Portfolios or of any portfolio of LM Institutional Fund
Advisors II, Inc., provided that such shares are eligible for sale in the
shareholder's state of residence, and are being offered at the time.
When a shareholder decides to exchange shares of a Portfolio, the Fund's
transfer agent will redeem shares of the Portfolio and invest the proceeds in
shares of the Portfolio selected. Redemptions of shares of the Portfolio will be
made at their net asset value determined on the same day that the request is
received in proper order, if received before the close of business of the
Exchange. If the request is received by the transfer agent after the close of
business on the Exchange, shares will be redeemed at their net asset value
determined as of the close of the Exchange on the next day the Exchange is open.
There is no charge for the exchange privilege and no sales charge imposed on an
exchange, but the Portfolios reserve the right to modify or terminate the
exchange privilege at any time. For more information concerning the exchange
privilege, or to make an exchange, please contact the Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Advisory Agreements, the Advisers are responsible for the execution of
the Portfolios' transactions. In selecting brokers or dealers, the Advisers must
seek the most favorable price (including the applicable dealer spread) and
execution for such transactions, subject to the possible payment as described
below of higher brokerage commissions or spreads to brokers or dealers who
provide research and analysis. The Portfolios may not always pay the lowest
commission or spread available. Rather, in placing orders on behalf of the
Portfolios, the Advisers will also take into account such factors as size of the
order, difficulty of execution, efficiency of the executing broker's or dealer's
facilities (including the services described below) and any risk assumed by the
executing broker or dealer.
Consistent with the policy of obtaining most favorable price and execution, an
Adviser may give consideration to research, statistical and other services
furnished by brokers or dealers to the Adviser for its use, may place orders
with brokers or dealers who provide supplemental investment and market research
and securities and economic analysis, and may pay to those brokers or dealers a
higher brokerage commission or spread than may be charged by other brokers or
dealers. Such research, analysis and other services may be useful to an Adviser
in connection with services to clients other than the Portfolios. An Adviser's
fee is not reduced by reason of its receiving such brokerage and research
services.
The Portfolios may not buy securities from, or sell securities to, an Adviser or
its affiliated persons as principal, except as permitted by the rules and
regulations of the SEC. Subject to certain conditions, the Portfolios may
purchase securities that are offered in underwritings in which an affiliate of
an Adviser is a participant, although the Portfolios may not make such purchases
directly from such affiliate.
The Advisers will select brokers to execute portfolio transactions. In the
over-the-counter market, the Portfolios generally will deal with responsible
primary market-makers unless a more favorable execution can otherwise be
obtained.
Investment decisions for the Portfolios are made independently from those of
other funds and accounts advised by the Advisers. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be
-33-
<PAGE>
equitably allocated to each account. In some cases, this procedure may adversely
affect the price or quantity of the security available to a particular account.
In other cases, however, an account's ability to participate in larger volume
transactions may produce better executions and prices. Brokerage commissions
paid on transactions were as follows: for the fiscal year ended March 31, 1999,
the nine month period ended March 31, 1998, and the years ended June 30, 1997
and 1996, the Western Asset Core Plus Portfolio paid $___________,
$____________; the Western Asset Core Portfolio paid $___________, $___________,
$__________, and $__________, respectively; the Western Asset Intermediate
Portfolio paid $__________, $________, $__________ and $__________,
respectively; the Western Asset Non-U.S. Fixed Income Portfolio paid $_______,
$_______, $_______ and $_______, respectively; and the Western Asset Limited
Duration Portfolio paid $________, $________, $________ and $_________. No
brokerage commissions were paid by any Portfolio to affiliated persons.
ADDITIONAL TAX INFORMATION
GENERAL REQUIREMENTS FOR "PASS-THROUGH" TREATMENT
In order to continue to qualify for treatment as a regulated investment company
("RIC") under the Code, each Portfolio must distribute annually to its
shareholders at least 90% of its investment company taxable income (consisting
generally of net investment income and net short-term capital gain, if any)
("Distribution Requirement") and must meet several additional requirements. With
respect to each Portfolio, these requirements include the following: (1) the
Portfolio must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or other income (including gains
from options or futures ) derived with respect to its business of investing in
securities ("Income Requirement"); (2) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Portfolio's total
assets; and (3) at the close of each quarter of the Portfolio's taxable year,
not more than 25% of its total assets may be invested in securities (other than
U.S. Government securities) of any one issuer.
A distribution declared by a Portfolio in December of any year and payable to
shareholders of record on a date in that month will be deemed to have been paid
by the Portfolio and received by the shareholders on December 31 if the
distribution is paid by the Portfolio during the following January. Such a
distribution, therefore, will be taxable to shareholders for the year in which
that December 31 falls.
ORIGINAL ISSUE DISCOUNT
A Portfolio may purchase debt securities issued with original issue discount.
Original issue discount that accrues in a taxable year will be treated as income
earned by the Portfolio and therefore an equivalent amount must be distributed
to satisfy the distribution requirement and avoid imposition of the 4% excise
tax. Because the original issue discount earned by a Portfolio in a taxable year
may not be represented by cash income, the Portfolio may have to dispose of
other securities and use the proceeds thereof to make distributions in amounts
necessary to satisfy those distribution requirements. A Portfolio may realize
capital gains or losses from such dispositions, which would increase or decrease
the Portfolio's investment company taxable income and/or net capital gain. In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce the Portfolio's ability to sell other securities (and options
and futures), held for less than three months that it might wish to sell in the
ordinary course of its portfolio management.
MISCELLANEOUS
If a Portfolio invests in shares of preferred stock or otherwise holds
dividend-paying securities as a result of exercising a conversion privilege, a
portion of the dividends from the Portfolio's investment company taxable income
(whether paid in cash or reinvested in additional shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by the Portfolio from U.S.
-34-
<PAGE>
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If shares of any Portfolio are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the price back as a taxable dividend or
capital gain distribution.
Dividends and interest received by a Portfolio, and gains realized by a
Portfolio on foreign securities, may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions that would reduce the
yield on the Portfolio's securities. Tax conventions between certain countries
and the United States may reduce or eliminate these foreign taxes, however, and
foreign countries generally do not impose taxes on capital gains in respect of
investments by foreign investors.
OTHER INFORMATION
LMIFA I was incorporated in Maryland on May 16, 1990. Prior to May 29, 1998,
LMIFA I was known as "Western Asset Trust, Inc." Each Portfolio is an open-end,
diversified management company, except for Western Asset Non-U.S. Fixed Income
Portfolio and Western Asset Global Strategic Income Portfolio, which are
non-diversified companies. The Directors of LMIFA I may, without shareholder
approval, create, in addition to the Portfolios, other series of shares
representing separate investment portfolios. Any such series may be divided
without shareholder approval into two or more classes of shares having such
terms as the Directors may determine. Establishment and offering of additional
portfolios or classes of shares of a portfolio will not alter the rights of the
Fund's shareholders.
LMIFA I has a total of [13.1] billion shares of common stock at par value
$0.001. Each share has one vote, with fractional shares voting proportionally.
Voting on matters pertinent only to a particular Portfolio, such as the adoption
of an investment advisory contract for that Portfolio, is limited to that
Portfolio's shareholders. Shares of all classes of a Portfolio will vote
together as a single class except when otherwise required by law or as
determined by the Directors. Shares are freely transferable, are entitled to
dividends as declared by the Directors, and, if a Portfolio were liquidated,
would receive the net assets of that Portfolio. Voting rights are not
cumulative, and all shares of the Portfolios are fully paid and nonassessable
and have no preemptive or conversion rights.
Although no Portfolio intends to hold annual shareholder meetings, it will hold
a special meeting of shareholders when the Investment Company Act of 1940 (the
"1940 Act") requires a shareholder vote on certain matters (including the
election of Directors in certain cases or approval of an advisory contract).
When issued, shares are fully paid, non-assessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights. In
liquidation of a Portfolio, each shareholder is entitled to receive his or her
pro rata share of the net assets of that Portfolio.
Prior to May 21, 1998, the Western Asset Core Portfolio was known as the Core
Portfolio; the Western Asset Limited Duration Portfolio was known as the Limited
Duration Portfolio; the Western Asset Intermediate Portfolio was known as the
Intermediate Portfolio; and the Western Asset Money Market Portfolio was known
as the Money Market Portfolio.
-35-
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
Set forth below is a table which contains the name, address and percentage of
ownership of each person who is known by the Fund to own beneficially five
percent or more of the outstanding shares of the Western Asset Core Portfolio as
of May 27, 1999:
<TABLE>
<CAPTION>
% of Ownership as of
Name and Address May 27, 1999
<S> <C>
Institutional Class
First National Bank of Omaha TTEE
One First National Center
Omaha, NE 68102-1596
Newspaper and Mail Deliverers' Publishers' Pension Fund 6.75%
41-18 27th Street
Long Island City, NY 11101-3825
</TABLE>
The following chart contains the name, address and percentage of ownership of
each person who is known by the Fund to own of record five percent or more of
the outstanding shares of the Western Asset Core Plus Portfolio as of May 27,
1999:
<TABLE>
<CAPTION>
<S> <C>
% of Ownership as
Name and Address of May 27, 1995
- ---------------- -----------------
Institutional Class
Thomson Consumer Electron 33.76%
Pension Plan for Employees
Post Office Box 1992
Boston, MA 02105-1992
Appleton Papers Inc. 23.15%
Post Office Box 92956
Chicago, IL 60675-2956
Howard County Community 12.59%
Health Foundation I
10440 Little Patuxent Parkway, Suite 90
Columbia, MD 21044-3629
Blanchard Valley Health 5.70%
Association Pension Plan
Post Office Box 160
Westerville, OH 43086-0160
W E Upjohn Unemployment 5.49%
Trustee Corp
Post Office Box 4042
Kalamazoo, MI 49003-4042
-36-
<PAGE>
Set forth below is a table which contains the name, address and percentage of
ownership of each person who is known by the Fund to own beneficially five
percent or more of the outstanding shares of the Western Asset Intermediate
Portfolio as of May 27, 1999:
% of Ownership as of
Name and Address May 27, 1999
- ---------------- -------------
Financial Intermediary Class
Link & Co. as Trustee for Various 100.00%
401-K Expediter Plans
Post Office Box 630074
Cincinnati, OH 45263-0001
Institutional Class
M A Hanna Master Trust 13.89%
30 South LaSalle Street
Chicago, IL 60603-1006
Anne Arundel County 11.06%
Maryland Master Trust
Post Office Box 1992, Mailstop B2
Boston, MA 02105-1992
MAC & Co. A/C APF8560142 8.94%
Mutual Fund Operations
Post Office Box 3198
Pittsburgh, PA 15230-3198
Sun Microsystems Savings Trust 8.03%
209 W. Jackson Boulevard, Suite 700
Chicago, IL 60606-6936
Mt. Sinai Health Care Foundation
Post Office Box 94870
Cleveland, OH 44101-4870 6.96%
Edward Health Services
Post Office Box 9014 Church Street Station
New York, NY 10008 6.58%
-37-
<PAGE>
The following chart contains the name, address and percentage of ownership of
each person who is known by the Fund to own of record five percent or more of
the outstanding shares of the Western Asset Non-U.S. Fixed Income Portfolio as
of May 27, 1999:
% of Ownership as of
Name and Address May 27, 1999
- ---------------- -------------
Institutional Class
Treasurer of the State of Connecticut 61.67%
One Enterprise Drive
North Quincy, MA 02171-2126
Booth & Co./Annuity Board of 29.21%
Southern Baptist Convention
Post Office Box 92923 C-IN
Chicago, IL 60675-2923
United Airline Pilots 8.27%
50 South LaSalle Street
Chicago, IL 60603-1006
-38-
<PAGE>
Set forth below is a table which contains the name, address and percentage of
ownership of each person who is known by the Fund to own beneficially five
percent or more of the outstanding shares of the Western Asset Limited Duration
Portfolio as of May 27, 1999:
% of Ownership as of
Name and Address May 27, 1999
- ---------------- -------------
Institutional Class
Western Michigan University 77.56%
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008
Wright State University Foundation 12.29%
Wright State University
Dayton, OH 45435
Good Shephard Medical 10.15%
P.O. Box 160
Westerville, OH 43086
</TABLE>
-39-
<PAGE>
Western Michigan University, Thomson Consumer Electronics Pension Plan
for Employees and the Treasurer of the State of Connecticut may be deemed to
control the Western Asset Limited Duration Portfolio, the Western Asset Core
Plus Portfolio and the Western Asset Non-U.S. Fixed Income Portfolio,
respectively, because each owns more than 25% of the outstanding voting
securities of such Portfolio. The Officers and Directors of the Portfolios own
in the aggregate less than 1% of the outstanding shares of each Portfolio.
PERFORMANCE INFORMATION
Each Portfolio may, from time to time, include its total return in marketing
materials or reports to shareholders or prospective investors. Quotations of
average annual total return for a class of shares of a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in that class of shares over periods of one, five and
ten years (up to the life of the class), calculated pursuant to the following
formula: P (1 + T)(exponent n) = ERV (where P = a hypothetical initial payment
of $1,000, T = the average annual total return, n = number of years, and ERV =
the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures reflect the deduction of a
proportional share of Portfolio expenses on an annual basis and assume that all
dividends and other distributions are reinvested when paid. The performance of
each class of a Portfolio will differ because each class is subject to different
expenses. The performance figures for the Portfolios shown below represent
performance of the Institutional Class shares, the only class of shares in
existence throughout the relevant periods.
[Information to be provided by Legg Mason]
The Western Asset Core Portfolio's total returns as of March 31, 1999 were as
follows:
Average
Cumulative Annual
Total Return Total Return
One Year
Five Years
Life of Portfolio(A)
(A) Portfolio's inception - September 4, 1990.
The Western Asset Intermediate Portfolio's total returns as of March 31, 1999
were as follows:
Average
Cumulative Annual
Total Return Total Return
One Year
Life of Portfolio(A)
(A) Portfolio's inception - July 1, 1994.
-40-
<PAGE>
The Western Asset Limited Duration Portfolio's total returns as of
March 31, 1999 were as follows:
Average
Cumulative Annual
Total Return Total Return
One Year
Life of Portfolio(A)
(A) Portfolio's inception - May 1, 1996.
The Western Asset Core Plus Portfolio's total returns as of March 31, 1999 were
as follows:
Average
Cumulative Annual
Total Return Total Return
Life of Portfolio(A)
(A) Portfolio's inception - July 8, 1998.
The Western Asset Non-U.S. Fixed Income Portfolio's total returns as of March
31, 1999 were as follows:
Average
Cumulative Annual
Total Return Total Return
Life of Portfolio(A)
(A) Portfolio's inception - July 15, 1998.
The current annualized yield for the Money Market Portfolios is based upon a
specified seven-day period and is computed by determining the net change in the
value of a hypothetical account in the Portfolio. The net change in the value of
the account includes the value of dividends and of additional shares purchased
with dividends, but does not include realized gains and losses or unrealized
appreciation and depreciation. In addition, the Money Market Portfolios may use
a compound effective annualized yield quotation which is calculated as
prescribed by SEC regulations, by adding one to the base period return
(calculated as prescribed above), raising the sum to a power equal to 365
divided by 7, and subtracting one.
Each Portfolio's performance may fluctuate daily depending upon such factors as
the average maturity of its securities, changes in investments, changes in
interest rates and variations in operating expenses. Therefore, current
performance does not provide a basis for determining future performance. The
fact that a Portfolio's performance will fluctuate and that shareholders'
principal is not guaranteed or insured should be considered in comparing the
Portfolio's performance with the performance of fixed-income investments. In
comparing the performance of a Portfolio to other investment vehicles,
consideration should be given to the investment policies of each, including the
types of investments owned, lengths of maturities of the portfolio, the method
used to compute the performance and whether there are any special charges that
may reduce the yield.
From time to time each Portfolio may compare the performance of a Class of
Shares in advertising and sales literature to the performance of other
investment companies, groups of investment companies or various market indices.
One such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of the
largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of
all dividends.
-41-
<PAGE>
It takes no account of the costs of investing or the tax consequences of
distributions. The Portfolios invest in many securities that are not included in
the S&P 500.
Each Portfolio may also cite rankings and ratings, and compare the return of a
Class of Shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. Each Portfolio may also
refer in such materials to mutual fund performance rankings, ratings,
comparisons with funds having similar investment objectives, and other mutual
funds reported in independent periodicals, including, but not limited to,
FINANCIAL WORLD, MONEY MAGAZINE, FORBES, BUSINESS WEEK, BARRON'S, FORTUNE, THE
KIPLINGER LETTERS, THE WALL STREET JOURNAL, AND THE NEW YORK TIMES.
Each Portfolio may compare the investment return of a Class of Shares to the
return on certificates of deposit and other forms of bank deposits, and may
quote from organizations that track the rates offered on such deposits. Bank
deposits are insured by an agency of the federal government up to specified
limits. In contrast, Portfolio shares are not insured, the value of Portfolio
shares may fluctuate, and an investor's shares, when redeemed, may be worth more
or less than the investor originally paid for them. Unlike the interest paid on
many certificates of deposit, which remains at a specified rate for a specified
period of time, the return of each Class of Shares will vary.
Portfolio advertisements may reference the history of Legg Mason and its
affiliates, the education and experience of the portfolio manager, and the fact
that the portfolio manager engages in a particular style of investing (e.g.,
growth or value).
In advertising, each Portfolio may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. Each Portfolio may use other
recognized sources as they become available.
Each Portfolio may use data prepared by Ibbotson Associates of Chicago, Illinois
("Ibbotson") to compare the returns of various capital markets and to show the
value of a hypothetical investment in a capital market. Ibbotson relies on
different indices to calculate the performance of common stocks, corporate and
government bonds and Treasury bills.
Each Portfolio may illustrate and compare the historical volatility of different
portfolio compositions where the performance of stocks is represented by the
performance of an appropriate market index, such as the S&P 500, and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
Each Portfolio may also include in advertising biographical information on key
investment and managerial personnel.
Each Portfolio may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through low price levels.
Each Portfolio may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors meet their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisers for private accounts and mutual
funds with assets of more than $88 billion as of March 31, 1999.
-42-
<PAGE>
In advertising, each Portfolio may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1790, Boston, Massachusetts 02105,
serves as custodian of the Fund's assets. Boston Financial Data Services, Inc.,
P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and
dividend-disbursing agent and administrator of various shareholder services.
Shareholders who request an historical transcript of their account will be
charged a fee based upon the number of years researched. The Fund reserves the
right, upon 60 days' written notice, to make other charges to investors to cover
administrative costs.
INDEPENDENT ACCOUNTANTS
____________________ have been selected to serve as the Fund's independent
accountants. The financial highlights included in the Prospectus and
incorporated by reference into this Statement of Additional Information and the
financial statements incorporated by reference into the Prospectus and this
Statement of Additional Information have been so included and incorporated in
reliance upon the report of ____________________, given on their authority as
experts in auditing and accounting.
LEGAL COUNSEL
Ropes & Gray, Boston, MA, serves as legal counsel to the Fund.
FINANCIAL STATEMENTS
The report of independent accountants, financial statements and financial
highlights for the fiscal year ended March 31, 1999 for each of the Western
Asset Limited Duration Portfolio, the Western Asset Intermediate Portfolio, the
Western Asset Core Portfolio, the Western Asset Core Plus Portfolio and the
Western Asset Non-U.S. Fixed Income Portfolio included in the Portfolios' Annual
Reports are hereby incorporated by reference into this Statement of Additional
Information.
The audited Statement of Assets and Liabilities as of March 31, 1999 for the
Western Asset Money Market Portfolio and the Report of Independent Accountants
related thereto, are shown on the following pages.
[To be provided]
LM Institutional Fund Advisors I, Inc.
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999
Money
Market
<TABLE>
<CAPTION>
<S> <C>
Portfolio
Assets
Cash
Deferred organization and initial offering costs
Total assets
-43-
<PAGE>
Liabilities
Accrued organization expenses and initial offering costs
Total liabilities
Net Assets - Offering and redemption price of $1.00 per share
with 1,000 shares outstanding of the Money Market Portfolio
(13,100,000,000 shares par value $.001 per share authorized)
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
[To Be Provided]
-44-
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. ("Moody's") corporate bond
- -------------------------------------------------------------------------
ratings:
- --------
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and are
to be considered upper- medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Description of Standard & Poor's corporate bond ratings:
AAA-This is the highest rating assigned by Standard & Poor's to an obligation
and indicates an extremely strong capacity to pay principal and interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay principal
and interest. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
A-1
<PAGE>
Description of Moody's preferred stock ratings:
- -----------------------------------------------
aaa-An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stock.
aa-An issue which is rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a-An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa-An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba-An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
Description of Moody's Short-Term Debt Ratings
- ----------------------------------------------
Prime-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2. Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor's Commercial Paper Ratings
- ---------------------------------------------------------
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for the issues
designated "A-1".
A-2
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation(1)
(b) Bylaws, as amended May 21, 1998(1)
(c) Instruments Defining Rights of Security Holders
(d) (1) Investment Management Agreement -- (2)
(i) Western Asset Government Money Market Portfolio
(ii) Western Asset Money Market Portfolio
(iii) Western Asset Core Portfolio
(iv) Western Asset Core Plus Portfolio
(v) Western Asset Intermediate Portfolio
(vi) Western Asset Intermediate Plus Portfolio
(vii) Western Asset Limited Duration Portfolio
(viii) Western Asset High Yield Portfolio
(ix) Western Asset Non-U.S. Fixed Income Portfolio
(x) Western Asset Global Strategic Income Portfolio
(xi) Western Asset Enhanced Equity Portfolio
(2)(i) Western Asset Government Money Market Portfolio
(ii) Western Asset Money Market Portfolio
(iii) Western Asset Core Portfolio
(iv) Western Asset Core Plus Portfolio
(v) Western Asset Intermediate Portfolio
(vi) Western Asset Intermediate Plus Portfolio
(vii) Western Asset Limited Duration Portfolio
(viii) Western Asset High Yield Portfolio
(ix) Western Asset Non-U.S. Fixed Income Portfolio
(x) Western Asset Global Strategic Income Portfolio
(xi) Western Asset Enhanced Equity Portfolio
(xii) Western Asset Core Plus Portfolio
(xiii) Western Asset Intermediate Plus Portfolio
(xiv) Western Asset Global Strategic Income Portfolio
(e) (i) Underwriting Agreement (2)
(ii) Broker Agreement (1)
(f) Bonus or profit sharing contracts -- none
(g) Custodian agreement(1)
(h) (a) Transfer Agent agreement(1)
(b) Administration agreement(1)
-5-
<PAGE>
(i) Opinion of counsel -- (2)
(j) Other opinions, appraisals, rulings and consents Accountants'
consent -- filed herewith
(k) Financial statements omitted from Item 22 -- not applicable
(l) Agreement for providing initial capital
(i) Western Asset Core Portfolio, Western Asset Intermediate
Portfolio, Western Asset Limited Duration Portfolio, and
International Securities Portfolio(1)
(ii) Western Asset Government Money Market Portfolio, Western
Asset Core Plus Portfolio, Western Asset Intermediate Plus
Portfolio, Western Asset High Yield Portfolio, Western Asset
Non-U.S. Fixed Income Portfolio, and Western Asset Global
Strategic Income Portfolio -- (2)
(m) Plan pursuant to Rule 12b-1 -- (2)
(i) Western Asset Government Money Market Portfolio
(ii) Western Asset Money Market Portfolio
(iii) Western Asset Core Portfolio
(iv) Western Asset Core Plus Portfolio
(v) Western Asset Intermediate Portfolio
(vi) Western Asset Intermediate Plus Portfolio
(vii) Western Asset Limited Duration Portfolio
(viii) Western Asset High Yield Portfolio
(ix) Western Asset Non-U.S. Fixed Income Portfolio
(x) Western Asset Global Strategic Income Portfolio
(xi) Western Asset Enhanced Equity Portfolio
(n) Financial Data Schedules -- not applicable
(o) Rule 18f-3 Plan - filed herewith
- -------------------------------------------------------
(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 15 to the Registration Statement, SEC File No. 33-34929, filed
October 30, 1997.
(2) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 18 to the Registration Statement, SEC File No. 33-34929, filed May
29, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant
Western Michigan University may be deemed to control the Western
Asset Limited Duration Portfolio as a result of its ownership of more than 25%
of the outstanding voting securities of such Portfolio.
Item 25. Indemnification
Article ELEVENTH of the Articles of Incorporation provides that to the maximum
extent permitted by applicable law (including Maryland law and the 1940 Act) the
directors and officers of the Registrant shall not be liable to the Registrant
or to any of its stockholders for monetary damages. Article ELEVENTH also
provides that no amendment, alteration or repeal of the contents contained in
the preceding sentence or the adoption, alteration or amendment of any other
provision of the Articles or Bylaws inconsistent with Article ELEVENTH shall
adversely affect any limitation of liability of any director or officer of the
Registrant with respect to any act or failure to act which occurred prior to
such amendment, alteration, repeal or adoption.
-6-
<PAGE>
Section 11.2 of Article ELEVENTH of the Registrant's Articles of Incorporation
provides that the Registrant shall indemnify its present and past directors,
officers, employees and agents, and persons who are serving or have served at
the Registrant's request in similar capacities for other entities to the maximum
extent permitted by applicable law (including Maryland law and the Investment
Company Act of 1940). Section 2-418(b) of the Maryland Corporations and
Associations Code ("Maryland Code") permits the Registrant to indemnify its
directors unless it is established that the act or omission of the director was
material to the matter giving rise to the proceeding, and (a) the act or
omission was committed in bad faith or was the result of active and deliberate
dishonesty; (b) the director actually received an improper personal benefit in
money, property or services; or (c) in the case of a criminal proceeding, the
director had reasonable cause to believe the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements and
reasonable expenses incurred in connection with a proceeding, in accordance with
the Maryland Code. Pursuant to Section 2418(j)(2) of the Maryland Code, the
Registrant is permitted to indemnify its officers, employees and agents to the
same extent. The provisions set forth above apply insofar as consistent with
Section 17(h) of the 1940 Act, which prohibits indemnification of any director
or officer of the Registrant against any liability to the Registrant or its
shareholders to which such director or officer otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Section 10.1 of Article X of the Bylaws sets forth the procedures by which the
Registrant will indemnify its directors, officers, employees and agents. Section
10.2 of Article X of the Bylaws provides that the Registrant may purchase and
maintain insurance on behalf of the above-mentioned persons to the extent
permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be provided to directors, officers and controlling persons
of the Registrant, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Registrant by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
prohibited as against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Under the Distribution Agreement, the Fund agrees to indemnify, defend and hold
the Distributor, its several officers and directors, and any person who controls
the Distributor within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, arising out of or
based upon any alleged untrue statement of a material fact contained in the
Registration Statement or arising out of or based upon any alleged omission to
state a material fact required to be stated or necessary to make the
Registration Statement not misleading, provided that in no event shall anything
contained in the Distribution Agreement be construed so as to protect the
Distributor against any liability to the Corporation or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
by reason of its reckless disregard of its obligations and duties under the
Agreement.
-7-
<PAGE>
The Investment Advisory Agreements provide that the Adviser will not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
or any Portfolio in connection with the performance of the agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under the agreement. The
Administration Agreements provide that the Administrator shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with performance of the Administration Agreement, except a loss
resulting from willful misfeasance, bad faith, or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties thereunder.
Item 26. Business and Other Connections of Investment Adviser
I. Western Asset Management Company ("Western"), investment adviser for the
Western Asset Core Portfolio, Western Asset Intermediate Portfolio, Western
Asset Limited Duration Portfolio, Western Asset Enhanced Equity Portfolio,
Western Asset Money Market Portfolio, Western Asset Government Money Market
Portfolio, Western Asset High Yield Portfolio and International Securities
Portfolio, is a registered investment adviser incorporated on October 5, 1971.
Western is primarily engaged in the investment advisory business. Western also
renders investment advice to other open-end registered investment companies, one
closed-end registered investment company, and private accounts. Information as
to the officers and directors of Western is included in its Form ADV filed with
the Securities and Exchange Commission as in effect on the date hereof
(registration number 801-08162) and is incorporated herein by reference.
II. Western Asset Global Management Limited ("Western Asset Global"), investment
adviser to the Western Asset Non-U.S. Fixed Income Portfolio, the Western Asset
Core Plus Portfolio, the Western Asset Intermediate Plus Portfolio and the
Western Asset Global Strategic Income Portfolio, is a corporation organized
under the laws of the United Kingdom, is registered with the Securities and
Exchange commission as an investment adviser and is regulated by the securities
laws of the United Kingdom. Western Asset Global has provided management of
global and international fixed income portfolios since its inception; however,
it does not manage assets for any other investment company. Information as to
the officers and directors of Western Asset Global is included in its Form ADV
filed with the Securities and Exchange Commission as in effect on the date
hereof (registration number 801-21068) and is incorporated herein by reference.
Item 27. Principal Underwriters
----------------------
(a) Legg Mason Cash Reserve Trust Legg Mason Special Investment Trust, Inc. Legg
Mason Value Trust, Inc. Legg Mason Tax-Exempt Trust, Inc. Legg Mason Income
Trust, Inc. Legg Mason Total Return Trust, Inc. Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc. Legg Mason Investors Trust, Inc.
(b) The following table sets forth information concerning each director and
officer of the Registrant's principal underwriter, Legg Mason Wood Walker,
Incorporated ("LMWW").
<TABLE>
<CAPTION>
<S> <C> <C>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. The Retired Vice Chairman None
of the Board
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
-8-
<PAGE>
Edward A. Taber III Senior Executive Vice None
President and
Director
Robert A. Frank Executive Vice None
President and
Director
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
F. Barry Bilson Senior Vice None
President and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania Avenue, N.W. President and
Washington, D.C. 20006 Director
Laura L. Lange Senior Vice None
President and
Director
-9-
<PAGE>
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania Avenue, N.W. President and
Washington, D.C. 20006 Director
Mark I. Preston Senior Vice None
President and
Director
Joseph Sullivan Senior Vice None
President and
Director
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Seth J. Lehr Senior Vice None
1735 Market St President
Philadelphia, PA 19103
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
Gail Reichard Senior Vice None
President
Timothy C. Scheve Senior Vice None
President and
Treasurer
-10-
<PAGE>
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
-11-
<PAGE>
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
</TABLE>
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
The following table sets forth information concerning each director and officer
of Arroyo Seco, Inc. ("Arroyo").
<TABLE>
<CAPTION>
<S> <C> <C>
Position and Positions and
Name and Principal Offices with Offices with
Business Address** Underwriter - Arroyo Registrant
- ------------------ -------------------- ----------
Ilene S. Harker Chief Executive Vice President
Officer and Director
Donna E. Barnes Corporate Secretary Secretary
James W. Hirschmann Director and Director Vice President
of Marketing
Randolph L. Kohn Director and Director of Vice President
Client Services
Steven T. Saruwatari Chief Financial Officer Vice President
W. Curtis Livingston, III Director President and Director
</TABLE>
** All addresses are 117 East Colorado Boulevard, Pasadena, California 91105,
unless otherwise indicated.
(c) The Registrant has no principal underwriter
which is not an affiliated person of the
Registrant or an affiliated person of such an
affiliated person.
-12-
<PAGE>
Item 28. Location of Accounts and Records
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Item 29. Management Services -- none
Item 30. Undertakings -- none
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, LM Institutional Fund Advisors I, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pasadena and State of
California, on the 1st day of June, 1999.
LM INSTITUTIONAL FUND ADVISORS I, INC.
By: /s/ Ilene Harker
----------------------------
Ilene Harker
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
/s/ W. Curtis Livingston, III President and Director June 1, 1999
- -----------------------------
W. Curtis Livingston, III*
/s/ Edward A. Taber, III Director June 1, 1999
- ------------------------
Edward A. Taber, III*
/s/ John E. Bryson Director June 1, 1999
- ------------------
John E. Bryson*
/s/ Ronald J. Arnault Director June 1, 1999
- ---------------------
Ronald J. Amault*
/s/ William G. McGagh Director June 1, 1999
- ---------------------
William G. McGagh*
/s/ Ronald L. Olson Director June 1, 1999
- -------------------
Ronald L. Olson*
/s/ William E. B. Siart Director June 1, 1999
- -----------------------
William E. B. Siart*
/s/ Anita L. DeFrantz Director June 1, 1999
- ---------------------
Anita L. DeFrantz*
/s/ Marie K. Karpinski Treasurer June 1, 1999
- ------------------------
Marie K. Karpinski*
* By: /s/ Ilene Harker
-----------------
Ilene Harker
Attorney-in-Fact Pursuant to Powers of Attorney filed
Herewith and for Herself
</TABLE>
<PAGE>
Exhibit Index
-------------
Exhibit (j) Power of Attorney
Exhibit (o) Multiple Class Plan
<PAGE>
Exhibit (j)
MHODMA.Active;3389552;4
LM INSTITUTIONAL FUND ADVISORS I, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lisa G. Hathaway, Ilene S. Harker, James W.
Hirschman, and W. Curtis Livingston, III, as his or her true and lawful
attorneys-in-fact and agents, each acting along, with full powers of
substitution, for him or her in his or her name, place and stead, in any and all
capacities, to sign any or all post-effective amendments to this Registration
Statement of LM Institutional Fund Advisors I, Inc., and to file the same, with
all exhibits thereto, and all other documents in connection therewith (File Nos.
33-34929 and 811-06110) granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his or
her substitute may lawfully do or cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ W. Curtis Livingston, III President and Director May 17, 1999
- -----------------------------
W. Curtis Livingston, III
/s/ Edward A. Taber, III Director May 17, 1999
- ------------------------
Edward A. Taber, III*
/s/ John E. Bryson Director May 17, 1999
- ------------------
John E. Bryson*
/s/ Ronald J. Arnault Director May 17, 1999
- ---------------------
Ronald J. Arnault*
/s/ William G. McGagh Director May 17, 1999
- ---------------------
William G. McGagh*
/s/ Ronald L. Olson Director May 17, 1999
- -------------------
Ronald L. Olson*
/s/ Louis A. Simpson Director May 17, 1999
- --------------------
Louis A. Simpson*
/s/ William E. B. Siart Director May 17, 1999
- -----------------------
William E. B. Siart*
/s/ Anita L. DeFrantz Director May 17, 1999
- ---------------------
Anita L. DeFrantz*
/s/ Marie K. Karpinski Treasurer May 17, 1999
- ------------------------
Marie K. Karpinski*
<PAGE>
Exhibit O
LM INSTITUTIONAL FUND ADVISORS I, INC.
Multiple Class (Rule 18f-3) Plan
April 17, 1998
This Plan is adopted by LM Institutional Fund Advisors I, Inc. (the
"Company") pursuant to Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "Act"), in order to document the separate arrangements and expense
allocations of each of the classes of shares (the "Classes") of the constituent
Portfolios of the Company specified on Schedule A attached hereto (the
"Multiclass Portfolios").
Section 1. Class Designations
The types of Classes are the "Institutional Class" and the "Financial
Intermediary Class."
Each Class has a different arrangement for shareholder services or
distribution or both, as follows:
(a) Institutional Class Shares -- are offered with no sales charges or
distribution expenses.
(b) Financial Intermediary Class Shares -- are offered with no sales
charges, but are subject to expenses incurred under a distribution plan adopted
in accordance with Rule 12b-1 under the Act ("Distribution Plan").
Section 2. Voting
Each Class shall have the voting rights set out in the Articles of
Incorporation and By-Laws of the Company, as they may be amended from time to
time. The Financial Intermediary Class shares shall have the right to vote with
respect to the Distribution Plan applicable to that Class.
Section 3. Allocation of Expenses Between Classes
(a) Distribution Expenses. All expenses incurred under a Class's
Distribution Plan shall be allocated to that Class.
(b) Other Class Expenses. All other expenses, to the extent they are
determined by the Directors, or by the Company's investment manager or
investment advisers, to have been incurred by or in respect of one but not both
Classes of a Multiclass Portfolio or otherwise unequally as between such
Classes, shall be allocated as between the Classes in any manner, consistent
with Rule 18f-3, that the Directors may in their discretion consider fair and
equitable. In light of the foregoing, the Directors have currently determined
that the expenses as set forth in Schedule B attached hereto shall be allocated
to the Institutional Class or the Financial Intermediary Class as shown on
Schedule B. Schedule B may be modified from time to time by
-14-
<PAGE>
the Directors and such modification shall not constitute an amendment to this
Plan which must be submitted to the shareholders of either Class.
Section 4. Other Allocations and Waivers/Reimbursements
(a) Expenses Applicable to More than One Portfolio. Expenses incurred
by the Company on behalf of a Portfolio, including any Multiclass Portfolio,
shall be allocated to that Portfolio, and expenses incurred by the Company on
behalf of more than one Portfolio shall be allocated among the Portfolios that
incurred the expenses based on the net asset values of the several Portfolios in
relation to the aggregate net asset value of all Portfolios to which the expense
relates, or on such other basis as the Directors may in their discretion
consider fair and equitable.
(b) Other Allocations. Income, realized and unrealized capital gains
and losses, and expenses other than expenses allocated pursuant to Section 3
shall be allocated to each Class on the basis of the net asset value of that
Class in relation to the net asset value of the Multiclass Portfolio, or on such
other basis, consistent with Rule 18f-3, as the Directors may in their
discretion consider fair and equitable.
(c) Waivers and Reimbursements. Nothing in this Plan shall be construed
as limiting the ability of any person to waive any fee paid by a Portfolio or
Class to that person or to reimburse any or all expenses of a Portfolio or
Class.
Section 5. Exchanges
Shareholders of a Class may, as and to the extent permitted by the
prospectus of the Portfolios in question, exchange their shares for shares of
the same Class of any other Portfolio in accordance with Section 11(a) of the
Act and the rules thereunder. For these purposes, the term "Portfolio" includes
any series of LM Institutional Fund Advisors II, Inc.
-2-
<PAGE>
Schedule A
----------
Constituent Portfolios of LM Institutional Fund Advisors I, Inc.
to Which the Multiclass Plan Applies
Portfolio
---------
Western Asset Enhanced Equity Portfolio
Western Asset Money Market Portfolio
Western Asset Government Money Market Portfolio
Western Asset Limited Duration Portfolio
Western Asset Intermediate Portfolio
Western Intermediate Plus Portfolio
Western Asset Core Portfolio
Western Asset Core Plus Portfolio
Western Asset High Yield Portfolio
Western Asset Non-U.S. Fixed Income Portfolio
Western Asset Global Strategic Income Portfolio
A-1
<PAGE>
Schedule B to Multiclass Plan
Allocation of Class Expenses
Institutional Class Shares
1. Printing and postage expenses related to preparing and distributing
material such as shareholder reports, prospectuses and proxy materials to
current holders of Institutional Class Shares;
2. Registration fees (other than State registration fees imposed on a
company or Portfolio-wide basis and Securities and Exchange Commission
registration fees) for Institutional Class Shares;
3. Litigation or other legal expenses relating solely to Institutional
Class Shares;
4. Transfer agency fees.
5. Directors' fees incurred as a result of issues relating solely to
Institutional Class Shares; and
6. The expense of holding meetings solely for holders of Institutional
Class Shares.
Financial Intermediary Class Shares
1. Printing and postage expenses related to preparing and distributing
material such as shareholder reports, prospectuses and proxy materials to
current holders of Financial Intermediary Class Shares;
2. Registration fees (other than State registration fees imposed on a
company or Portfolio-wide basis and Securities and Exchange Commission
registration fees) for Financial Intermediary Class Shares;
3. Litigation or other legal expenses relating solely to Financial
Intermediary Class Shares;
4. Transfer agency fees;
5. Directors' fees incurred as a result of issues relating solely to
Financial Intermediary Class Shares; and
6. The expense of holding meetings solely for holders of Financial
Intermediary Class Shares.
B-1
