As filed with the Securities and Exchange Commission on April 30, 1997.
1933 Act File No. 33-56672
1940 Act File No. 811-7418
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
-------
Post-Effective Amendment No. 12 [X]
-------
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 14
------
LEGG MASON GLOBAL TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on May 1 , 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1997 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1997 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.
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule on February 27,
1997.
<PAGE>
Legg Mason Global Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Table of Contents
Cross Reference Sheet
Legg Mason Global Government Trust -- Primary Shares
Legg Mason International Equity Trust -- Primary Shares
Legg Mason Emerging Markets Trust -- Primary Shares
Part A - Prospectus
Navigator Global Government Trust
Navigator International Equity Trust
Navigator Emerging Markets Trust
Part A - Prospectus
Legg Mason Global Government Trust
Legg Mason International Equity Trust
Legg Mason Emerging Markets Trust
(Primary Shares and Navigator Shares)
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Global Trust, Inc.
Legg Mason Global Government Trust - Primary Shares
Legg Mason International Equity Trust - Primary Shares
Legg Mason Emerging Markets Trust - Primary Shares
Form N-1A Cross Reference Sheet
-------------------------------
Part A. Item No. Prospectus Caption
- ---------------- ------------------
1 Cover Page
2 Prospectus Highlights;
Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Description of the
Corporation and Its Shares
5 Expenses;
The Funds' Management and Investment Adviser;
The Funds' Distributor;
The Funds' Custodian and Transfer Agent
6 Prospectus Highlights;
Description of the Corporation and
Its Shares;
Dividends and Other Distributions;
Shareholder Services;
Taxes
7 How You Can Invest in the Funds;
How Your Shareholder Account is
Maintained;
How Net Asset Value is Determined;
The Funds' Distributor
8 How You Can Redeem Your Primary Shares
9 Not Applicable
<PAGE>
Legg Mason Global Trust, Inc.
Navigator Global Government Trust
Navigator International Equity Trust
Navigator Emerging Markets Trust
Form N-1A Cross Reference Sheet
-------------------------------
Part A. Item No. Prospectus Caption
- ---------------- ------------------
1 Cover Page
2 Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Description of the
Corporation and Its Shares
5 Expenses;
The Funds' Management and Investment Adviser;
The Funds' Distributor;
The Funds' Custodian and Transfer Agent
6 Description of the Corporation and
Its Shares;
Dividends and Other Distributions;
Shareholder Services;
Taxes
7 How to Purchase and Redeem Shares;
How Your Shareholder Account is
Maintained;
How Net Asset Value is Determined;
The Funds' Distributor
8 How to Purchase and Redeem Shares
9 Not Applicable
<PAGE>
Legg Mason Global Trust, Inc.
Legg Mason Global Government Trust
Legg Mason International Equity Trust
Legg Mason Emerging Markets Trust
(Primary Shares and Navigator Shares)
Form N-1A Cross Reference Sheet
-------------------------------
Statement of Additional
Part B. Item No. Information Caption
- ---------------- -----------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About
Investment Limitations and Policies;
Portfolio Transactions and Brokerage
14 The Corporation's Directors and Officers
15 The Corporation's Directors and Officers
16 The Funds' Investment Adviser/Manager;
Sub-Advisory Agreement;
The Funds' Distributor;
The Corporation's Independent Accountants;
The Funds' Custodian and
Transfer and Dividend-Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Fund Shares;
Additional Purchase and Redemption Information
20 Additional Tax Information;
Tax-Deferred Retirement Plans
21 The Funds' Distributor;
Portfolio Transactions and Brokerage
22 Performance Information
23 Financial Statements
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 6
Performance Information 7
Investment Objectives and Policies 8
How You Can Invest in the Funds 22
How Your Shareholder Account is
Maintained 23
How You Can Redeem Your Primary Shares 23
How Net Asset Value is Determined 25
Dividends and Other Distributions 25
Taxes 26
Shareholder Services 27
The Funds' Management and Investment Advisers 28
The Funds' Distributor 29
The Funds' Custodian and Transfer Agent 30
Description of the Corporation and its Shares 30
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.,
Washington, DC 20036-1800
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, MD 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ANY FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY ANY FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
[RECYCLED LOGO] PRINTED ON RECYCLED PAPER
LMF-041
LEGG MASON
GLOBAL
FUNDS
GLOBAL GOVERNMENT TRUST
INTERNATIONAL EQUITY TRUST
EMERGING MARKETS TRUST
PRIMARY SHARES
------------------------------------------
PUTTING YOUR FUTURE FIRST
PROSPECTUS
MAY 1, 1997
[LEGG MASON FUNDS LOGO]
<PAGE>
LEGG MASON GLOBAL FUNDS -- PRIMARY SHARES
LEGG MASON GLOBAL TRUST, INC.:
LEGG MASON GLOBAL GOVERNMENT TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
The Legg Mason Global Trust, Inc. ("Corporation") is an open-end management
investment company which currently offers three series: The Legg Mason Global
Government Trust ("Global Government"), The Legg Mason International Equity
Trust ("International Equity") and the Legg Mason Emerging Markets Trust
("Emerging Markets") (each separately referred to as a "Fund" and collectively
referred to as the "Funds"). Global Government is a bond fund; International
Equity and Emerging Markets are equity funds.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated May 1, 1997 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by reference. The Statement of Additional Information is
available without charge upon request from the Funds' distributor, Legg Mason
Wood Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
INTERNATIONAL EQUITY AND EMERGING MARKETS MAY INVEST UP TO 35% AND 100%,
RESPECTIVELY, OF THEIR TOTAL ASSETS IN THE SECURITIES OF COMPANIES LOCATED IN
DEVELOPING COUNTRIES, INCLUDING COUNTRIES OR REGIONS WITH RELATIVELY LOW GROSS
NATIONAL PRODUCT PER CAPITA COMPARED TO THE WORLD'S MAJOR ECONOMIES, AND IN
COUNTRIES OR REGIONS WITH THE POTENTIAL FOR RAPID BUT UNSTABLE ECONOMIC GROWTH
(COLLECTIVELY, "EMERGING MARKETS"). BECAUSE OF THE RISKS ASSOCIATED WITH COMMON
STOCK INVESTMENTS, BOTH INTERNATIONAL EQUITY AND EMERGING MARKETS ARE INTENDED
TO BE LONG-TERM INVESTMENT VEHICLES AND ARE NOT DESIGNED TO PROVIDE INVESTORS
WITH A MEANS OF SPECULATING ON SHORT-TERM STOCK MARKET MOVEMENTS. INVESTORS IN
THESE TWO FUNDS SHOULD BE ABLE TO TOLERATE SUDDEN, SOMETIMES SUBSTANTIAL
FLUCTUATIONS IN THE VALUE OF THEIR INVESTMENTS.
INVESTORS SHOULD BE COGNIZANT OF THE UNIQUE RISKS OF INTERNATIONAL
INVESTING, INCLUDING EXPOSURE TO CURRENCY FLUCTUATIONS. BECAUSE OF THESE RISKS,
AN INVESTMENT IN ANY OF THESE FUNDS SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM. BECAUSE OF THE SPECIAL RISKS ASSOCIATED WITH EMERGING
MARKETS, AN INVESTMENT IN EITHER OF THE EQUITY FUNDS ALSO SHOULD BE CONSIDERED
SPECULATIVE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
May 1, 1997
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
GLOBAL GOVERNMENT is a non-diversified, professionally managed
portfolio seeking to provide capital appreciation and current income in
order to achieve an attractive total return consistent with prudent
investment risk. In attempting to achieve the Fund's objective, the Fund's
investment adviser, Western Asset Management Company ("Western Asset"),
normally invests at least 75% of the Fund's total assets in debt
securities issued or guaranteed by foreign governments, the U.S.
Government, their agencies, instrumentalities or political subdivisions.
At least 75% of the Fund's total assets normally will be invested in
investment grade debt securities of foreign or domestic corporations,
governments or other issuers, certain money market instruments, and
repurchase agreements collateralized by such securities.
The value of the debt instruments held by the Fund, and thus the net
asset value of Fund shares, generally fluctuates inversely with movements
in market interest rates. The prices of longer-term securities generally
fluctuate more than those of shorter-term securities. As a non-diversified
series, the Fund may be subject to greater risk with respect to its
portfolio securities than an investment company that has a broader range
of investments.
The Fund may invest up to 25% of its assets in debt securities rated
below investment grade, whose credit quality is generally considered the
equivalent of U.S. corporate debt securities commonly known as "junk
bonds." Such securities are considered predominantly speculative and may
involve a substantial risk of default. The Fund may also invest in loans
and loan participations, and may use interest rate, currency and index
swaps, caps, collars and floors, all of which involve certain risks and
costs. See "Investment Techniques and Risks" in "Investment Objectives and
Policies," at pages 11-22.
INTERNATIONAL EQUITY is a diversified, professionally managed
portfolio seeking maximum long-term total return. In attempting to achieve
the Fund's objective, the Fund's investment adviser, Batterymarch
Financial Management, Inc. ("Batterymarch"), normally invests the Fund's
assets in common stocks of companies located outside the United States.
The Fund may invest up to 35% of its total assets in emerging market
securities.
EMERGING MARKETS is a diversified, professionally managed portfolio
seeking long-term capital appreciation. In attempting to achieve the
Fund's objective, Batterymarch, as the Fund's investment adviser, normally
invests at least 65% of the Fund's total assets in equity securities of
emerging market companies. Assets not invested in emerging market equity
securities may be invested in any combination of debt securities of the
U.S. Government, equity securities of issuers in developed countries, cash
and money market instruments.
The adviser considers emerging markets to include most of the
countries of Asia, Africa, Latin America, Eastern Europe and the Middle
East, as well as certain countries in Western or Southern Europe. Most
emerging market countries or regions have relatively low gross national
products per capita compared to the world's major economies, and have the
potential for rapid but unstable economic growth. The risks of foreign
investing are heightened in emerging markets.
Because of the risks associated with common stock investments in
emerging markets, International Equity and Emerging Markets are intended
to be long-term investment vehicles and are not designed to provide
investors with a means of speculating on short-term stock market
movements. Investors should be able to tolerate sudden, sometimes
substantial fluctuations in the value of their investment. The value of
the equity and other instruments held by these Funds, and thus the net
asset values of Fund shares, are subject to market risk. See "Investment
Techniques and Risks" in "Investment Objectives and Policies," at pages
11-22.
There can be no assurance that any Fund will achieve its objective.
See "Investment Objectives and Policies," page 8. Changes in economic
conditions in, or governmental policies of, foreign
2
<PAGE>
nations will have a significant impact on the performance of the Funds.
Foreign investment involves a possibility of expropriation,
nationalization, confiscatory taxation, limitations on the use or removal
of funds or other assets of a Fund, the withholding of tax on interest or
dividends, and restrictions on the ownership of securities by foreign
entities such as the Funds. Fluctuations in the value of foreign
currencies relative to the U.S. dollar will affect the value of Fund
holdings denominated in such currencies. Each Fund's participation in
hedging and option income strategies also involves certain investment
risks and transaction costs. Because of these risks, each Fund should not
be considered a complete investment program.
Each Fund offers two classes of shares --
Primary Class ("Primary Shares") and Navigator Class ("Navigator Shares").
Primary Shares offered in this Prospectus are available to all investors
except certain institutions (see page 5). No initial sales charge is
payable on purchases, and no redemption charge is payable on sales of
Global Government and International Equity shares. For Emerging Markets, a
2% redemption fee is charged on the proceeds of shares redeemed or
exchanged within one year of purchase. Each Fund pays management fees to
its respective adviser, and distribution fees with respect to Primary
Shares to its distributor, Legg Mason, as described on pages 29-30 of this
Prospectus.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISERS:
Western Asset Management Company (for Global Government)
Batterymarch Financial Management, Inc. (for International Equity and
Emerging Markets)
INVESTMENT SUB-ADVISER:
Western Asset Global Management, Ltd. (for Global Government)
INVESTMENT MANAGER:
Legg Mason Fund Adviser, Inc. ("LMFA")
INITIAL PURCHASE:
$1,000 minimum, generally.
SUBSEQUENT PURCHASES:
$100 minimum, generally.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. See "How You Can
Invest in the Funds," page 22.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 27.
DIVIDENDS:
Declared and paid monthly for Global Government. Declared and paid
annually for International Equity and Emerging Markets. See "Dividends and
Other Distributions," page 25. All dividends and other distributions are
automatically reinvested in Fund shares unless cash payments are
requested.
3
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor in Primary Shares will bear
directly or indirectly. The expenses and fees set forth in the table are based
on average net assets and annual Fund operating expenses related to Primary
Shares for the year ended December 31, 1996. For Emerging Markets, which has
limited operating history prior to the date of this Prospectus, other expenses
are based on estimates for the current fiscal year, and fees are adjusted for
current expense limits and fee waiver levels.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees:
For Global Government and International
Equity None
For Emerging Markets 2.00%*
- ---------------
* Because of the costs involved in trading emerging market securities, Emerging
Markets assesses a 2.00% redemption fee on the proceeds of shares redeemed or
exchanged within one year of purchase. The fee is paid directly to the Fund,
and not to LMFA or Legg Mason. See page 24.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
GLOBAL INTERNATIONAL EMERGING
GOVERNMENT EQUITY MARKETS
---------------------------------------
Management fees
(after fee
waivers) 0.75% 0.68% 0.00%
12b-1 fees 0.75% 1.00% 1.00%
Other expenses 0.36% 0.57% 1.50%(B)
---------------------------------------
Total operating
expenses (after
fee waivers) 1.86% 2.25% 2.50%
---------------------------------------
- ---------------
(A) Pursuant to voluntary expense limitations, LMFA, Legg Mason, and each Fund's
adviser have agreed to waive the management and 12b-1 fees to the extent
necessary to limit total operating expenses attributable to the Primary
Shares of each Fund (exclusive of taxes, interest, brokerage and
extraordinary expenses) as follows: For Global Government, 1.90% of average
daily net assets indefinitely; for International Equity, 2.25% of average
daily net assets until May 1, 1998; and for Emerging Markets, 2.50% of
average daily net assets until May 1, 1998. In the absence of such waivers,
the expected management fee, 12b-1 fee, other expenses, and total operating
expenses of each Fund would be as follows: for International Equity, 0.75%,
1.00%, 0.57% and 2.32% of average net assets; and for Emerging Markets,
1.00%, 1.00%, 1.50% and 3.50% of average net assets. No fee waivers were
necessary for Global Government.
(B) Other expenses are based on annualized estimated amounts for the current
fiscal year.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1) a 5%
annual rate of return and (2) full redemption at the end of each time period. As
noted in the prior table, Global Government and International Equity charge no
redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------
Global Government $ 19 $58 $101 $218
International Equity $ 23 $70 $120 $258
Emerging Markets $ 46 $78 N/A N/A
Emerging Markets
(Assuming no
redemption) $ 25 $78 N/A N/A
This example assumes that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same over the time periods shown and that all
dividends and other distributions are reinvested. If the waivers are not
extended beyond May 1, 1998, the expense figures in the example may be higher.
The above tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE ASSUMED
5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT, THE PROJECTED
OR ACTUAL PERFORMANCE OF PRIMARY SHARES OF THE FUNDS. THE ABOVE TABLES AND
EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The actual expenses
attributable to Primary Shares will depend upon, among other things, the level
of average net assets, the levels of sales and redemptions of shares, the extent
to which LMFA (and/or a Fund's adviser) and Legg Mason waive their fees and the
extent to
4
<PAGE>
which Primary Shares incur variable expenses, such as transfer agency costs.
Because each Fund pays a 12b-1 fee with respect to Primary Shares, long-term
shareholders may pay more in distribution expenses than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"). For further information concerning Fund
expenses, see "The Funds' Management and Investment Advisers," page 28.
5
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. Navigator Shares are currently offered for sale only to
institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own monies and monies for which they act in a fiduciary
capacity, to clients of Legg Mason Trust Company ("Trust Company") for
which Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg Mason
Profit Sharing Plan and Trust. The information for Primary Shares reflects
the 12b-1 fees paid by that Class.
The financial information in the table that follows has been audited by
Coopers & Lybrand L.L.P. Global Government's, International Equity's and
Emerging Markets' financial statements for the year ended December 31, 1996
and the report of Coopers & Lybrand L.L.P. thereon are included in the
Corporation's Annual Report to Shareholders and are incorporated by
reference into the Statement of Additional Information. The annual report
is available to shareholders without charge by calling your Legg Mason or
affiliated financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544.
<TABLE>
<CAPTION>
INVESTMENT OPERATIONS DISTRIBITIONS FROM:
__________________________________________ ______________________________________
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVEST- IN EXCESS
NET ASSET NET MENTS, OPTIONS TOTAL NET OF NET
VALUE, INVESTMENT AND FUTURES AND FROM NET REALIZED REALIZED
BEGINNING INCOME FOREIGN CURRENCY INVESTMENT INVESTMENT GAIN ON GAIN ON
OF PERIOD (LOSS) TRANSACTIONS OPERATIONS INCOME INVESTMENTS INVESTMENTS
____________________________________________________________________________________________________________________________
<S> <C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1996 $ 10.33 $ 0.59 $ 0.21 $ 0.80 $(0.62) $ (0.10) $ --
1995 9.54 0.63(A) 1.32 1.95 (1.16) -- --
1994 10.27 0.57(A) (0.71) (0.14) (0.59) -- --
April 15,(B)-
Dec. 31, 1993 10.00 0.36(A) 0.31 0.67 (0.36) (0.04) --
INTERNATIONAL EQUITY TRUST
Year Ended Dec. 31,
1996(E) $ 10.70 $ 0.02(F) $ 1.74 $ 1.76 $(0.05) $ (0.32) $ --
Feb. 17,(B)-
Dec. 31, 1995 10.00 0.04(F) 0.77 0.81 (0.04) -- (0.07)
EMERGING MARKETS TRUST
May 28,(B)-
Dec. 31, 1996(E) $ 10.00 $(0.03)(G) $ 0.57 $ 0.54 $(0.03) $ -- $ --
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
____________________________________________________________________
NET
NET ASSET INVESTMENT NET ASSETS
VALUE EXPENSES INCOME (LOSS) PORTFOLIO END OF
TOTAL END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD
DISTRIBUTIONS PERIOD RETURN NET ASSETS NET ASSETS RATE (IN THOUSANDS)
_____________________________________________________________________________________________________________________________
<S> <C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1996 $ (0.72) $ 10.41 8.22% 1.86% 5.80% 172% $161,549
1995 (1.16) 10.33 20.80% 1.81%(A) 5.72%(A) 169% 153,954
1994 (0.59) 9.54 (1.40)% 1.34%(A) 5.71%(A) 127% 145,415
April 15,(B)-
Dec. 31, 1993 (0.40) 10.27 6.76%(C) 0.27%(A,D) 5.41%(A,D) 128%(D) 161,072
INTERNATIONAL EQUITY TRUST
Year Ended Dec. 31,
1996(E) $ (0.37) $ 12.09 16.49% 2.25%(F) 0.21%(F) 83% $167,926
Feb. 17,(B)
Dec. 31, 1995 (0.11) 10.70 8.11%(C) 2.25%(D,F) 0.52%(D,F) 58%(D) 65,947
EMERGING MARKETS TRUST
May 28,(B)-
Dec. 31, 1996(E) $ (0.03) $ 10.51 5.40%(C) 2.50%(D,G) (.68)%(D,G) 46%(D) $ 21,206
</TABLE>
------------------
(A) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY EXPENSE LIMITATIONS OF 0.2% UNTIL SEPTEMBER 30, 1993;
0.35% UNTIL DECEMBER 31, 1993; 0.5% UNTIL JANUARY 31, 1994; 0.7% UNTIL
FEBRUARY 28, 1994; 0.9% UNTIL MARCH 31, 1994; 1.1% UNTIL APRIL 30, 1994;
1.3% UNTIL MAY 31, 1994; 1.5% UNTIL JUNE 30, 1994; 1.7% UNTIL JULY 31,
1994; AND 1.9% INDEFINITELY.
(B) COMMENCEMENT OF OPERATIONS.
(C) NOT ANNUALIZED
(D) ANNUALIZED.
(E) PURSUANT TO SEC REGULATIONS ADOPTED FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THE AVERAGE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD DURING THE YEAR ENDED DECEMBER 31, 1996 FOR
INTERNATIONAL EQUITY TRUST AND EMERGING MARKETS TRUST WERE $.0083 AND
$.0061, RESPECTIVELY.
(F) NET OF FEES WAIVED AND/OR EXPENSES REIMBURSED PURSUANT TO A VOLUNTARY
EXPENSE LIMITATION OF 2.25%.
(G) NET OF FEES WAIVED AND/OR EXPENSES REIMBURSED PURSUANT TO VOLUNTARY
EXPENSES LIMITATION OF 2.50%.
6
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of each class of
shares in advertisements or in reports or other communications to shareholders.
A mutual fund's total return is a measurement of the overall change in value,
including changes in share price and assuming reinvestment of dividends and
capital gain distributions, of an investment in the fund. CUMULATIVE TOTAL
RETURN shows the fund's performance over a specific period of time. AVERAGE
ANNUAL TOTAL RETURN is the average annual compounded return that would have
produced the same cumulative total return if the fund's performance had been
constant over the entire period. Average annual returns, which differ from
actual year-by-year results, tend to smooth out variations in a fund's return.
No adjustment has been made for any income taxes payable by shareholders. The
total returns shown below would have been lower if LMFA and Legg Mason had not
waived certain fees for the periods presented below.
Prior to May 1, 1996, International Equity was named Legg Mason Global
Equity Trust ("Global Equity"). Global Equity invested primarily in common
stocks of companies located anywhere in the world, including the United States.
Since May 1, 1996, with this name change, it invests in common stocks located
outside the United States.
Total returns of Primary Shares as of December 31, 1996 were as follows:
CUMULATIVE TOTAL GLOBAL INTERNATIONAL EMERGING
RETURN GOVERNMENT EQUITY MARKETS
- ----------------------------------------------------------
One Year +8.22% + 16.49% N/A
Life of Class +37.62%(A) + 25.94%(B) + 3.30%(C)
AVERAGE ANNUAL
TOTAL RETURN
- ----------------------------------------------------------
One Year +8.22% + 16.49% N/A
Life of Class +8.97%(A) + 13.10%(B) N/A
- ---------------
(A) INCEPTION OF GLOBAL GOVERNMENT -- APRIL 15, 1993.
(B) INCEPTION OF INTERNATIONAL EQUITY -- FEBRUARY 17, 1995.
(C) INCEPTION OF EMERGING MARKETS -- MAY 28, 1996. NET OF 2.0% REDEMPTION FEE
ASSESSED WITHIN TWELVE MONTHS OF PURCHASE.
Global Government also may advertise its YIELD. Yield reflects investment
income net of expenses over a 30-day (or one-month) period on a Fund share,
expressed as an annualized percentage of the offering price per share at the end
of the period. The effective yield, although calculated similarly, will be
slightly higher than the yield because it assumes that income earned from the
investment is reinvested (i.e., it includes the compounding effect of
reinvestment). Yield computations differ from other accounting methods and
therefore may differ from dividends actually paid or reported net income.
Total return and yield information reflect past performance and are not
predictions or guarantees of future results. Investment return and share price
will fluctuate, and the value of your shares, when redeemed, may be worth more
or less than their original cost. Further information about each Fund's
performance is contained in the Corporation's annual report to shareholders,
which may be obtained without charge by calling your Legg Mason or affiliated
financial advisor or Legg Mason's Funds Marketing Department at 800-822-5544.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Corporation's
Board of Directors without a shareholder vote. There can be no assurance
that any Fund will achieve its investment objective.
GLOBAL GOVERNMENT'S investment objective is to provide capital
appreciation and current income in order to achieve an attractive total
return consistent with prudent investment risk. The Fund normally attempts
to achieve this objective by investing at least 75% of its total assets in
debt securities issued or guaranteed by the U. S. Government or foreign
governments, their agencies, instrumentalities or political subdivisions.
The Fund normally will invest at least 75% of its total assets in debt
securities issued or guaranteed by the U. S. Government or foreign
governments, the agencies or instrumentalities of either, supranational
organizations and foreign or domestic corporations, trusts, or financial
institutions rated within the four highest grades by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's ("S&P") or, if unrated by
Moody's or S&P, judged by Western Asset to be of comparable quality,
certain money market instruments and repurchase agreements involving any
of the foregoing. These are considered investment grade debt securities.
Under normal circumstances, the Fund will be invested in at least
three different countries, including the United States. The Fund will
invest no more than 40% of its total assets in any one country other than
the United States. There is no other limit on the percentage of the Fund's
assets that may be invested in any one country or currency.
The money market instruments in which the Fund may invest include
commercial paper and other money market instruments which are: rated A-1
or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of investment;
issued or guaranteed as to principal and interest by issuers or guarantors
having an existing debt security rating of A or better by Moody's or S&P,
or if unrated by Moody's or S&P, judged by Western Asset to be of
comparable quality; and bank certificates of deposit and bankers'
acceptances judged by Western Asset to be of comparable quality.
The remainder of the Fund's assets, not in excess of 25% of its
assets, may be invested in: (1) debt securities of issuers which are rated
at the time of purchase below Moody's or S&P's four highest grades, or
unrated securities judged by Western Asset to be of comparable quality.
This may include lower-rated debt securities issued or guaranteed by
foreign governments or by domestic or foreign corporations, trusts or
financial institutions; (2) loans and participations in loans originated
by banks and other financial institutions, which also may be below
investment grade; (3) securities which may be convertible into or
exchangeable for, or carry warrants to purchase, common stock, or other
equity interests (such securities may offer attractive income
opportunities, and the debt securities of certain issuers may not be
available without such features); and (4) common and preferred stocks. See
page 18 for a discussion of the risks of lower-rated debt securities. If a
security is downgraded subsequent to its purchase, the Fund will sell that
security or another if that is necessary to assure that 75% of its assets
are investment grade or equivalent quality instruments.
The Fund may invest directly in U.S. dollar-denominated or foreign
currency-denominated foreign fixed-income securities (including preferred
or preference stock) and money market securities issued or guaranteed by
governmental and non-governmental issuers, international agencies and
supranational entities. 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.
The Fund's foreign investments may include securities of issuers based
in developed countries (including, but not limited to, countries in the
European Union, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea).
The Fund may invest in "Brady Bonds," which are debt restructurings
that provide for the exchange of cash and loans for newly issued bonds.
Brady Bonds have been issued by numerous emerging market governments, and
other such
8
<PAGE>
governments are expected to issue them in the future. Brady Bonds
currently are rated below investment grade. As of the date of this
Prospectus, Western Asset is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize, however, that Brady
Bonds have been issued only recently and, accordingly, do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U. S. dollar) and are
actively traded in the secondary market for Latin American debt.
The Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate par bonds or floating rate discount bonds, are collateralized
in full as to principal by U.S. Treasury zero coupon bonds having the same
maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an amount that, in the case of
fixed-rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at
least one year's rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals
thereafter.
Foreign government securities may include debt securities denominated
in multinational currency units. An example of a multinational currency
unit is the European Currency Unit ("ECU"). An ECU represents specified
amounts of currencies of certain member states of the European Union. The
specific amounts of currencies comprising the ECU may be adjusted to
reflect changes in relative values of the underlying currencies. Western
Asset does not believe that such adjustments will adversely affect holders
of ECU-denominated obligations or the marketability of such securities.
European supranational entities, in particular, issue ECU-denominated
obligations. The market for ECUs may become illiquid at times of rapid
change in the European currency markets, limiting the Fund's ability to
prevent potential losses.
The Fund may buy and sell options, futures and forward contracts for
hedging purposes and, to the extent permitted by regulatory agencies, for
non-hedging purposes in an effort to enhance income. See "Options, Futures
and Forward Currency Exchange Contracts," page 16 and "Risks of Futures,
Options and Forward Currency Exchange Contracts," page 17. The Fund may
purchase securities on a when-issued basis and enter into forward
commitments to purchase securities; may enter into swaps, caps, collars
and floors for hedging and other purposes; may lend its securities to
brokers, dealers and other financial institutions to earn income; may
borrow money for temporary or emergency purposes; and may enter into short
sales "against the box." See "When-Issued Securities and Standby
Commitments," page 21.
When Western Asset believes such action is warranted by abnormal
market or economic situations, the Fund may invest temporarily without
limit in cash and U.S. dollar-denominated money market instruments
including repurchase agreements.
INTERNATIONAL EQUITY'S investment objective is to seek maximum
long-term total return. The Fund attempts to meet this objective by
investing primarily in equity securities of companies located outside the
United States. Under normal circumstances, the Fund will invest at least
65% of its total assets in equity securities of issuers located in at
least three different countries other than the United States. In
implementing this policy, Batterymarch currently intends to invest
substantially all of the Fund's assets in non-U.S. equity securities.
Batterymarch examines securities from over 20 international stock markets,
with emphasis on several of the largest -- Japan, the United Kingdom,
France, Canada and Germany. Common stocks are chosen using Batterymarch's
system for identifying common stocks it believes to be undervalued. The
weighting of the Fund's assets among individual countries will reflect an
assessment of the attractiveness of individual equity securities
regardless of where they trade. In addition, the Fund may invest up to 35%
of its total assets in emerging market securities.
The Fund's investment portfolio will normally be diversified across a
broad range of industries and across a number of countries, consistent
with the objective of maximum total return. The Fund is expected to remain
substantially fully invested in equity securities. However, when cash is
temporarily available, or for temporary defensive purposes, when
Batterymarch believes such action is warranted by abnormal market or
economic situations, the Fund may invest without limit in cash and
9
<PAGE>
U.S. dollar-denominated money market instruments, including repurchase
agreements of domestic issuers. When Batterymarch believes such action is
warranted by abnormal market or economic situations, for temporary
defensive purposes, the Fund also may invest without limit in short-term
debt instruments, including government, corporate and money market
securities of domestic issuers. Such short-term investments will be rated
in one of the four highest rating categories by S&P or Moody's or, if
unrated by S&P or Moody's, judged by Batterymarch to be of comparable
quality.
The Fund is authorized to invest in stock index futures and options as
discussed below. The Fund may also enter into forward foreign currency
exchange contracts in order to protect against fluctuations in exchange
rates. See "Options, Futures and Forward Currency Exchange Contracts,"
page 16 and "Risks of Futures, Options and Forward Currency Exchange
Contracts," page 17.
The Fund is permitted to hold securities other than common stock, such
as debentures or preferred stock that may or may not be convertible into
common stock. Some of these instruments may be rated below investment
grade. The Fund will not purchase securities rated below investment grade
(or comparable unrated securities) if, as a result, more than 5% of the
Fund's net assets would be so invested.
EMERGING MARKETS' investment objective is long-term capital
appreciation. The Fund attempts to meet this objective by investing at
least 65% of its total assets in emerging market equity securities under
normal conditions.
Assets not invested in emerging market equity securities may be
invested in any combination of debt securities of the U.S. Government,
equity securities of issuers in developed countries, cash and money market
instruments, including repurchase agreements. Batterymarch intends to be
substantially fully invested in equity securities and convertible
securities of emerging market issuers. The Fund may use options and stock
index futures as discussed below. It may also enter into forward foreign
currency exchange contracts in order to protect against fluctuations in
exchange rates. However, appropriate hedging instruments are not available
with respect to most emerging markets, and the Fund accordingly will not
often employ hedging strategies. See "Options, Futures and Forward
Currency Exchange Contracts," page 16, and "Risks of Futures, Options and
Forward Currency Exchange Contracts," page 17.
The Fund may invest in the following types of equity securities:
common stock, preferred stock, securities convertible into common stock,
rights and warrants to acquire such securities and substantially similar
forms of equity with comparable risk characteristics.
The Fund intends to invest in Asia, Latin America, the Indian
Sub-continent, Southern and Eastern Europe, the Middle East, and Africa,
although it may not invest in all these markets at all times and may not
invest in any particular market when it deems investment in that country
or region to be inadvisable.
More than 25% of the Fund's total assets may be denominated in a
single currency. Concentration in a single foreign currency will increase
the Fund's exposure to adverse developments affecting the value of that
currency. An issuer of securities purchased by the Fund may be domiciled
in a country other than the country in whose currency the securities are
denominated.
When abnormal market or economic situations warrant in the opinion of
Batterymarch, the Fund may invest without limit for temporary defensive
purposes in short-term debt instruments, including government, corporate
and money market securities of domestic issuers, as well as repurchase
agreements. Such short-term instruments will be rated in one of the four
highest rating categories by S&P or Moody's or, if unrated, judged by the
adviser to be of comparable quality.
INVESTMENT RESTRICTIONS
Global Government is a "non-diversified" investment company;
therefore, the percentage of its assets invested in any single issuer is
not limited by the Investment Company Act of 1940 ("1940 Act"). However,
the Fund intends to continue to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"),
which requires that, among other things, at the close of each quarter of
the Fund's taxable year: (1) with respect to 50% of the Fund's total
assets, no more than 5% of its total assets may be invested in the
securities of any one issuer; and (2) no more than 25% of the
10
<PAGE>
value of the Fund's total assets may be invested in the securities of a
single issuer; these limits do not apply to U.S. government securities. To
the extent the Fund's assets are invested in the obligations of a limited
number of issuers or in a limited number of countries or currencies, the
value of the Fund's shares will be more susceptible to any single
economic, political or regulatory occurrence than would the shares of a
diversified company.
The fundamental restrictions applicable to the Fund include a
prohibition on investing 25% or more of total assets in the securities of
issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U. S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto). Additional fundamental and non-fundamental
investment restrictions are set forth in the Statement of Additional
Information.
As a fundamental policy, each Fund may borrow an amount equal to
33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Because of the limited liquidity of
some emerging markets, Emerging Markets, in particular, occasionally may
be required to borrow to meet redemption requests. Borrowing may cause
greater fluctuation in share value, but also may enable the Fund to retain
favorable securities positions rather than liquidating them to meet
redemptions. None of the Funds will borrow for the purpose of leveraging
its portfolio. As a non-fundamental policy, none of the Funds may purchase
securities when outstanding borrowings exceed 5% of total assets.
INVESTMENT TECHNIQUES AND RISKS
The following investment techniques and risks apply to each of the
Funds unless otherwise stated.
Foreign Securities
Investing in the securities of issuers in any foreign country involves
special risks and considerations not typically associated with investing
in U.S. companies. 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. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar
irrespective of the performance of the underlying investment.
The relative performance of various countries' fixed income and equity
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 Fund may be listed on foreign
exchanges or traded over-the-counter. Transactions on foreign exchanges
are usually subject to mark-ups or commissions higher than negotiated
commissions on U.S. transactions, although each Fund will endeavor to
obtain the best net results in effecting 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 will include higher custodial
fees than apply to domestic custodial arrangements and transaction costs
of foreign currency conversions.
Emerging Market Securities
Each Fund may invest in securities of issuers based in emerging
markets (including, but not limited to, countries in Asia, Latin America,
the Indian Sub-continent, Southern and Eastern Europe, the Middle East,
and Africa). The risks of foreign investment, described above, are greater
for investments in emerging markets. Because of the special risks
associated with investing in emerging markets, an investment in any of the
Funds should be considered speculative. With respect to Global Government,
debt securities of
11
<PAGE>
governmental and corporate issuers in such countries will typically be
rated below investment grade or be of comparable quality. Emerging markets
will include any country: (i) having an "emerging stock market" as defined
by the International Finance Corporation; (ii) with low- to middle-income
economies according to the International Bank for Reconstruction and
Development ("World Bank"); (iii) listed in World Bank publications as
developing or (iv) determined by Batterymarch to be an emerging market in
accordance with the criteria of those organizations. The following are
considered emerging market securities: (1) securities publicly traded on
emerging market stock exchanges, or whose principal trading market is
over-the-counter (i.e., off-exchange) in an emerging market; (2)
securities (i) denominated in any emerging market currency or (ii)
denominated in a major currency if issued by companies to finance
operations in an emerging market; (3) securities of companies that derive
a substantial portion of their total revenues from goods or services
produced in, or sales made in, emerging markets; (4) securities of
companies organized under the laws of an emerging market country or
region, which are publicly traded in securities markets elsewhere; and (5)
American depositary receipts ("ADRs") (or similar instruments) with
respect to the foregoing.
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. Many emerging market
countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations
in inflation rates have had, and may continue to have, very negative
effects on the economies and securities markets of certain emerging
markets.
Economies in emerging markets 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.
Over the last quarter of a century, inflation in many emerging market
countries has been significantly higher than the world average. While some
emerging market countries have sought to develop a number of corrective
mechanisms to reduce inflation or mitigate its effects, inflation may
continue to have significant effects both on emerging market economies 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.
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. Although it might be
theoretically possible to hedge for anticipated income and gains, the
ongoing and indeterminate nature of the foregoing risks (and the costs
associated with hedging transactions) makes 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 the Fund 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 availability 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 Fund. In such a case, the
Fund's ability to obtain U.S. dollars may be adversely affected by any
increased restrictions imposed on the outflow of foreign exchange. If the
Fund 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, the Fund'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.
12
<PAGE>
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 markets 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 emerging 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. 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 Fund
to make intended securities purchases due to settlement problems could
cause that Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund 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 markets as a result of which trading of securities may cease
or may be substantially curtailed and prices for a Fund's portfolio
securities in such markets may not be readily available.
Investment in Japan
International Equity may invest more than 25% of its total assets in
securities of Japanese issuers. Japan is the largest capitalized stock
market outside the United States. The performance of the Fund may
therefore be significantly affected by events affecting the Japanese
economy and the exchange rate between the Japanese yen and the U.S.
dollar. Japan has recently experienced a recession, including a decline in
real estate values that adversely affected the balance sheets of many
financial institutions. The strength of the Japanese currency may
adversely affect industries engaged substantially in export. Japan's
economy is heavily dependent on foreign oil. Japan is located in a
seismically active area, and severe earthquakes may damage important
elements of the country's infrastructure. Japanese economic prospects may
be affected by the political and military situations of its nearby
neighbors, notably North and South Korea, China, and Russia.
Sovereign Debt Securities
Global Government may invest in sovereign debt securities of emerging
market governments. 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 multilateral 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.
Repurchase Agreements
Repurchase agreements are agreements under which either U.S.
government obligations or other high-quality, liquid debt securities are
acquired from a securities dealer or bank subject to resale at an
agreed-upon price and date. The securities are held for the Funds by a
custodian bank as collateral until resold and will be supplemented by
additional collateral if necessary to maintain a total value equal to or
in excess of the value of the repurchase agreement. A Fund bears a risk of
loss in the event that the other party to a repurchase agreement defaults
on its obligations and that Fund is delayed or prevented from exercising
its right to dispose of the collateral securities, which
13
<PAGE>
may decline in value in the interim. A Fund will enter into repurchase
agreements only with financial institutions which its adviser believes
present minimal risk of default during the term of the agreement based on
guidelines established by the Corporation's Board of Directors.
Preferred Stock
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Preferred shareholders may
have certain rights if dividends are not paid, but do not generally have a
legal right to demand payment. Shareholders may suffer a loss of value if
dividends are not paid. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the
issuer's creditworthiness than are the prices of debt securities. Under
ordinary circumstances, preferred stock does not carry voting rights.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. 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 ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
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. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. Global Government has no current
intention of converting any convertible securities it may own into equity
or holding them as equity upon conversion, although it may do so for
temporary purposes. 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 Global
Government is called for redemption, the Fund will be required to convert
it into the underlying common stock, sell it to a third party or permit
the issuer to redeem the security. Any of these actions could have an
adverse effect on the Fund's ability to achieve its investment objective.
Reverse Repurchase Agreements and Other Borrowing
In a reverse repurchase agreement, a Fund temporarily transfers
possession of a portfolio instrument to another person, such as a
financial institution or broker-dealer, in return for cash and agrees to
repurchase the instrument at an agreed upon time (normally within seven
days) and price, including interest payment. Each Fund may also enter into
dollar rolls, in which a Fund sells a fixed income security for delivery
in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, that Fund would forego
principal and interest paid on such securities. The Fund would be
compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by the interest earned
on the proceeds of the initial sale.
Each Fund may engage in reverse repurchase agreements, dollar rolls
and other borrowing as a means of raising cash to satisfy redemption
requests or for other temporary or emergency purposes without selling
portfolio instruments.
To avoid potential leveraging effects of borrowing (including reverse
repurchase agreements
14
<PAGE>
and dollar rolls), each Fund will not purchase securities while such
borrowing is in excess of 5% of its total assets. Each Fund will limit its
borrowing to no more than one-third of its total assets.
Loans of Portfolio Securities
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of 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 that Fund's
custodian. During the time securities are on loan, the borrower will pay
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn 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 Fund or the borrower. Each Fund may
pay reasonable 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. Each Fund
presently does not expect to have on loan at any given time securities
totaling more than one-third of its net asset value. When a Fund loans a
security to another party, it runs the risk that the other party will
default on its obligation, and that the value of the collateral will
decline before the Fund can dispose of it.
Restricted and Illiquid Securities
Restricted securities are securities subject to legal or contractual
restrictions on resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when a sale
would otherwise be desirable. No Fund will acquire a security which cannot
be expected to be sold within seven days at approximately the price at
which it is valued ("illiquid assets") if such acquisition would cause the
aggregate value of illiquid assets to exceed 15% of its net assets. Time
deposits and repurchase agreements maturing in more than seven days are
considered illiquid. Illiquid securities may be difficult to value, and
the Fund may have difficulty disposing of such securities promptly.
The Funds 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. Rule 144A securities,
although not registered, may be sold to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933. Each Fund's
adviser, acting pursuant to guidelines established by the Corporation's
Board of Directors, may determine that some Rule 144A securities are
liquid. If the newly-developing institutional markets for restricted
securities do not develop as anticipated, the liquidity of a Fund could be
adversely affected.
Depositary Receipts
The Funds may invest in ADRs or similar non-U.S. instruments issued by
foreign banks or trust companies. ADRs are securities issued by a U.S.
depositary (usually a bank) and represent a specified quantity of
underlying non-U.S. stock on deposit with a custodian bank as collateral.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositaries. The Funds may invest in either type of ADR. 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. Some of these depositary
receipts may be issued in bearer form. For purposes of their investment
policies, each Fund will treat ADRs and similar instruments as equivalent
to investment in the underlying securities.
Securities of Other Investment Companies
Due to restrictions on direct investment by foreign entities in
certain emerging markets, or other difficulties limiting the availability
of local securities, investment in other investment companies may be the
most practical or only manner in which a Fund can invest in certain
emerging markets. A Fund may invest in the securities of other investment
companies, but it will not own more
15
<PAGE>
than 3% of the total outstanding voting stock of any investment company,
invest more than 5% of its total assets in any one investment company, or
invest more than 10% of its total assets in investment companies in
general. Such investments 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. There can
be no assurance that a Fund will be able to invest in certain emerging
markets. A Fund will invest in such funds when, in the adviser's judgment,
the potential benefits of such investment justify the payment of any
applicable premium or sales charge.
Options, Futures and Forward Currency Exchange Contracts
A futures contract is an agreement between the parties to buy or sell
a specified amount of one or more securities 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. Under an option contract,
one party has the right to require the other to buy or sell a specific
security, currency or futures contract, and may exercise that right if the
market price of the underlying instrument moves in a direction
advantageous to the holder of the option. A forward foreign currency
exchange contract is an obligation to purchase or sell a specific amount
of a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. Options, futures and forward currency
exchange contracts are generally considered to be "derivatives."
FOR GLOBAL GOVERNMENT:
The Fund may buy and sell options, futures and forward contracts for
hedging purposes and, to the extent permitted by regulatory agencies, for
non-hedging purposes in an effort to enhance income. The Fund may purchase
and sell call and put options on bond indices and on securities in which
the Fund is authorized to invest for hedging purposes or to enhance
income. The Fund may also purchase and sell interest rate and bond index
futures contracts and options thereon for hedging purposes.
The Fund may enter into forward currency contracts for the purchase or
sale of a specified currency at a specified future date either with
respect to specified transactions or with respect to its portfolio
positions. For example, when Western Asset anticipates making a currency
exchange transaction in connection with the purchase or sale of a
security, the Fund may enter into a forward contract in order to set the
exchange rate at which the transaction will be made. The Fund may enter
into a forward contract to sell an amount of a foreign currency
approximating the value of some or all of its security positions
denominated in such currency. It may also engage in cross-hedging by using
a forward contract in one currency to hedge against fluctuations in the
value of securities denominated in a different currency. The purpose of
these contracts is to minimize the risk to the Fund from adverse changes
in the relationship between two currencies. Cross-currency hedging
requires a degree of correlation between the two currencies involved. Some
currency relationships thought to be correlated have proven highly
volatile on some occasions.
The Fund may also purchase and sell foreign currency futures
contracts, options thereon and options on foreign currencies to hedge
against the risk of fluctuations in the market value of foreign securities
it holds or intends to purchase, resulting from changes in foreign
exchange rates. The Fund may also purchase and sell options on foreign
currencies and use forward currency contracts to enhance income.
FOR INTERNATIONAL EQUITY AND EMERGING MARKETS:
A Fund may enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign
exchange rates in the purchase and sale of investment securities. It may
not enter into such contracts for speculative purposes. Forward currency
contracts may be bought or sold to protect the Fund to a limited extent
against adverse changes in exchange rates between foreign currencies and
the U.S. dollar.
Each Fund may utilize futures contracts and options to a limited
extent. Specifically, a Fund may enter into futures contracts and related
options provided that not more than 5% of its net assets are required as a
futures contract deposit and/or premium; in addition, a Fund may not enter
into futures contracts or related options if, as
16
<PAGE>
a result, more than 20% of the Fund's total assets would be so invested.
Futures contracts and options may be used for several reasons: to
simulate full investment in underlying securities while retaining a cash
balance for Fund management purposes, 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 equity
security or index.
As noted above, it may be difficult or impossible to hedge exposures
in emerging markets, both because of the nature of the risks and because
of the limited availability of suitable hedging instruments.
Risks of Futures, Options and Forward Currency Exchange Contracts
The use of options, futures and forward currency exchange contracts
involves certain investment risks and transaction costs. These risks
include (1) dependence on the ability of each Fund's adviser to predict
movements in the prices of individual securities, fluctuations in the
general securities markets or in market sectors and movements in interest
rates and currency markets; (2) imperfect correlation, or no correlation
at all, between movements in the price of options, futures contracts or
forward currency contracts and movements in the price of the underlying
securities or currencies; (3) the fact that skills needed to use these
instruments are different from those needed to select a Fund's portfolio
securities; (4) the possible lack of a liquid secondary market for any
particular instrument at any particular time; (5) the possibility that the
use of cover or segregation involving a large percentage of the Fund's
assets could impede portfolio management or that Fund's ability to meet
redemption requests or other short-term obligations; (6) the possible need
to defer closing out positions in these instruments in order to avoid
adverse tax consequences; and (7) the fact that, although use of these
instruments for hedging purposes can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments. There can be
no assurance that a Fund's use of futures contracts, forward currency
contracts or options will be successful. Moreover, in the event that an
anticipated change in the price of the securities or currencies that are
the subject of the strategy does not occur, the Fund might have been in a
better position had it not used that strategy at all. Forward currency
contracts, which protect the value of a Fund's investment securities
against a decline in the value of a currency, do not eliminate
fluctuations in the underlying prices of the securities. They simply
establish an exchange rate at a future date. The use of options and
futures contracts for speculative purposes, i.e., to enhance income or to
increase a Fund's exposure to a particular security or foreign currency,
subjects the Fund to additional risk. The use of options, futures or
forward contracts to hedge an anticipated purchase also subjects a Fund to
additional risk until the purchase is completed or the position is closed
out.
When a Fund purchases or sells a futures contract, it 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"). A Fund
will not enter into futures contracts or commodities option positions
(other than option positions that are "in-the-money" at the time of
purchase) if, immediately thereafter, its initial margin deposits plus
premiums paid by it, would exceed 5% of the fair market value of the
Fund's net assets. If a Fund writes an option or sells a futures contract
and is not able to close out that position prior to settlement date, the
Fund may be required to deliver cash or securities substantially in excess
of these amounts.
Many options on securities are traded primarily on the
over-the-counter ("OTC") market. OTC options are two-party contracts with
price and other terms negotiated between buyer and seller and generally do
not have as much liquidity as exchange-traded options. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has
purchased the option to make or take delivery of the securities underlying
the option. Failure by the dealer to do so would result in the loss of the
premium paid by that Fund as well as the loss of the expected benefit of
the transaction. OTC options may be considered "illiquid securities" for
purposes of each Fund's investment limitations. Options and futures traded
on U.S. or other exchanges may be subject to position and daily
fluctuation limits, which may limit the ability of a Fund to reduce risk
using such options and futures and may limit their liquidity.
17
<PAGE>
When using options, futures or forwards, each Fund will cover its
short positions or maintain a segregated asset account, to the extent
required by SEC staff positions. The Statement of Additional Information
contains a more detailed description of futures, options and forward
strategies.
THE FOLLOWING DESCRIBES CERTAIN INVESTMENT TECHNIQUES USED PRIMARILY
BY GLOBAL GOVERNMENT:
Lower-Rated Debt Securities
The Fund may invest in debt obligations of any grade. Western Asset
seeks to minimize the risks of investing in all securities through
in-depth credit analysis and attention to current developments in interest
rates and market conditions.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium-grade" obligations; they are "neither highly protected nor poorly
secured . . . [I]nterest 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." Where one rating organization has assigned an
investment grade rating to an instrument and others have given it a lower
rating, the Fund may consider the instrument to be investment grade. The
ratings do not include the risk of market fluctuations.
The Fund may invest up to 25% of its total assets in high-yield,
high-risk securities rated below investment grade. Such securities are
deemed by Moody's and S&P to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal. Those in the
lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding
the individual issuer are more likely to cause price volatility and weaken
the capacity of such securities to make principal and interest payments
than is the case for higher grade debt securities. An economic downturn
affecting the issuers may result in an increased incidence of default. The
market for lower-rated securities may be thinner and less active than that
for higher-rated securities. Western Asset will invest in such securities
only when it concludes that the anticipated return to the Fund on such an
investment warrants exposure to the additional level of risk. A further
description of Moody's and S&P's ratings is included in the Appendix to
the Statement of Additional Information. The Fund may invest in
lower-rated debt securities of domestic issuers, those issued by foreign
corporations, those issued or guaranteed by foreign governmental issuers,
and those issued by domestic corporations but linked to the performance of
such foreign-issue debt. See "Foreign Securities" page 11.
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. Although the prices of lower-rated bonds are
generally less sensitive to interest rate changes than those of
higher-rated bonds, the prices of lower-rated bonds may be more sensitive
to adverse economic changes and developments regarding the individual
issuer. Issuers of lower-rated debt securities are often highly leveraged
and may not have access to more traditional methods of financing.
As a result of the limited liquidity of high yield securities, the
valuation of these securities may require greater judgment than is
necessary with respect to securities having more active markets. In
addition, their prices have at time experienced rapid decline when a
significant number of holders of such securities decided to sell them.
Widespread sales may result from adverse publicity and investor
perceptions, whether or not based on fundamental analysis.
Debt securities may be subject to mandatory call provisions. If
issuers were to invoke these provisions during periods of declining
interest rates, the Fund would receive redemption proceeds at times when
only lower-yielding securities were available for investment by the Fund.
The table below provides a summary of ratings assigned to debt
holdings in Global Government's portfolio. These figures are
dollar-weighted averages of month-end portfolio holdings during the fiscal
year ended December 31, 1996, presented as a percentage of total
investments. These percentages are historical and are not necessarily
18
<PAGE>
indicative of the quality of current or future portfolio holdings, which
may vary.
MOODY'S Aaa/
RATINGS Aa/A Baa Ba B Caa Ca C NR
- ----------------------------------------------------------------
Average 68.4% 9.1% 5.9% 10.6% -- 1.5% -- 4.5%
AAA/ CC/
S&P RATINGS AA/A BBB BB B CCC C D NR
- ----------------------------------------------------------------------
Average 72.9% 4.5% 14.7% 1.9% -- 1.5% -- 4.5%
The dollar-weighted average of securities not rated by either Moody's
or S&P amounted to 4.5%. This may include securities rated by other
nationally recognized rating organizations, as well as unrated securities.
Unrated securities are not necessarily lower-quality securities.
U.S. Government Securities
The U.S. government securities in which the Fund may invest include
direct obligations of the U.S. Treasury (such as Treasury bills, notes and
bonds) and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association ("GNMA") certificates), securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Federal Home Loan Banks), securities supported solely by
the discretionary authority of the U.S. Treasury to lend to the issuer
(such as Fannie Mae) ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") securities).
Mortgage-Related Securities
The Fund may invest in mortgage-related securities. Mortgage-related
securities represent interests in pools of mortgages created by lenders
such as commercial banks, savings and loan institutions, mortgage bankers
and others. Mortgage-related securities may be issued by governmental or
government-related entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential 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 residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related 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. When interest rates are
declining, such prepayments usually increase. On the other hand, a
decrease in the rate of prepayments, resulting from an increase in market
interest rates, among other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in
market interest rates. The volume of prepayments of principal on a pool of
mortgages underlying a particular mortgage-related security will influence
the yield of that security. Increased prepayment of principal may limit a
Fund's ability to realize the appreciation in the value of such securities
that would otherwise accompany declining interest rates. An increase in
mortgage prepayments could cause a Fund to incur a loss on a
mortgage-related security that was purchased at a premium. In determining
the Fund's average maturity, Western Asset must apply certain assumptions
and projections about the maturity and prepayment of mortgage-related
securities; actual prepayment rates may differ.
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations
19
<PAGE>
("CMOs") which are collateralized by mortgage-related securities issued by
FHLMC, FNMA, GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Although
full payoff of each class of bonds 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.
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 payments in the former securities. However, many issuers or
servicers of mortgage-related securities guarantee timely payment of
interest and principal on such securities. Timely payment of principal may
also be supported by various forms of insurance, including individual
loan, title, pool and hazard policies. There can be no assurance that the
private issuers or insurers will be able to meet their obligations under
the relevant guarantees and insurance policies. Where non-governmental
securities are collateralized by securities issued by FHLMC, FNMA or GNMA,
the timely payment of interest and principal is supported by the
government-related securities collateralizing such obligations.
Some mortgage-related securities will be considered illiquid and will
be subject to the Fund's investment limitation that no more than 15% of
its net assets will be invested in illiquid assets.
Stripped Mortgage-Backed Securities
The Fund may invest in stripped mortgage-backed securities, which are
classes of mortgage-backed securities that receive different proportions
of interest and principal distributions from an underlying pool of
mortgage assets. These securities are more sensitive to changes in
prepayment and interest rates and the market for them is less liquid than
is the case for traditional mortgage-backed and other debt securities. A
common type of stripped mortgage-backed security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest only or "IO" class), while the
other class will receive all of the principal (the principal only or "PO"
class). The yield to maturity of an IO class is extremely sensitive not
only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the related underlying
mortgage assets. If the Fund purchases an IO and the underlying principal
is repaid faster than expected, the Fund will recoup less than the
purchase price of the IO, even one that is highly rated. Extensions of
maturity resulting from increases of market interest rates may have an
especially pronounced effect on POs. Most IOs and POs are regarded as
illiquid and will be included in the Fund's 15% limit on illiquid
securities. U.S. government-issued IOs and POs backed by fixed-rate
mortgages may be deemed liquid by Western Asset, following guidelines and
standards established by the Corporation's Board of Directors.
Asset-Backed Securities
Asset-backed securities are securities that represent direct or
indirect participations in, or are secured by and payable from, assets
such as motor vehicle installment sales contracts, 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 and special purpose
corporations. The value of such securities partly depends on loan
repayments by individuals, which may be adversely affected during general
downturns in the economy. Payments or distributions of principal and
interest on asset-backed securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters
of credit. Like mortgage-related securities, asset-backed securities are
subject to the risk of prepayment. The risk that recovery on repossessed
collateral might be unavailable or inadequate to support payments on
asset-backed securities, however, is greater than in the case of
mortgage-backed securities.
Loans and Loan Participations
The Fund may purchase loans and participation interests in loans
originally made by banks and other lenders to governmental borrowers. Many
such interests are not rated by any rating agency and may involve
borrowers considered to
20
<PAGE>
be poor credit risks. The Fund's interests in these loans may not be
secured, and the Fund will be exposed to a risk of loss if the borrower
defaults. Many such interests will be illiquid and therefore subject to
the Fund's 15% limit on illiquid investments.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional
types of securities. The Fund's ability to assert its rights against the
borrower will also depend on the particular terms of the loan agreement
among the parties.
Variable and Floating Rate Securities
The Fund may invest in variable and floating rate securities. These
securities provide for periodic adjustment in the interest rate paid on
the obligations. Western Asset believes that the variable or floating rate
of interest paid on these securities may reduce the wide fluctuations in
market value typical of fixed-rate, long-term securities. The yield
available on floating rate securities is typically less than that on
fixed-rate notes of similar maturity issued by the same company. The rates
of some securities vary according to a formula based on one or more
interest rates, and some vary inversely with changes in the underlying
rates. The value of these securities can be very volatile when market
rates change.
Zero Coupon and Pay-In-Kind Bonds
A zero coupon bond is a security that makes no fixed interest payments
but instead is sold at a deep 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. Pay-in-kind securities pay interest in the form of
additional securities, thereby adding additional debt to the issuer's
balance sheet. The prices of both types of bonds fluctuate more in
response to changes in market interest rates than do the prices of debt
securities with similar maturities that pay interest in cash.
An investor in zero coupon or pay-in-kind bonds generally accrues
income on such securities prior to the receipt of cash payments. Since the
Fund must distribute substantially all of its income to its shareholders
to qualify for pass-through treatment under the federal income tax laws,
the Fund, as an investor in such bonds, may have to dispose of other
securities to generate the cash necessary for the distribution of income
attributable to its zero coupon or pay-in-kind bonds. Such disposal could
occur at a time which would be disadvantageous to the Fund and when the
Fund would not otherwise choose to dispose of the assets.
When-Issued Securities and Standby Commitments
The Fund may enter into commitments to purchase U. S. government
securities or other securities on a when-issued basis. Such securities are
often the most efficiently priced and have the best liquidity in the bond
market. When the Fund purchases securities on a when-issued basis, it
assumes the risks of ownership at the time of purchase, not at the time of
receipt. However, the Fund does not have to pay for the obligations until
they are delivered to it. This is normally seven to 15 days later, but
could be considerably longer in the case of some mortgage-backed
securities. Use of this practice would have a leveraging effect on the
Fund. The Fund does not expect that its commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 20% of its total
assets.
Issuance of securities purchased on a when-and if-issued basis depends
on the occurrence of an event. If the anticipated event does not occur,
the securities are not issued. The characteristics and risks of
when-and-if-issued securities are similar to those involved in writing put
options.
To meet its payment obligation, the Fund will establish a segregated
account with its custodian and maintain cash or appropriate liquid
obligations, in an amount at least equal in value to the Fund's
commitments to purchase when- and if-issued securities.
Indexed Securities
The Fund may purchase various fixed income and debt securities whose
principal value or rate of return is linked or indexed to relative
exchange rates among two or more currencies or linked to commodities
prices or other financial indicators. Such securities may be more volatile
than the underlying instruments, resulting in a leveraging effect on the
Fund.
21
<PAGE>
The value of such securities may fluctuate in response to changes in
the index, market conditions, and the creditworthiness of the issuer.
These securities may vary directly or inversely with the underlying
investments. The value of such securities may change significantly if
their principal value or rate of return is linked or indexed to relative
exchange rates involving a foreign currency for which there is not a
readily available market.
Capital Appreciation and Risk
The market value of fixed income and other debt securities is
partially a function of changes in the current level of interest rates. An
increase in interest rates generally reduces the market value of existing
fixed income and other debt securities, while a decline in interest rates
generally increases the market value of such securities. The longer the
maturity, the more pronounced is the rise or decline in the security's
price. When interest rates are falling, a fund with a shorter maturity
generally will not generate as high a level of total return as a fund with
a longer maturity. Conversely, when interest rates are rising, a fund with
a shorter maturity will generally outperform longer maturity portfolios.
When interest rates are flat, shorter maturity portfolios generally will
not generate as high a level of total return as longer maturity portfolios
(assuming that long-term interest rates are higher than short-term rates,
which is commonly the case).
Changes in the creditworthiness, or the market's perception of the
creditworthiness, of the issuers of fixed income and other debt securities
will also affect their prices.
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 the Fund is called for redemption,
the Fund 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 the Fund's ability to achieve its investment objective.
FOR EACH FUND:
Portfolio Turnover
For the year ended December 31, 1996, Global Government's portfolio
turnover rate was 172%, International Equity's portfolio turnover rate was
83% and for the period May 28, 1996 (commencement of operations) to
December 31, 1996, Emerging Markets' annualized portfolio turnover rate
was 46%. Global Government may sell fixed-income securities and buy
similar securities to obtain yield and take advantage of market anomalies,
a practice which will increase the reported turnover rate of that Fund.
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded
from the calculation. High portfolio turnover rates (100% or more) will
involve correspondingly greater transaction costs which will be borne
directly by that Fund. It may also increase the amount of short-term
capital gains, if any, realized by a Fund and will affect the tax
treatment of distributions paid to shareholders because distributions of
net short-term capital gains are taxable as ordinary income. Each Fund
will take these possibilities into account as part of its investment
strategy.
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason or with an affiliate that has a dealer agreement
with Legg Mason. Your Legg Mason or affiliated financial advisor will be
pleased to explain the shareholder services available from the Funds and
answer any questions you may have. Documents available from your Legg
Mason or affiliated financial advisor should be completed if you invest in
shares of the Funds through an Individual Retirement Account ("IRA"),
Self-Employed Individual Retirement Plan ("Keogh Plan"), Simplified
Employee Pension Plan ("SEP"), Savings Incentive Match Plan for Employees
("SIMPLE") or other qualified retirement plan.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
22
<PAGE>
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds and investments in an IRA or similar plan, is $1,000, and the
minimum investment for each purchase of additional shares is $100, except
as noted below. The minimum amount for subsequent investments in an IRA or
similar plan will be waived if an investment will bring the investment for
the year to the maximum amount permitted under the Code. For those
investing through a Fund's Future First Systematic Investment Plan,
payroll deduction plans and plans involving automatic payment of funds
from financial institutions or automatic investment of dividends from
certain unit investment trusts, minimum initial and subsequent investments
are lower. Each Fund may change these minimum amount requirements at its
discretion.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares:
1. THROUGH YOUR LEGG MASON OR AFFILIATED FINANCIAL ADVISOR
Shares may be purchased through any Legg Mason or affiliated financial
advisor. A financial advisor will be pleased to open an account for you,
explain to you the shareholder services available from the Funds and
answer any questions you may have. After you have established a Legg Mason
or affiliated account, you can order shares from your financial advisor in
person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Fund of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to transfer funds each month from
your checking account. Please contact any Legg Mason or affiliated
financial advisor for further information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through any Legg Mason or
affiliated financial advisor.
Primary Share purchases will be processed at the net asset value next
determined after your Legg Mason or affiliated financial advisor has
received your order; payment must be made within three business days to
Legg Mason. Orders received by your Legg Mason or affiliated financial
advisor before the close of regular trading on the New York Stock Exchange
("Exchange") (normally 4:00 p.m. Eastern time) ("close of the Exchange")
on any day the Exchange is open will be executed at the net asset value
determined as of the close of the Exchange on that day. Orders received by
your Legg Mason or affiliated financial advisor after the close of the
Exchange or on days the Exchange is closed will be executed at the net
asset value determined as of the close of the Exchange on the next day the
Exchange is open. See "How Net Asset Value is Determined," page 25. Each
Fund reserves the right to reject any order for its shares or to suspend
the offering of shares for a period of time.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. Shares may not be held in, or
transferred to, an account with any brokerage firm other than Legg Mason
or its affiliates. The Funds no longer issue share certificates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Legg Mason or affiliated financial advisor an order for
repurchase of your shares. Please have the following information ready
when you call: the name of
23
<PAGE>
the Fund, the number of shares to be redeemed and your shareholder account
number. Second, you may send a written request for redemption to: [insert
complete Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland 21203-1476.
Requests for redemption in "good order," as described below, received
by your Legg Mason or affiliated financial advisor before the close of the
Exchange on any day when the Exchange is open, will be transmitted to
BFDS, transfer agent for the Funds, for redemption at the net asset value
per share determined as of the close of the Exchange on that day. Requests
for redemption received by your Legg Mason or affiliated financial advisor
after the close of the Exchange will be executed at the net asset value
determined as of the close of the Exchange on its next trading day. A
redemption request received by your Legg Mason or affiliated financial
advisor may be treated as a request for repurchase and, if it is accepted
by Legg Mason, your shares will be purchased at the net asset value per
share determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your Legg Mason brokerage
account two business days after trade date. The proceeds of your
redemption or repurchase may be more or less than your original cost. If
the shares to be redeemed or repurchased were paid for by check (including
certified or cashier's checks), within 10 business days of the redemption
or repurchase request, the proceeds will not be disbursed unless the Fund
can be reasonably assured that the check has been collected.
A redemption request will be considered to be received in "good order"
only if:
1. You have indicated in writing the number of Primary Shares to be
redeemed, the complete Fund name and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents 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 redemption of Fund shares, contact your Legg Mason
or affiliated financial advisor.
Emerging Markets' investment objective results in it investing a
substantial portion of its assets in thinly traded stocks which can
experience large price fluctuations and whose purchase and sale can
involve significant transaction costs. The Fund is intended for long-term
investors, and short-term "market timers" who engage in frequent purchases
and redemptions affect the Fund's investment planning and create
additional transaction costs which are borne by all shareholders. For this
reason, the Fund imposes a 2% redemption fee on all redemptions, including
exchanges, of Fund shares held for less than one year.
The redemption fee will be paid directly to the Fund to help offset
the costs imposed on it by short-term trading in emerging markets. The fee
will not be paid to either LMFA or Legg Mason. No fees are charged on
redemptions from Global Government or International Equity.
The Fund will use the "first-in, first-out" (FIFO) method to determine
the one year holding period. Under this method, the date of redemption or
exchange will be compared with the earliest purchase date of shares held
in the account. If this holding period is less than one year, the
redemption fee will be assessed.
The fee will not apply to any shares purchased through reinvestment of
dividends or other distributions or to shares held in retirement plans
such as 401(k), 403(b), 457, Keogh, SEP-IRA, SIMPLE, profit sharing, and
money purchase pension accounts. The fee does apply to shares held in IRA
accounts and to shares purchased through automatic investment plans
(described under "How You Can Invest in the Funds"). The fee may apply to
shares in broker omnibus accounts.
24
<PAGE>
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. The Funds may
be liable for losses due to unauthorized or fraudulent instructions if
they do not follow reasonable procedures. Telephone redemption privileges
are available automatically to all shareholders unless certificates have
been issued. Shareholders who do not wish to have telephone redemption
privileges should call their Legg Mason or affiliated financial advisor
for further instructions.
To redeem your Legg Mason Fund retirement account, a Distribution
Request Form must be completed and returned to Legg Mason Client Services
for processing. This form can be obtained through your Legg Mason or
affiliated financial advisor or Legg Mason Client Services in Baltimore,
Maryland. Upon receipt of your form, your shares will be redeemed at the
net asset value per share determined as of the next close of the Exchange.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
LMFA, the respective Fund could be adversely affected by immediate
payment. (The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.)
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having your
account closed.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily as
of the close of the Exchange on every day that the Exchange is open, by
subtracting the liabilities attributable to Primary Shares from the total
assets attributable to such shares and dividing the result by the number
of Primary Shares outstanding. Each Fund's securities are valued on the
basis of market quotations or, lacking such quotations, at fair value as
determined under the guidance of the Board of Directors. Securities for
which market quotations are readily available are valued at the last sale
price of the day for a comparable position, or, in the absence of any such
sales, the last available bid price for a comparable position. Where a
security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by
each Fund's adviser to be the primary market. Securities with remaining
maturities of 60 days or less are valued at amortized cost. Each Fund will
value its foreign securities in U.S. dollars on the basis of the
then-prevailing exchange rates.
Most securities held by Global Government are valued on the basis of
valuations furnished by a service which utilizes both dealer-supplied
valuations and electronic data processing techniques 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 data.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly for
Global Government; and are declared and paid annually for International
Equity and Emerging Markets. Shareholders begin to earn dividends on their
Global Government shares as of settlement date, which is normally the
third business day after their orders are placed with their Legg Mason or
affiliated financial advisor. Dividends from net short-term capital gain
and distributions of substantially all net capital gain (the excess of net
long-term capital gain over net short-term capital loss) and any net
realized gain from foreign currency transactions generally are declared
and paid after the end of the taxable year in which the gain is realized.
A second distribution of net capital gain may be necessary in some years
to avoid imposition of the
25
<PAGE>
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Dividends and other distributions, if
any, on shares held in an IRA, Keogh Plan, SEP, SIMPLE or other qualified
retirement plan and by shareholders maintaining a Systematic Withdrawal
Plan generally are reinvested in Primary Shares on the payment dates.
Other shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares of
the distributing Fund;
2. Receive dividends in cash and other distributions in Primary Shares
of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, you may reinvest dividends and other distributions
in the corresponding class of shares of another Legg Mason fund. Please
contact your Legg Mason or affiliated financial advisor for additional
information about this option.
If no election is made, both dividends and other distributions are
credited to your account in Primary Shares of the distributing Fund at the
net asset value of the shares determined as of the close of the Exchange
on the reinvestment date. Shares received pursuant to any of the first
three (reinvestment) elections above also are credited to your account at
that net asset value. If you elect to receive dividends and/or other
distributions in cash, you will be sent a check or will have your Legg
Mason account credited after the payment date. You may elect at any time
to change your option by notifying the applicable Fund in writing at:
[insert complete Fund name], c/o Legg Mason Funds Processing, P.O. Box
1476, Baltimore, MD 21203-1476. Your election must be received at least 10
days before the payment date in order to be effective for dividends and
other distributions paid as of that date.
TAXES
Each Fund intends to continue to qualify for treatment as a RIC under
the Code so that it will be relieved of federal income tax on that part of
its investment company taxable income (generally consisting of net
investment income and any net short-term capital gain and net gains from
certain foreign currency transactions) and net capital gain that is
distributed to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Primary Shares) are taxable to its
shareholders (other than IRAs, Keogh Plans, SEPs, SIMPLEs other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent of the Fund's earnings and profits. Distributions of each Fund's
net capital gain (whether paid in cash or reinvested in Primary Shares),
when designated as such, are taxable to those shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during the year. Each Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
non-corporate shareholders who do not provide that Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and other distributions payable to such shareholders who
otherwise are subject to backup withholding.
A redemption of Primary Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Primary Shares for shares of any other Legg Mason
fund generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege," below. If Fund shares are purchased
within 30 days before or after redeeming other shares of the same Fund
(regardless of class) at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
Each Fund's dividend and interest income, and gains realized from
disposition of 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 that Fund's securities. Tax conventions between
certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
26
<PAGE>
capital gains in respect of investments by foreign investors.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Primary Shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
If more than 50% of the value of International Equity's or Emerging
Markets' total assets at the close of any taxable year consists of
securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service that will enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign
and U.S. possessions' income taxes paid by it. Pursuant to any such
election, such Fund would treat those taxes as dividends paid to its
shareholders, and each shareholder would be required to (1) include in
gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) treat the shareholder's share of
those taxes and of any dividend paid by the Fund that represents income
from foreign or U.S. possessions' sources as the shareholder's own income
from those sources, and (3) either deduct the taxes deemed paid by the
shareholder in computing the shareholder's taxable income or ,
alternately, use the foregoing information in calculating the foreign tax
credit against the shareholder's federal income tax. Each of the Funds
will report to its shareholders shortly after each taxable year their
respective shares of the Fund's income from sources within, and taxes paid
to, foreign countries and U.S. possessions if it makes this election.
The foregoing is only a summary of some of the important federal
income tax considerations generally affecting each Fund and its
shareholders; see the Statement of Additional Information for a further
discussion. In addition to those considerations, which are applicable to
any investment in the Funds, there may be other federal, state, local or
foreign tax considerations applicable to a particular investor.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital gain
distributions and purchases made through the Future First Systematic
Investment Plan or through automatic investments). An account statement
will be sent to you monthly unless there has been no activity in the
account or you are purchasing shares through the Future First Systematic
Investment Plan or through automatic investments, in which case an account
statement will be sent quarterly. Reports will be sent to each Fund's
shareholders at least semi-annually showing its portfolio and other
information; the annual report will contain financial statements audited
by the Corporation's independent accountants.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan. Please contact your Legg Mason or affiliated financial
advisor for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds
27
<PAGE>
from the redemption of Fund shares to be exchanged that were originally
purchased by exchange from a fund on which the same or higher initial
sales charge previously was paid. There is no charge for the exchange
privilege, but each Fund reserves the right to terminate or limit the
exchange privilege of any shareholder who makes more than four exchanges
from that Fund in one calendar year. To obtain further information
concerning the exchange privilege and prospectuses of other Legg Mason
funds, or to make an exchange, please contact your Legg Mason or
affiliated financial advisor. To effect an exchange by telephone, please
call your Legg Mason or affiliated financial advisor with the information
described in "How You Can Redeem Your Primary Shares," page 23. The other
factors relating to telephone redemptions described in that section apply
also to telephone exchanges. Please read the prospectus for the other
fund(s) carefully before you invest by exchange. Each Fund reserves the
right to modify or terminate the exchange privilege upon 60 days' notice
to shareholders.
Emerging Markets imposes a 2% redemption fee on exchanges of shares
held less than one year. See page 24.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of the Corporation's Board of Directors.
LEGG MASON FUND ADVISER
Pursuant to separate management or advisory agreements with each Fund
(each a "Management Agreement" or "Advisory Agreement"), which were
approved by the Corporation's Board of Directors, Legg Mason Fund Adviser,
Inc., serves as manager of each Fund. As manager, LMFA manages the
non-investment affairs of each Fund, directs all matters related to the
operation of those Funds and provides office space and administrative
staff for the Funds. Pursuant to its Advisory Agreement or Management
Agreement, Global Government and International Equity each pays LMFA a fee
equal to an annual rate of 0.75% and Emerging Markets pays a fee at an
annual rate equal to 1.00%, of its average daily net assets. Each Fund
pays all its other expenses which are not assumed by LMFA. LMFA has
voluntarily agreed to waive indefinitely its fees for Global Government to
the extent necessary to limit total operating expenses attributable to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) to 1.90% of Global Government's average daily net assets.
LMFA acts as investment adviser, manager or consultant to eighteen
investment company portfolios which had aggregate assets under management
of over $7.0 billion as of March 31, 1997. The address of LMFA is 111
South Calvert Street, Baltimore, Maryland 21202.
WESTERN ASSET MANAGEMENT COMPANY
Western Asset Management Company ("Western Asset") serves as
investment adviser to Global Government pursuant to the terms of an
advisory agreement with LMFA dated May 1, 1995. Western Asset acts as the
portfolio manager for Global Government and is responsible for the actual
investment management of the Fund, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security.
For these services, LMFA (not the Fund) pays Western Asset a fee, computed
daily and payable monthly, at an annual rate equal to 53 1/3% of the fee
received by LMFA, or 0.40% of the Fund's average daily net assets.
Keith J. Gardner has been primarily responsible for the day-to-day
management of Global Government since its inception. Mr. Gardner has been
Vice President of Legg Mason since November, 1992 and Senior Portfolio
Manager at Western Asset Management Company since December, 1994. From
1985 to 1992, he served as Vice President, bond trader and portfolio
manager for both U.S. and global portfolios at T. Rowe Price Associates,
Inc.
Western Asset renders investment advice to sixteen open-end investment
companies and one closed-end investment company, which together had
aggregate assets under management of approximately $4.3 billion as of
March 31, 1997. Western Asset also renders investment advice to private
accounts with fixed-income assets under management of approximately $22.6
billion as of that date. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, California 91105.
28
<PAGE>
Western Asset has managed fixed-income portfolios continuously since
its founding in 1971, and has focused exclusively on such accounts since
1984.
WESTERN ASSET GLOBAL MANAGEMENT, LTD.
Western Asset Global Management, Ltd. ("Western Asset Global") serves
as investment sub-adviser to Global Government pursuant to the terms of a
sub-advisory agreement with Western Asset dated May 1, 1997. Western Asset
Global is responsible for providing research, analytical and trading
support for the Fund's investment program, as well as exercising
investment discretion for part of the portfolio, subject to the
supervision of Western Asset and LMFA. As compensation for Western Asset
Global's services and for expenses borne by Western Asset Global under the
sub-advisory agreement, Western Asset Global will be paid monthly by
Western Asset (not the Fund) at an annual rate equal to 0.20% of the
Fund's average daily net assets.
Western Asset Global, located at 155 Bishops- gate, London EC2M 3TY,
also renders investment advice to institutional, private and commingled
fund portfolios with assets of over $2.1 billion as of March 31, 1997.
Western Asset Global has managed global fixed income assets for U.S. and
non-U.S. clients since 1984.
BATTERYMARCH FINANCIAL MANAGEMENT, INC.
Pursuant to advisory agreements with LMFA (each an "Advisory
Agreement"), which were approved by the Corporation's Board of Directors,
Batterymarch serves as investment adviser to International Equity and
Emerging Markets. Battery march acts as the portfolio manager for each
Fund and is responsible for the actual investment management of the Funds,
including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security. LMFA (not the Funds) pays
Batterymarch, pursuant to each Advisory Agreement, a management fee equal
to an annual rate of 0.50% of International Equity's average daily net
assets and 0.75% of Emerging Markets' average daily net assets. LMFA and
Batterymarch have voluntarily agreed to waive their fees to the extent
necessary to limit each Fund's total operating expenses attributable to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) to 2.25% of International Equity's and 2.50% of Emerging Markets
average daily net assets. These agreements will expire on May 1, 1998,
unless extended by LMFA or Batterymarch.
Batterymarch 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 Batterymarch
were approximately $4.3 billion as of March 31, 1997. The address of
Batterymarch is 200 Clarendon Street, Boston, Massachusetts 02116.
An investment team is responsible for the day-to-day management of
International Equity and Emerging Markets.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to
separate Underwriting Agreements with the Funds. The Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares of each Fund, including any compensation to its
financial advisors, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and periodic reports
have been prepared, set in type and mailed to existing shareholders at the
Fund's expense, and for any supplementary sales literature and advertising
costs.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
The Board of Directors of the Corporation has adopted Distribution and
Shareholder Services Plans (each a "Plan") pursuant to Rule 12b-1 under
the 1940 Act for each Fund. The Plans provide that as compensation for
Legg Mason's ongoing services to investors in Primary Shares and its
activities and expenses related to the sale and distribution of Primary
Shares, Legg Mason receives an annual distribution fee from each Fund
equal to 0.50% of Global Government's average daily net assets, and 0.75%
of International Equity's and Emerging Markets' average daily net assets;
and an annual service fee from each Fund equal to 0.25% of its average
daily net assets. The
29
<PAGE>
distribution fee and the service fee are calculated daily and paid
monthly. The fees received by Legg Mason during any year may be more or
less than its cost of providing distribution and shareholder services to
the Funds. Legg Mason has temporarily agreed to waive the distribution fee
to the extent necessary to limit total expenses attributable to Primary
Shares of each Fund (exclusive of taxes, interest, brokerage fees and
extraordinary expenses) as described above.
NASD rules limit the amount of annual distribution and service fees
that may be paid by mutual funds and impose a ceiling on the cumulative
distribution fees received. Each Fund's Plan complies with those rules.
Legg Mason is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of the Manager and the Advisers. Legg Mason receives a fee
from BFDS for assisting it with its transfer agent and shareholder
servicing functions; for the year ended December 31, 1996, Legg Mason
received $31,000, $43,000 and $4,000 for performing such services in
connection with Global Government, International Equity and Emerging
Markets, respectively.
The Chairman, President and Treasurer of the Corporation are employed
by Legg Mason.
THE FUNDS' CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is custodian for the securities and cash of
each Fund. Boston Financial Data Services, P.O. Box 953, Boston,
Massachusetts 02103, serves as transfer agent for Fund shares and
dividend-disbursing agent for each Fund.
Pursuant to rules adopted under Section 17(f) of the 1940 Act, each
Fund may maintain foreign securities and cash in the custody of certain
eligible foreign banks and securities depositories. Selection of these
foreign custodial institutions is made by the Board of Directors in
accordance with SEC rules. The Board of Directors will consider a number
of factors, including, but not limited to, the relationship of the
institution to State Street, the reliability and financial stability of
the institution, the ability of the institution to capably perform
custodial services for the Funds, the reputation of the institution in its
national market, the perceived political and economic stability of the
countries in which the sub-custodians will be located and perceived risks
of potential nationalization or expropriation of Fund assets. No assurance
can be given that the Board of Directors' appraisal of the risks in
connection with foreign custodial arrangements will always be correct or
that expropriation, nationalization, freezes, or confiscation of Fund
assets will not occur. Securities traded abroad are more likely to be in
bearer form, which heightens the risk of loss through inadvertance or
theft. In such event, a Fund may be dependent on its foreign custodian,
the custodian's business insurance, or foreign law for any recovery.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
The Corporation was established as a Maryland corporation on December
31, 1992. The Articles of Incorporation authorize the Corporation to issue
one billion shares of common stock par value $.001 per share and to create
additional series, each of which may issue separate classes of shares.
Each Fund currently offers two Classes of Shares -- Class A (known as
"Primary Shares") and Class Y (known as "Navigator Shares"). The two
Classes represent interests in the same pool of assets. A separate vote is
taken by a Class of Shares of a Fund if a matter affects just that Class
of Shares. Each Class of Shares may bear certain differing Class-specific
expenses. Salespersons and others entitled to receive compensation for
selling or servicing Fund shares may receive more with respect to the one
Class than another.
Navigator Shares are currently offered for sale only to institutional
clients of Fairfield for investment of their own funds and funds for which
they act in a fiduciary capacity, to clients of Trust Company for which
Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. The initial and subsequent investment
minimums for Navigator Shares are $50,000 and $100, respectively.
Investments in Navigator Shares may be made through financial advisors of
Fairfield Group, Inc. or Legg Mason.
Each Fund pays no Rule 12b-1 fee with respect to Navigator Shares. The
per share net asset value of Navigator Shares, and dividends
30
<PAGE>
and distributions (if any) paid to Navigator shareholders, are generally
expected to be higher than those of Primary Shares of the Funds, because
of the lower expenses attributable to Navigator Shares. The per share net
asset value of the classes of shares will tend to converge, however,
immediately after the payment of ordinary income dividends. Navigator
Shares of a Fund may be exchanged for the corresponding class of shares of
certain other Legg Mason funds. Investments by exchange into the other
Legg Mason funds are made at the per share net asset value, determined on
the same business day as redemption of the Navigator Shares the investors
wish to redeem.
The Board of Directors of the Corporation does not anticipate that
there will be any conflicts among the interests of the holders of the
different Classes of Fund shares. On an ongoing basis, the Boards will
consider whether any such conflict exists and, if so, take appropriate
action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Corporation will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
31
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
GLOBAL
FUNDS
Putting Your Future First
Global Funds
Navigator Class of Global
Government Trust
Navigator Class of
International Equity Trust
Navigator Class of
Emerging Markets Trust
Prospectus
May 1, 1997
This wrapper is not part of the prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000 800 (bullet) 822 (bullet) 5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.,
Washington, DC 20036-1800
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street
Baltimore, MD 21202
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by the Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by any Fund or its distributor. The Prospectus does not
constitute an offering by any Fund or by the principal underwriter in any
jurisdiction in which such offering may not lawfully be made.
[Legg Mason Funds logo]
<PAGE>
NAVIGATOR GLOBAL FUNDS
PROSPECTUS
MAY 1, 1997
LEGG MASON GLOBAL TRUST, INC.:
LEGG MASON GLOBAL GOVERNMENT TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
Shares of Navigator Global Government Trust, Navigator International Equity
Trust and Navigator Emerging Markets Trust (collectively referred to as
"Navigator Shares") represent separate classes ("Navigator Classes") of
interest in the Legg Mason Global Government Trust ("Global Government"), Legg
Mason International Equity Trust ("International Equity") and Legg Mason
Emerging Markets Trust ("Emerging Markets"), respectively. Global Government,
International Equity and Emerging Markets (each separately referred to as a
"Fund" and collectively referred to as the "Funds") are separate, professionally
managed portfolios of Legg Mason Global Trust, Inc. ("Corporation"), an open-end
management investment company. Global Government is a bond fund; International
Equity and Emerging Markets are equity funds.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be retained for
future reference. A Statement of Additional Information about the Funds dated
May 1, 1997 has been filed with the Securities and Exchange Commission ("SEC")
and, as amended or supplemented from time to time, is incorporated herein by
reference. The Statement of Additional Information is available without charge
upon request from the Funds' distributor, Legg Mason Wood Walker, Incorporated
("Legg Mason") (address and telephone numbers listed on the next page).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INTERNATIONAL EQUITY AND EMERGING MARKETS MAY INVEST UP TO 35% AND 100%,
RESPECTIVELY, OF THEIR TOTAL ASSETS IN THE SECURITIES OF COMPANIES LOCATED IN
DEVELOPING COUNTRIES, INCLUDING COUNTRIES OR REGIONS WITH RELATIVELY LOW GROSS
NATIONAL PRODUCT PER CAPITA COMPARED TO THE WORLD'S MAJOR ECONOMIES, AND IN
COUNTRIES OR REGIONS WITH THE POTENTIAL FOR RAPID BUT UNSTABLE ECONOMIC GROWTH
(COLLECTIVELY, "EMERGING MARKETS"). BECAUSE OF THE RISKS ASSOCIATED WITH COMMON
STOCK INVESTMENTS, BOTH INTERNATIONAL EQUITY AND EMERGING MARKETS ARE INTENDED
TO BE LONG-TERM INVESTMENT VEHICLES AND ARE NOT DESIGNED TO PROVIDE INVESTORS
WITH A MEANS OF SPECULATING ON SHORT-TERM STOCK MARKET MOVEMENTS. INVESTORS IN
THESE TWO FUNDS SHOULD BE ABLE TO TOLERATE SUDDEN, SOMETIMES SUBSTANTIAL
FLUCTUATIONS IN THE VALUE OF THEIR INVESTMENTS.
GLOBAL GOVERNMENT is a non-diversified, professionally managed portfolio
seeking capital appreciation and current income in order to achieve an
attractive total return consistent with prudent investment risk. In attempting
to achieve the Fund's objective, the Fund's investment adviser, Western Asset
Management Company ("Western Asset"), normally invests at least 75% of the
Fund's total assets in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities or political
subdivisions. At least 75% of its total assets normally will be invested in
investment grade debt securities of foreign or domestic corporations,
governments or other issuers, certain money market instruments, and repurchase
agreements collateralized by such securities. The Fund may invest up to 25% of
its total assets in debt securities rated below investment grade.
INTERNATIONAL EQUITY is a diversified, professionally managed portfolio
seeking maximum long-term total return. IN ATTEMPTING TO ACHIEVE THE FUND'S
OBJECTIVE, THE FUND'S INVESTMENT ADVISER, BATTERYMARCH FINANCIAL MANAGEMENT,
INC. ("BATTERYMARCH"), NORMALLY INVESTS THE FUND'S ASSETS IN COMMON STOCKS OF
COMPANIES LOCATED OUTSIDE THE UNITED STATES. THE FUND MAY INVEST UP TO 35% OF
ITS TOTAL ASSETS IN EMERGING MARKET SECURITIES.
<PAGE>
EMERGING MARKETS is a diversified, professionally managed portfolio seeking
long-term capital appreciation. In attempting to achieve the Fund's objective,
Batterymarch, as the Fund's investment adviser, normally invests at least 65% of
the Fund's total assets in equity securities of emerging market companies.
Assets not invested in emerging market equity securities may be invested in any
combination of debt securities of the U.S. Government, equity securities of
issuers in developed countries, cash and money market instruments.
The adviser considers emerging markets to include most of the countries of
Asia, Africa, Latin America, Eastern Europe and the Middle East, as well as
certain countries in Western or Southern Europe. Most emerging market countries
or regions have relatively low gross national products per capita compared to
the world's major economies, and have the potential for rapid but unstable
economic growth. The risks of foreign investing are heightened in emerging
markets.
INVESTORS SHOULD BE COGNIZANT OF THE UNIQUE RISKS OF INTERNATIONAL
INVESTING, INCLUDING EXPOSURE TO CURRENCY FLUCTUATIONS. BECAUSE OF THESE RISKS,
AN INVESTMENT IN ANY OF THESE FUNDS SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM. BECAUSE OF THE SPECIAL RISKS ASSOCIATED WITH EMERGING
MARKETS, AN INVESTMENT IN EITHER OF THE EQUITY FUNDS SHOULD BE CONSIDERED
SPECULATIVE.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own monies and monies for which they act
in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with such Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust.
Navigator Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
No initial sales charge is imposed by the Funds on purchases, and no
redemption charge is imposed by Global Government and International Equity on
sales of Navigator Shares. For Emerging Markets, a 2% redemption fee is charged
on the proceeds of Navigator Shares redeemed or exchanged within one year of
purchase. Institutional Clients may charge their Customer Accounts for services
provided in connection with the purchase or redemption of shares. See "How to
Purchase and Redeem Shares." Each Fund pays management fees to Legg Mason Fund
Adviser, Inc. ("LMFA"), but Navigator Classes pay no distribution fees.
<PAGE>
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objectives and Policies 6
How to Purchase and Redeem Shares 19
How Shareholder Accounts are Maintained 21
How Net Asset Value Is Determined 21
Dividends and Other Distributions 21
Taxes 22
Shareholder Services 23
The Funds' Management and Investment Advisers 24
The Funds' Distributor 25
The Funds' Custodian and Transfer Agent 25
Description of the Corporation and its Shares 25
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
2
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. Other expenses set
forth in the table are based on estimates and fees are adjusted for
current expense limits and fee waiver levels for the initial period of
operations of the Navigator Classes.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH
FUND
Maximum sales charge on purchases or
reinvested dividends None
Redemption and exchange fees:
For Global Government and International
Equity None
For Emerging Markets 2.00%*
* Because of the costs involved in trading emerging market securities,
Emerging Markets assesses a 2% redemption fee on the proceeds of shares
redeemed or exchanged within one year of purchase. The fee is paid
directly to the Fund, and not to LMFA or Legg Mason.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
INTER-
GLOBAL NATIONAL EMERGING
GOVERNMENT EQUITY MARKETS
______________________________________
Management fees
(after fee waivers) 0.75% 0.68% 0.00%
12b-1 fees None None None
Other expenses 0.36% 0.57% 1.50(B)
___________________________________
Total operating
expenses (after fee
waivers) 1.11% 1.25% 1.50%
===================================
(A) Pursuant to voluntary expense limitations, LMFA and each Fund's adviser
have agreed to waive the management fees to the extent necessary to
limit total operating expenses attributable to the Navigator Shares of
each Fund (exclusive of taxes, interest, brokerage and extraordinary
expenses) as follows: For Global Government 1.15% of average daily net
assets indefinitely; for International Equity, 1.25% of average daily
net assets until May 1, 1998; and for Emerging Markets, 1.50% of average
daily net assets until May 1, 1998. In the absence of such waivers, the
expected management fee, other expenses, and total operating expenses of
each Fund would be as follows. For International Equity, 0.75%, 0.57%
and 1.32% of average net assets; and for Emerging Markets, 1.00%, 1.50%
and 2.50% of average net assets. No fee waivers would be necessary for
Global Government.
(B) Other expenses are based on annualized estimated amounts for the current
fiscal year.
For further information concerning Fund expenses, see "The Funds'
Management and Investment Advisers," page 24.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming
(1) a 5% annual rate of return and (2) full redemption at the end of each
time period. As noted in the table above, Global Government and
International Equity charge no redemption fees of any kind.
1 3 5 10
YEAR YEARS YEARS YEARS
____________________________
Global Government $11 $35 $61 $135
International Equity $13 $40 $69 $151
Emerging Markets $36 $47 N/A N/A
Emerging Markets
(Assuming no redemption) $15 $47 N/A N/A
This example assumes that the percentage amounts listed under "Annual
Fund Operating Expenses" remain the same over the time periods shown and
that all dividends and other distributions are reinvested. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE
ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF AND DOES NOT REPRESENT THE
PROJECTED OR ACTUAL PERFORMANCE OF NAVIGATOR SHARES OF THE FUNDS. THE
ABOVE TABLES AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The actual expenses attributed to Navigator Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, whether LMFA and/or a Fund's adviser
waive their fees, and the extent to which Navigator Shares incur variable
expenses, such as transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. The information shown below is for Primary Shares and reflects
12b-1 fees paid by that class and not by Navigator Shares.
The financial information in the table that follows has been audited by
Coopers & Lybrand L.L.P. Global Government's, International Equity's and
Emerging Markets' financial statements for the year ended December 31, 1996
and the report of Coopers & Lybrand L.L.P. thereon are included in the
Corporation's Annual Report to Shareholders and are incorporated by
reference into the Statement of Additional Information. The annual report
is available to shareholders without charge by calling a financial advisor
at Fairfield, Legg Mason or Legg Mason's Funds Marketing Department at
800-822-5544.
<TABLE>
<CAPTION>
INVESTMENT OPERATIONS DISTRIBUTIONS FROM:
__________________________________________ ______________________________________
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVEST- IN EXCESS
NET ASSET NET MENTS, OPTIONS TOTAL NET OF NET
VALUE, INVESTMENT AND FUTURES AND FROM NET REALIZED REALIZED
BEGINNING INCOME FOREIGN CURRENCY INVESTMENT INVESTMENT GAIN ON GAIN ON
OF PERIOD (LOSS) TRANSACTIONS OPERATIONS INCOME INVESTMENTS INVESTMENTS
____________________________________________________________________________________________________________________________
<S> <C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1996 $ 10.33 $ 0.59 $ 0.21 $ 0.80 $(0.62) $ (0.10) $ --
1995 9.54 0.63(A) 1.32 1.95 (1.16) -- --
1994 10.27 0.57(A) (0.71) (0.14) (0.59) -- --
April 15,(B)-
Dec. 31, 1993 10.00 0.36(A) 0.31 0.67 (0.36) (0.04) --
INTERNATIONAL EQUITY
TRUST
Year Ended Dec. 31,
1996(E) $ 10.70 $ 0.02(F) $ 1.74 $ 1.76 $(0.05) $ (0.32) $ --
Feb. 17,(B)-
Dec. 31, 1995 10.00 0.04(F) 0.77 0.81 (0.04) -- (0.07)
EMERGING MARKETS TRUST
May 28,(B)-
Dec. 31, 1996(E) $ 10.00 $(0.03)(G) $ 0.57 $ 0.54 $(0.03) $ -- $ --
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
____________________________________________________________________
NET
NET ASSET INVESTMENT NET ASSETS
VALUE EXPENSES INCOME (LOSS) PORTFOLIO END OF
TOTAL END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD
DISTRIBUTIONS PERIOD RETURN NET ASSETS NET ASSETS RATE (IN THOUSANDS)
_____________________________________________________________________________________________________________________________
<S> <C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1996 $ (0.72) $ 10.41 8.22% 1.86% 5.80% 172% $161,549
1995 (1.16) 10.33 20.80% 1.81%(A) 5.72%(A) 169% 153,954
1994 (0.59) 9.54 (1.40)% 1.34%(A) 5.71%(A) 127% 145,415
April 15,(B)-
Dec. 31, 1993 (0.40) 10.27 6.76%(C) 0.27%(A,D) 5.41%(A,D) 128%(D) 161,072
INTERNATIONAL EQUITY TRUST
Year Ended Dec. 31,
1996(E) $ (0.37) $ 12.09 16.49% 2.25%(F) 0.21%(F) 83% $167,926
Feb. 17,(B)-
Dec. 31, 1995 (0.11) 10.70 8.11%(C) 2.25%(D,F) 0.52%(D,F) 58%(D) 65,947
EMERGING MARKETS TRUST
May 28,(B)-
Dec. 31, 1996(E) $ (0.03) $ 10.51 5.40%(C) 2.50%(D,G) (.68)%(D,G) 46%(D) $ 21,206
</TABLE>
(A) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY EXPENSE LIMITATIONS OF 0.2% UNTIL SEPTEMBER 30, 1993;
0.35% UNTIL DECEMBER 31, 1993; 0.5% UNTIL JANUARY 31, 1994; 0.7% UNTIL
FEBRUARY 28, 1994; 0.9% UNTIL MARCH 31, 1994; 1.1% UNTIL APRIL 30, 1994;
1.3% UNTIL MAY 31, 1994; 1.5% UNTIL JUNE 30, 1994; 1.7% UNTIL JULY 31,
1994; AND 1.9% INDEFINITELY.
(B) COMMENCEMENT OF OPERATIONS.
(C) NOT ANNUALIZED
(D) ANNUALIZED.
(E) PURSUANT TO SEC REGULATIONS ADOPTED FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THE AVERAGE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD DURING THE YEAR ENDED DECEMBER 31, 1996 FOR
INTERNATIONAL EQUITY TRUST AND EMERGING MARKETS TRUST WERE $.0083 AND
$.0061, RESPECTIVELY.
(F) NET OF FEES WAIVED AND/OR EXPENSES REIMBURSED PURSUANT TO A VOLUNTARY
EXPENSE LIMITATION OF 2.25%.
(G) NET OF FEES WAIVED AND/OR EXPENSES REIMBURSED PURSUANT TO VOLUNTARY
EXPENSES LIMITATION OF 2.50%.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of each class of
shares in advertisements or in reports or other communications to shareholders.
A mutual fund's total return is a measurement of the overall change in value,
including changes in share price and assuming reinvestment of dividends and
capital gain distributions, of an investment in the fund. CUMULATIVE TOTAL
RETURN shows the fund's performance over a specific period of time. AVERAGE
ANNUAL TOTAL RETURN is the average annual compounded return that would have
produced the same cumulative total return if the fund's performance had been
constant over the entire period. Performance figures reflect past performance
only and are not intended to indicate future performance. Average annual returns
tend to smooth out variations in the fund's return, so they differ from actual
year-by-year results.
Prior to May 1, 1996, International Equity was named Legg Mason Global
Equity Trust ("Global Equity"). Global Equity invested primarily in common
stocks of companies located anywhere in the world, including the United States.
Since May 1, 1996, with this name change, it invests in common stocks located
outside the United States.
Total returns as of December 31, 1996 were as follows:
CUMULATIVE TOTAL GLOBAL INTERNATIONAL EMERGING
RETURN GOVERNMENT EQUITY MARKETS
____________________________________________________________
Primary Class:
One Year +8.22% +16.49% N/A
Life of Class +37.62%(A) +25.94%(B) +3.30%(C)
AVERAGE ANNUAL
TOTAL RETURN
____________________________________________________________
Primary Class:
One Year +8.22% +16.49% N/A
Life of Class +8.97%(A) +13.10%(B) N/A
(A) INCEPTION OF GLOBAL GOVERNMENT -- APRIL 15, 1993.
(B) INCEPTION OF INTERNATIONAL EQUITY -- FEBRUARY 17, 1995.
(C) INCEPTION OF EMERGING MARKETS -- MAY 28, 1996. NET OF 2.0% REDEMPTION FEE
ASSESSED WITHIN TWELVE MONTHS OF PURCHASE.
No adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in the Funds will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns would have been lower if LMFA had not
waived/reimbursed certain fees and expenses during the periods presented above.
Because Navigator Shares have lower total expenses, they will generally have a
higher return than Primary Shares. As of the date of this Prospectus, Navigator
Shares have no performance history.
Global Government also may advertise its YIELD. Yield reflects net
investment income per share (as defined by applicable SEC regulations) over a
30-day (or one-month) period, expressed as an annualized percentage of net asset
value at the end of the period. The effective yield, although calculated
similarly, will be slightly higher than the yield because it assumes that income
earned from the investment is reinvested (i.e., the compounding effect of
reinvestment). Yield computations differ from other accounting methods and
therefore may differ from dividends actually paid or reported net income.
Further information about each Fund's performance is contained in the
Corporation's annual report to shareholders, which may be obtained without
charge by calling a financial advisor at Fairfield, Legg Mason or Legg Mason's
Funds Marketing Department at 800-822-5544.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Corporation's
Board of Directors without a shareholder vote. There can be no assurance
that any Fund will achieve its investment objective.
GLOBAL GOVERNMENT'S investment objective is to provide capital
appreciation and current income in order to achieve an attractive total
return consistent with prudent investment risk. The Fund normally attempts
to achieve this objective by investing at least 75% of its total assets in
debt securities issued or guaranteed by the U. S. Government or foreign
governments, their agencies, instrumentalities or political subdivisions.
The Fund normally will invest at least 75% of its total assets in debt
securities issued or guaranteed by the U. S. Government or foreign
governments, the agencies or instrumentalities of either, supranational
organizations and foreign or domestic corporations, trusts, or financial
institutions rated within the four highest grades by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's ("S&P") or, if unrated by
Moody's or S&P, judged by Western Asset to be of comparable quality,
certain money market instruments and repurchase agreements involving any
of the foregoing. These are considered investment grade debt securities.
Under normal circumstances, the Fund will be invested in at least
three different countries, including the United States. The Fund will
invest no more than 40% of its total assets in any one country other than
the United States. There is no other limit on the percentage of the Fund's
assets that may be invested in any one country or currency.
The money market instruments in which the Fund may invest include
commercial paper and other money market instruments which are: rated A-1
or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of investment;
issued or guaranteed as to principal and interest by issuers or guarantors
having an existing debt security rating of A or better by Moody's or S&P,
or if unrated by Moody's or S&P, judged by Western Asset to be of
comparable quality; and bank certificates of deposit and bankers'
acceptances judged by Western Asset to be of comparable quality.
The remainder of the Fund's assets, not in excess of 25% of its
assets, may be invested in: (1) debt securities of issuers which are rated
at the time of purchase below Moody's or S&P's four highest grades, or
unrated securities judged by Western Asset to be of comparable quality.
This may include lower-rated debt securities issued or guaranteed by
foreign governments or by domestic or foreign corporations, trusts or
financial institutions; (2) loans and participations in loans originated
by banks and other financial institutions, which also may be below
investment grade; (3) securities which may be convertible into or
exchangeable for, or carry warrants to purchase, common stock, or other
equity interests (such securities may offer attractive income
opportunities, and the debt securities of certain issuers may not be
available without such features); and (4) common and preferred stocks. See
page 16 for a discussion of the risks of lower-rated debt securities. If a
security is downgraded subsequent to its purchase, the Fund will sell that
security or another if that is necessary to assure that 75% of its assets
are investment grade or equivalent quality instruments.
The Fund may invest directly in U.S. dollar-denominated or foreign
currency-denominated foreign fixed-income securities (including preferred
or preference stock) and money market securities issued or guaranteed by
governmental and non-governmental issuers, international agencies and
supranational entities. 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.
The Fund's foreign investments may include securities of issuers based
in developed countries (including, but not limited to, countries in the
European Union, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea).
The Fund may invest in "Brady Bonds," which are debt restructurings
that provide for the exchange of cash and loans for newly issued bonds.
Brady Bonds have been issued by numerous emerging market governments, and
other such governments are expected to issue them in the future. Brady
Bonds currently are rated below investment grade. As of the date of this
Prospectus, Western Asset is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize, however, that Brady
Bonds have been issued only recently and, accordingly, do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U. S. dollar) and are
actively traded in the secondary market for Latin American debt.
The Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which
6
<PAGE>
may be fixed-rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Interest payments on such bonds
generally are collateralized by cash or securities in an amount that, in
the case of fixed-rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is
equal to at least one year's rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter.
Foreign government securities may include debt securities denominated
in multinational currency units. An example of a multinational currency
unit is the European Currency Unit ("ECU"). An ECU represents specified
amounts of currencies of certain member states of the European Economic
Community. The specific amounts of currencies comprising the ECU may be
adjusted to reflect changes in relative values of the underlying
currencies. Western Asset does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the
marketability of such securities. European supranational entities, in
particular, issue ECU-denominated obligations. The market for ECUs may
become illiquid at times of rapid change in the European currency markets,
limiting the Fund's ability to prevent potential losses.
The Fund may buy and sell options, futures and forward contracts for
hedging purposes and, to the extent permitted by regulatory agencies, for
non-hedging purposes in an effort to enhance income. See "Options, Futures
and Forward Currency Exchange Contracts," page 13 and "Risks of Futures,
Options and Forward Currency Exchange Contracts," page 14. The Fund may
purchase securities on a when-issued basis and enter into forward
commitments to purchase securities; may enter into swaps, caps, collars
and floors for hedging and other purposes; may lend its securities to
brokers, dealers and other financial institutions to earn income; may
borrow money for temporary or emergency purposes; and may enter into short
sales "against the box." See "When-Issued Securities and Standby
Commitments," page 18.
When Western Asset believes such action is warranted by abnormal
market or economic situations, the Fund may invest temporarily without
limit in cash and U.S. dollar-denominated money market instruments
including repurchase agreements.
INTERNATIONAL EQUITY'S investment objective is to seek maximum
long-term total return. The Fund attempts to meet this objective by
investing primarily in equity securities of companies located outside the
United States. Under normal circumstances, the Fund will invest at least
65% of its total assets in equity securities of issuers located in at
least three different countries other than the United States. In
implementing this policy, Batterymarch currently intends to invest
substantially all of the Fund's assets in non-U.S. equity securities.
Batterymarch examines securities from over 20 international stock markets,
with emphasis on several of the largest -- Japan, the United Kingdom,
France, Canada and Germany. Common stocks are chosen using Batterymarch's
system for identifying common stocks it believes to be undervalued. The
weighting of the Fund's assets among individual countries will reflect an
assessment of the attractiveness of individual equity securities
regardless of where they trade. In addition, the Fund may invest up to 35%
of its total assets in emerging market securities.
The Fund's investment portfolio will normally be diversified across a
broad range of industries and across a number of countries, consistent
with the objective of maximum total return. The Fund is expected to remain
substantially fully invested in equity securities. However, when cash is
temporarily available, or for temporary defensive purposes, when
Batterymarch believes such action is warranted by abnormal market or
economic situations, the Fund may invest without limit in cash and U.S.
dollar-denominated money market instruments, including repurchase
agreements of domestic issuers. When Batterymarch believes such action is
warranted by abnormal market or economic situations, for temporary
defensive purposes, the Fund also may invest without limit in short-term
debt instruments, including government, corporate and money market
securities of domestic issuers. Such short-term investments will be rated
in one of the four highest rating categories by S&P or Moody's or, if
unrated by S&P or Moody's, judged by Batterymarch to be of comparable
quality.
The Fund is authorized to invest in stock index futures and options as
discussed below. The Fund may also enter into forward foreign currency
exchange contracts in order to protect against fluctuations in exchange
rates. See "Options, Futures and Forward Currency Exchange Contracts,"
page 13 and "Risks of Futures, Options and Forward Currency Exchange
Contracts," page 14.
The Fund is permitted to hold securities other than common stock, such
as debentures or preferred stock that may or may not be convertible
7
<PAGE>
into common stock. Some of these instruments may be rated below investment
grade. The Fund will not purchase securities rated below investment grade
(or comparable unrated securities) if, as a result, more than 5% of the
Fund's net assets would be so invested.
EMERGING MARKETS' investment objective is long-term capital
appreciation. The Fund attempts to meet this objective by investing at
least 65% of its total assets in emerging market equity securities under
normal conditions.
Assets not invested in emerging market equity securities may be
invested in any combination of debt securities of the U.S. Government,
equity securities of issuers in developed countries, cash and money market
instruments, including repurchase agreements. Batterymarch intends to be
substantially fully invested in equity securities and convertible
securities of emerging market issuers. The Fund may use options and stock
index futures as discussed below. It may also enter into forward foreign
currency exchange contracts in order to protect against fluctuations in
exchange rates. However, appropriate hedging instruments are not available
with respect to most emerging markets, and the Fund accordingly will not
often employ hedging strategies. See "Options, Futures and Forward
Currency Exchange Contracts," page 13, and "Risks of Futures, Options,
Futures and Forward Currency Exchange Contracts," page 14.
The Fund may invest in the following types of equity securities:
common stock, preferred stock, securities convertible into common stock,
rights and warrants to acquire such securities and substantially similar
forms of equity with comparable risk characteristics.
The Fund intends to invest in Asia, Latin America, the Indian
Sub-continent, Southern and Eastern Europe, the Middle East, and Africa,
although it may not invest in all these markets at all times and may not
invest in any particular market when it deems investment in that country
or region to be inadvisable.
More than 25% of the Fund's total assets may be denominated in a
single currency. Concentration in a single foreign currency will increase
the Fund's exposure to adverse developments affecting the value of that
currency. An issuer of securities purchased by the Fund may be domiciled
in a country other than the country in whose currency the securities are
denominated.
When abnormal market or economic situations warrant in the opinion of
Batterymarch, the Fund may invest without limit for temporary defensive
purposes in short-term debt instruments, including government, corporate
and money market securities of domestic issuers, as well as repurchase
agreements. Such short-term instruments will be rated in one of the four
highest rating categories by S&P or Moody's or, if unrated, judged by
Batterymarch to be of comparable quality.
INVESTMENT RESTRICTIONS
Global Government is a "non-diversified" investment company;
therefore, the percentage of its assets invested in any single issuer is
not limited by the Investment Company Act of 1940 ("1940 Act"). However,
the Fund intends to continue to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ( "Code"),
which requires that, among other things, at the close of each quarter of
the Fund's taxable year: (1) with respect to 50% of the Fund's total
assets, no more than 5% of its total assets may be invested in the
securities of any one issuer; and (2) no more than 25% of the value of the
Fund's total assets may be invested in the securities of a single issuer;
these limits do not apply to U.S. government securities. To the extent the
Fund's assets are invested in the obligations of a limited number of
issuers or in a limited number of countries or currencies, the value of
the Fund's shares will be more susceptible to any single economic,
political or regulatory occurrence than would the shares of a diversified
company.
The fundamental restrictions applicable to the Fund include a
prohibition on investing 25% or more of total assets in the securities of
issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U. S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto). Additional fundamental and non-fundamental
investment restrictions are set forth in the Statement of Additional
Information.
As a fundamental policy, each Fund may borrow an amount equal to
33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Because of the limited liquidity of
some emerging markets, Emerging Markets, in particular, may occasionally
be required to borrow to meet redemption requests. Borrowing may cause
greater fluctuation in share value, but also may enable the Fund to retain
favorable securities positions rather than liquidating them to meet
redemptions. None of the Funds will borrow for the purpose of leveraging
its portfolio. As a non-fundamental policy, none of the Funds may purchase
securities when outstanding borrowings exceed 5% of total assets.
8
<PAGE>
INVESTMENT TECHNIQUES AND RISKS
The following investment techniques and risks apply to each of the
Funds unless otherwise stated.
Foreign Securities
Investing in the securities of issuers in any foreign country involves
special risks and considerations not typically associated with investing
in U.S. companies. 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. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar
irrespective of the performance of the underlying investment.
The relative performance of various countries' fixed income and equity
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 Fund may be listed on foreign
exchanges or traded over-the-counter. Transactions on foreign exchanges
are usually subject to mark-ups or commissions higher than negotiated
commissions on U.S. transactions, although each Fund will endeavor to
obtain the best net results in effecting 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 will include higher custodial
fees than apply to domestic custodial arrangements and transaction costs
of foreign currency conversions.
Emerging Market Securities
Each Fund may invest in securities of issuers based in emerging
markets (including, but not limited to, countries in Asia, Latin America,
the Indian Sub-continent, Southern and Eastern Europe, the Middle East,
and Africa). The risks of foreign investment, described above, are greater
for investments in emerging markets. Because of the special risks
associated with investing in emerging markets, an investment in any of the
Funds should be considered speculative. With respect to Global Government,
debt securities of governmental and corporate issuers in such countries
will typically be rated below investment grade or be of comparable
quality. Emerging markets will include any country: (i) having an
"emerging stock market" as defined by the International Finance
Corporation; (ii) with low- to middle-income economies according to the
International Bank for Reconstruction and Development ("World Bank");
(iii) listed in World Bank publications as developing or (iv) determined
by Batterymarch to be an emerging market in accordance with the criteria
of those organizations. The following are considered emerging market
securities: (1) securities publicly traded on emerging market stock
exchanges, or whose principal trading market is over-the-counter (i.e.,
off-exchange) in an emerging market; (2) securities (i) denominated in any
emerging market currency or (ii) denominated in a major currency if issued
by companies to finance operations in an emerging market; (3) securities
of companies that derive a substantial portion of their total revenues
from goods or services produced in, or sales made in, emerging markets;
(4) securities of companies organized under the laws of an emerging market
country or region, which are publicly traded in securities markets
elsewhere; and (5) American depositary receipts ("ADRs") (or similar
instruments) with respect to the foregoing.
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. Many emerging market
countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations
in inflation rates have had, and may continue to have, very negative
effects on the economies and securities markets of certain emerging
markets.
Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be
9
<PAGE>
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.
Over the last quarter of a century, inflation in many emerging market
countries has been significantly higher than the world average. While some
emerging market countries have sought to develop a number of corrective
mechanisms to reduce inflation or mitigate its effects, inflation may
continue to have significant effects both on emerging market economies 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.
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. Although it might be
theoretically possible to hedge for anticipated income and gains, the
ongoing and indeterminate nature of the foregoing risks (and the costs
associated with hedging transactions) makes 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 the Fund 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 availability 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 Fund. In such a case, the
Fund's ability to obtain U.S. dollars may be adversely affected by any
increased restrictions imposed on the outflow of foreign exchange. If the
Fund 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, the Fund'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 markets 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 emerging 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. 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 Fund
to make intended securities purchases due to settlement problems could
cause that Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund 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 markets as a result of which trading of securities may cease
or may be substantially curtailed and prices for a Fund's portfolio
securities in such markets may not be readily available.
Investment in Japan
International Equity may invest more than 25% of its total assets in
securities of Japanese issuers. Japan is the largest capitalized stock
market outside the United States. The performance of the Fund may
therefore be significantly affected by events affecting the Japanese
economy and the exchange rate between the Japanese yen and the U.S.
dollar. Japan has recently experienced a recession, including a decline in
real estate values that adversely affected the balance sheets of many
financial institutions. The strength of the Japanese currency may
adversely affect industries engaged substantially in export. Japan's
economy is heavily dependent on foreign oil. Japan is located in a
10
<PAGE>
seismically active area, and severe earthquakes may damage important
elements of the country's infrastructure. Japanese economic prospects may
be affected by the political and military situations of its nearby
neighbors, notably North and South Korea, China, and Russia.
Sovereign Debt Securities
Global Government may invest in sovereign debt securities of emerging
market governments. 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 multilateral 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.
Repurchase Agreements
Repurchase agreements are agreements under which either U.S.
government obligations or other high-quality, liquid debt securities are
acquired from a securities dealer or bank subject to resale at an
agreed-upon price and date. The securities are held for the Funds by a
custodian bank as collateral until resold and will be supplemented by
additional collateral if necessary to maintain a total value equal to or
in excess of the value of the repurchase agreement. A Fund bears a risk of
loss in the event that the other party to a repurchase agreement defaults
on its obligations and that Fund is delayed or prevented from exercising
its right to dispose of the collateral securities, which may decline in
value in the interim. A Fund will enter into repurchase agreements only
with financial institutions which its adviser believes present minimal
risk of default during the term of the agreement based on guidelines
established by the Corporation's Board of Directors.
Preferred Stock
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Preferred shareholders may
have certain rights if dividends are not paid, but do not generally have a
legal right to demand payment. Shareholders may suffer a loss of value if
dividends are not paid. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the
issuer's creditworthiness than are the prices of debt securities. Under
ordinary circumstances, preferred stock does not carry voting rights.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. 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 ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
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. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. Global Government has no current
intention of converting any convertible securities it
11
<PAGE>
may own into equity or holding them as equity upon conversion, although it
may do so for temporary purposes. 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 Global Government is called for redemption, the Fund will be
required to convert it into the underlying common stock, sell it to a
third party or permit the issuer to redeem the security. Any of these
actions could have an adverse effect on the Fund's ability to achieve its
investment objective.
Reverse Repurchase Agreements and Other Borrowing
In a reverse repurchase agreement, a Fund temporarily transfers
possession of a portfolio instrument to another person, such as a
financial institution or broker-dealer, in return for cash and agrees to
repurchase the instrument at an agreed upon time (normally within seven
days) and price, including interest payment. Each Fund may also enter into
dollar rolls, in which a Fund sells a fixed income security for delivery
in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, that Fund would forego
principal and interest paid on such securities. The Fund would be
compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by the interest earned
on the proceeds of the initial sale.
Each Fund may engage in reverse repurchase agreements, dollar rolls
and other borrowing as a means of raising cash to satisfy redemption
requests or for other temporary or emergency purposes without selling
portfolio instruments.
To avoid potential leveraging effects of borrowing (including reverse
repurchase agreements and dollar rolls), each Fund will not purchase
securities while such borrowing is in excess of 5% of its total assets.
Each Fund will limit its borrowing to no more than one-third of its total
assets.
Loans of Portfolio Securities
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of 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 that Fund's
custodian. During the time securities are on loan, the borrower will pay
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn 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 Fund or the borrower. Each Fund may
pay reasonable 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. Each Fund
presently does not expect to have on loan at any given time securities
totaling more than one-third of its net asset value. When a Fund loans a
security to another party, it runs the risk that the other party will
default on its obligation, and that the value of the collateral will
decline before the Fund can dispose of it.
Restricted and Illiquid Securities
Restricted securities are securities subject to legal or contractual
restrictions on resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when a sale
would otherwise be desirable. No Fund will acquire a security which cannot
be expected to be sold within seven days at approximately the price at
which it is valued ("illiquid assets") if such acquisition would cause
the aggregate value of illiquid assets to exceed 15% of its net assets.
Time deposits and repurchase agreements maturing in more than seven days
are considered illiquid. Illiquid securities may be difficult to value,
and the Fund may have difficulty disposing of such securities promptly.
The Funds 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. Rule 144A securities,
although not registered, may be sold to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933. Each Fund's
adviser, acting pursuant to guidelines established by the Corporation's
Board of Directors, may determine that some Rule 144A securities are
liquid. If the newly-developing institutional markets for restricted
securities do not develop as anticipated, it could adversely affect the
liquidity of a Fund.
Depositary Receipts
The Funds may invest in ADRs or similar non-U.S. instruments issued by
foreign banks or trust companies. ADRs are securities issued by a U.S.
depositary (usually a bank) and represent a specified quantity of
underlying non-U.S. stock on deposit with a custodian bank as collateral.
ADRs
12
<PAGE>
may be sponsored or unsponsored. A sponsored ADR is issued by a depositary
which has an exclusive relationship with the issuer of the underlying
security. An unsponsored ADR may be issued by any number of U.S.
depositaries. The Funds may invest in either type of ADR. 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. Some of these depositary
receipts may be issued in bearer form. For purposes of their investment
policies, each Fund will treat ADRs and similar instruments as equivalent
to investment in the underlying securities.
Securities of Other Investment Companies
Due to restrictions on direct investment by foreign entities in
certain emerging markets, or other difficulties limiting the availability
of local securities, investment in other investment companies may be the
most practical or only manner in which a Fund can invest in certain
emerging markets. A Fund may invest in the securities of other investment
companies, but it will not own more than 3% of the total outstanding
voting stock of any investment company, invest more than 5% of its total
assets in any one investment company, or invest more than 10% of its total
assets in investment companies in general. Such investments 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. There can be no assurance that a Fund
will be able to invest in certain emerging markets. A Fund will invest in
such funds when, in the adviser's judgment, the potential benefits of such
investment justify the payment of any applicable premium or sales charge.
Options, Futures and Forward Currency Exchange Contracts
A futures contract is an agreement between the parties to buy or sell
a specified amount of one or more securities 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. Under an option contract,
one party has the right to require the other to buy or sell a specific
security, currency or futures contract, and may exercise that right if the
market price of the underlying instrument moves in a direction
advantageous to the holder of the option. A forward foreign currency
exchange contract is an obligation to purchase or sell a specific amount
of a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. Options, futures and forward currency
exchange contracts are generally considered to be "derivatives."
FOR GLOBAL GOVERNMENT:
The Fund may buy and sell options, futures and forward contracts for
hedging purposes and, to the extent permitted by regulatory agencies, for
non-hedging purposes in an effort to enhance income. The Fund may purchase
and sell call and put options on bond indices and on securities in which
the Fund is authorized to invest for hedging purposes or to enhance
income. The Fund may also purchase and sell interest rate and bond index
futures contracts and options thereon for hedging purposes.
The Fund may enter into forward currency contracts for the purchase or
sale of a specified currency at a specified future date either with
respect to specified transactions or with respect to its portfolio
positions. For example, when Western Asset anticipates making a currency
exchange transaction in connection with the purchase or sale of a
security, the Fund may enter into a forward contract in order to set the
exchange rate at which the transaction will be made. The Fund may enter
into a forward contract to sell an amount of a foreign currency
approximating the value of some or all of its security positions
denominated in such currency. It may also engage in cross-hedging by using
a forward contract in one currency to hedge against fluctuations in the
value of securities denominated in a different currency. The purpose of
these contracts is to minimize the risk to the Fund from adverse changes
in the relationship between two currencies. Cross-currency hedging
requires a degree of correlation between the two currencies involved. Some
currency relationships thought to be correlated have proven highly
volatile on some occasions.
The Fund may also purchase and sell foreign currency futures
contracts, options thereon and options on foreign currencies to hedge
against the risk of fluctuations in the market value of foreign securities
it holds or intends to purchase, resulting from changes in foreign
exchange rates. The Fund
13
<PAGE>
may also purchase and sell options on foreign currencies and use forward
currency contracts to enhance income.
FOR INTERNATIONAL EQUITY AND EMERGING MARKETS:
A Fund may enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign
exchange rates in the purchase and sale of investment securities. It may
not enter into such contracts for speculative purposes. Forward currency
contracts may be bought or sold to protect the Fund to a limited extent
against adverse changes in exchange rates between foreign currencies and
the U.S. dollar.
Each Fund may utilize futures contracts and options to a limited
extent. Specifically, a Fund may enter into futures contracts and related
options provided that not more than 5% of its net assets are required as a
futures contract deposit and/or premium; in addition, a Fund may not enter
into futures contracts or related options if, as a result, more than 20%
of the Fund's total assets would be so invested.
Futures contracts and options may be used for several reasons: to
simulate full investment in underlying securities while retaining a cash
balance for Fund management purposes, 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 equity
security or index.
As noted above, it may be difficult or impossible to hedge exposures
in emerging markets, both because of the nature of the risks and because
of the limited availability of suitable hedging instruments.
Risks of Futures, Options and Forward Currency Exchange Contracts
The use of options, futures and forward currency exchange contracts
involves certain investment risks and transaction costs. These risks
include (1) dependence on the ability of each Fund's adviser to predict
movements in the prices of individual securities, fluctuations in the
general securities markets or in market sectors and movements in interest
rates and currency markets; (2) imperfect correlation, or no correlation
at all, between movements in the price of options, futures contracts or
forward currency contracts and movements in the price of the underlying
securities or currencies; (3) the fact that skills needed to use these
instruments are different from those needed to select a Fund's portfolio
securities; (4) the possible lack of a liquid secondary market for any
particular instrument at any particular time; (5) the possibility that the
use of cover or segregation involving a large percentage of the Fund's
assets could impede portfolio management or that Fund's ability to meet
redemption requests or other short-term obligations; (6) the possible need
to defer closing out positions in these instruments in order to avoid
adverse tax consequences; and (7) the fact that, although use of these
instruments for hedging purposes can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments. There can be
no assurance that a Fund's use of futures contracts, forward currency
contracts or options will be successful. Moreover, in the event that an
anticipated change in the price of the securities or currencies that are
the subject of the strategy does not occur, the Fund might have been in a
better position had it not used that strategy at all. Forward currency
contracts, which protect the value of a Fund's investment securities
against a decline in the value of a currency, do not eliminate
fluctuations in the underlying prices of the securities. They simply
establish an exchange rate at a future date. The use of options and
futures contracts for speculative purposes, i.e., to enhance income or to
increase a Fund's exposure to a particular security or foreign currency,
subjects the Fund to additional risk. The use of options, futures or
forward contracts to hedge an anticipated purchase also subjects a Fund to
additional risk until the purchase is completed or the position is closed
out.
When a Fund purchases or sells a futures contract, it 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"). A Fund
will not enter into futures contracts or commodities option positions
(other than option positions that are "in-the-money" at the time of
purchase) if, immediately thereafter, its initial margin deposits plus
premiums paid by it, would exceed 5% of the fair market value of the
Fund's net assets. If a Fund writes an option or sells a futures contract
and is not able to close out that position prior to settlement date, the
Fund may be required to deliver cash or securities substantially in excess
of these amounts.
Many options on securities are traded primarily on the
over-the-counter ("OTC") market. OTC options are two-party contracts with
price and other terms negotiated between buyer and seller and generally do
not have as much liquidity as exchange-traded options. Thus, when a Fund
purchases an OTC option, it relies on the dealer
14
<PAGE>
from which it has purchased the option to make or take delivery of the
securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by that Fund as well as the loss of
the expected benefit of the transaction. OTC options may be considered
"illiquid securities" for purposes of each Fund's investment limitations.
Options and futures traded on U.S. or other exchanges may be subject to
position and daily fluctuation limits, which may limit the ability of a
Fund to reduce risk using such options and futures and may limit their
liquidity.
When using options, futures or forwards, each Fund will cover its
short positions or maintain a segregated asset account, to the extent
required by SEC staff positions. The Statement of Additional Information
contains a more detailed description of futures, options and forward
strategies.
THE FOLLOWING DESCRIBES CERTAIN INVESTMENT TECHNIQUES USED PRIMARILY
BY GLOBAL GOVERNMENT:
Lower-Rated Debt Securities
The Fund may invest in debt obligations of any grade. Western Asset
seeks to minimize the risks of investing in all securities through
in-depth credit analysis and attention to current developments in interest
rates and market conditions.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium-grade" obligations; they are "neither highly protected nor poorly
secured . . . [I]nterest 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." Where one rating organization has assigned an
investment grade rating to an instrument and others have given it a lower
rating, the Fund may consider the instrument to be investment grade. The
ratings do not include the risk of market fluctuations.
The Fund may invest up to 25% of its total assets in high-yield,
high-risk securities rated below investment grade. Such securities are
deemed by Moody's and S&P to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal. Those in the
lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding
the individual issuer are more likely to cause price volatility and weaken
the capacity of such securities to make principal and interest payments
than is the case for higher grade debt securities. An economic downturn
affecting the issuers may result in an increased incidence of default. The
market for lower-rated securities may be thinner and less active than that
for higher-rated securities. Western Asset will invest in such securities
only when it concludes that the anticipated return to the Fund on such an
investment warrants exposure to the additional level of risk. A further
description of Moody's and S&P's ratings is included in the Appendix to
the Statement of Additional Information. The Fund may invest in
lower-rated debt securities of domestic issuers, those issued by foreign
corporations, those issued or guaranteed by foreign governmental issuers,
and those issued by domestic corporations but linked to the performance of
such foreign-issue debt. See "Foreign Securities" page 9.
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. Although the prices of lower-rated bonds are
generally less sensitive to interest rate changes than those of
higher-rated bonds, the prices of lower-rated bonds may be more sensitive
to adverse economic changes and developments regarding the individual
issuer. Issuers of lower-rated debt securities are often highly leveraged
and may not have access to more traditional methods of financing.
As a result of the limited liquidity of high yield securities, the
valuation of these securities may require greater judgment than is
necessary with respect to securities having more active markets. In
addition, their prices have at times experienced rapid decline when a
significant number of holders of such securities decided to sell them.
Widespread sales may result from adverse publicity and investor
perceptions, whether or not based on fundamental analysis.
Debt securities may be subject to mandatory call provisions. If
issuers were to invoke these provisions during periods of declining
interest rates, the Fund would receive redemption proceeds at times when
only lower-yielding securities were available for investment by the Fund.
15
<PAGE>
The table below provides a summary of ratings assigned to debt
holdings in Global Government's portfolio. These figures are
dollar-weighted averages of month-end portfolio holdings during the fiscal
year ended December 31, 1996, presented as a percentage of total
investments. These percentages are historical and are not necessarily
indicative of the quality of current or future portfolio holdings, which
may vary.
Aaa/
MOODY'S RATINGS Aa/A Baa Ba B Caa Ca C NR
_______________________________________________________________________
Average 68.4% 9.1% 5.9% 10.6% -- 1.5% -- 4.5%
AAA/ CC/
S&P RATINGS AA/A BBB BB B CCC C D NR
_______________________________________________________________________
Average 72.9% 4.5% 14.7% 1.9% -- 1.5% -- 4.5%
The dollar-weighted average of securities not rated by either Moody's
or S&P amounted to 4.5%. This may include securities rated by other
nationally recognized rating organizations, as well as unrated securities.
Unrated securities are not necessarily lower-quality securities.
U.S. Government Securities
The U.S. government securities in which the Fund may invest include
direct obligations of the U.S. Treasury (such as Treasury bills, notes and
bonds) and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association ("GNMA") certificates), securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Federal Home Loan Banks), securities supported solely by
the discretionary authority of the U.S. Treasury to lend to the issuer of
the issuer (such as Fannie Mae ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") securities).
Mortgage-Related Securities
The Fund may invest in mortgage-related securities. Mortgage-related
securities represent interests in pools of mortgages created by lenders
such as commercial banks, savings and loan institutions, mortgage bankers
and others. Mortgage-related securities may be issued by governmental or
government-related entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers.
Interest in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential 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 residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related 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. When interest rates are
declining, such prepayments usually increase. On the other hand, a
decrease in the rate of prepayments, resulting from an increase in market
interest rates, among other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in
market interest rates. The volume of prepayments of principal on a pool of
mortgages underlying a particular mortgage-related security will influence
the yield of that security. Increased prepayment of principal may limit
the Fund's ability to realize the appreciation in the value of such
securities that would otherwise accompany declining interest rates. An
increase in mortgage prepayments could cause the Fund to incur a loss on a
mortgage-related security that was purchased at a premium. In determining
the Fund's average maturity, Western Asset must apply certain assumptions
and projections about the maturity and prepayment of mortgage-related
securities; actual prepayment rates may differ.
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
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-
16
<PAGE>
related securities issued by FHLMC, FNMA, GNMA or by pools of conventional
mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Although
full payoff of each class of bonds 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.
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 payments in the former securities. However, many issuers or
servicers of mortgage-related securities guarantee timely payment of
interest and principal on such securities. Timely payment of principal may
also be supported by various forms of insurance, including individual
loan, title, pool and hazard policies. There can be no assurance that the
private issuers or insurers will be able to meet their obligations under
the relevant guarantees and insurance policies. Where non-governmental
securities are collateralized by securities issued by FHLMC, FNMA or GNMA,
the timely payment of interest and principal is supported by the
government-related securities collateralizing such obligations.
Some mortgage-related securities will be considered illiquid and will
be subject to the Fund's investment limitation that no more than 15% of
its net assets will be invested in illiquid securities.
Stripped Mortgage-Backed Securities
The Fund may invest in stripped mortgage-backed securities, which are
classes of mortgage-backed securities that receive different proportions
of interest and principal distributions from an underlying pool of
mortgage assets. These securities are more sensitive to changes in
prepayment and interest rates and the market for them is less liquid than
is the case for traditional mortgage-backed and other debt securities. A
common type of stripped mortgage-backed security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest only or "IO" class), while the
other class will receive all of the principal (the principal only or "PO"
class). The yield to maturity of an IO class is extremely sensitive not
only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the related underlying
mortgage assets. If the Fund purchases an IO and the underlying principal
is repaid faster than expected, the Fund will recoup less than the
purchase price of the IO, even one that is highly rated. Extensions of
maturity resulting from increases of market interest rates may have an
especially pronounced effect on POs. Most IOs and POs are regarded as
illiquid and will be included in the Fund's 15% limit on illiquid
securities. U.S. government-issued IOs and POs backed by fixed-rate
mortgages may be deemed liquid by Western Asset, following guidelines and
standards established by the Corporation's Board of Directors.
Asset-Backed Securities
Asset-backed securities are securities that represent direct or
indirect participations in, or are secured by and payable from, assets
such as motor vehicle installment sales contracts, 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 and special purpose
corporations. The value of such securities partly depends on loan
repayments by individuals, which may be adversely affected during general
downturns in the economy. Payments or distributions of principal and
interest on asset-backed securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters
of credit. Like mortgage-related securities, asset-backed securities are
subject to the risk of prepayment. The risk that recovery on repossessed
collateral might be unavailable or inadequate to support payments on
asset-backed securities, however, is greater than in the case of
mortgage-backed securities.
Loans and Loan Participations
The Fund may purchase loans and participation interests in loans
originally made by banks and other lenders to governmental borrowers. Many
such interests are not rated by any rating agency and may involve
borrowers considered to be poor credit risks. The Fund's interests in
these loans may not be secured, and the Fund will be exposed to a risk of
loss if the borrower defaults. Many such interests will be illiquid and
therefore subject to the Fund's 15% limit on illiquid investments.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional
types of securities. The Fund's ability to assert its rights against the
borrower will also depend on
17
<PAGE>
the particular terms of the loan agreement among the parties.
Variable and Floating Rate Securities
The Fund may invest in variable and floating rate securities. These
securities provide for periodic adjustment in the interest rate paid on
the obligations. Western Asset believes that the variable or floating rate
of interest paid on these securities may reduce the wide fluctuations in
market value typical of fixed-rate, long-term securities. The yield
available on floating rate securities is typically less than that on
fixed-rate notes of similar maturity issued by the same company. The rates
of some securities vary according to a formula based on one or more
interest rates, and some vary inversely with changes in the underlying
rates. The value of these securities can be very volatile when market
rates change.
Zero Coupon and Pay-In-Kind Bonds
A zero coupon bond is a security that makes no fixed interest payments
but instead is sold at a deep 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. Pay-in-kind securities pay interest in the form of
additional securities, thereby adding additional debt to the issuer's
balance sheet. The prices of both types of bonds fluctuate more in
response to changes in market interest rates than do the prices of debt
securities with similar maturities that pay interest in cash.
An investor in zero coupon or pay-in-kind bonds generally accrues
income on such securities prior to the receipt of cash payments. Since the
Fund must distribute substantially all of its income to its shareholders
to qualify for pass-through treatment under the federal income tax laws,
the Fund, as an investor in such bonds, may have to dispose of other
securities to generate the cash necessary for the distribution of income
attributable to its zero coupon or pay-in-kind bonds. Such disposal could
occur at a time which would be disadvantageous to the Fund and when the
Fund would not otherwise choose to dispose of the assets.
When-Issued Securities and Standby Commitments
The Fund may enter into commitments to purchase U.S. government
securities or other securities on a when-issued basis. Such securities are
often the most efficiently priced and have the best liquidity in the bond
market. When the Fund purchases securities on a when-issued basis, it
assumes the risks of ownership at the time of purchase, not at the time of
receipt. However, the Fund does not have to pay for the obligations until
they are delivered to it. This is normally seven to 15 days later, but
could be considerably longer in the case of some mortgage-backed
securities. Use of this practice would have a leveraging effect on the
Fund. The Fund does not expect that its commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 20% of its total
assets.
Issuance of securities purchased on a when-and if-issued basis depends
on the occurrence of an event. If the anticipated event does not occur,
the securities are not issued. The characteristics and risks of
when-and-if-issued securities are similar to those involved in writing put
options.
To meet its payment obligation, the Fund will establish a segregated
account with its custodian and maintain cash or appropriate liquid
obligations, in an amount at least equal in value to the Fund's
commitments to purchase when- and if-issued securities.
Indexed Securities
The Fund may purchase various fixed income and debt securities whose
principal value or rate of return is linked or indexed to relative
exchange rates among two or more currencies or linked to commodities
prices or other financial indicators. Such securities may be more volatile
than the underlying instruments, resulting in a leveraging effect on the
Fund.
The value of such securities may fluctuate in response to changes in
the index, market conditions, and the creditworthiness of the issuer.
These securities may vary directly or inversely with the underlying
investments. The value of such securities may change significantly if
their principal value or rate of return is linked or indexed to relative
exchange rates involving a foreign currency for which there is not a
readily available market.
Capital Appreciation and Risk
The market value of fixed income and other debt securities is
partially a function of changes in the current level of interest rates. An
increase in interest rates generally reduces the market value of existing
fixed income and other debt securities, while a decline in interest rates
generally increases the market value of such securities. The longer the
maturity, the more pronounced is the rise or decline in the security's
price. When interest rates
18
<PAGE>
are falling, a fund with a shorter maturity generally will not generate as
high a level of total return as a fund with a longer maturity. Conversely,
when interest rates are rising, a fund with a shorter maturity will
generally outperform longer maturity portfolios. When interest rates are
flat, shorter maturity portfolios generally will not generate as high a
level of total return as longer maturity portfolios (assuming that
long-term interest rates are higher than short-term rates, which is
commonly the case).
Changes in the creditworthiness, or the market's perception of the
creditworthiness, of the issuers of fixed income and other debt securities
will also affect their prices.
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 the Fund is called for redemption,
the Fund 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 the Fund's ability to achieve its investment objective.
FOR EACH FUND:
PORTFOLIO TURNOVER
For the year ended December 31, 1996, Global Government's portfolio
turnover rate was 172%, International Equity's portfolio turnover rate was
83% and for the period May 28, 1996 (commencement of operations) to
December 31, 1996, Emerging Markets' annualized portfolio turnover rate
was 46%. Global Government may sell fixed-income securities and buy
similar securities to obtain yield and take advantage of market anomalies,
a practice which will increase the reported turnover rate of that Fund.
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded
from the calculation. High portfolio turnover rates (100% or more) will
involve correspondingly greater transaction costs which will be borne
directly by that Fund. It may also increase the amount of short-term
capital gains, if any, realized by a Fund and will affect the tax
treatment of distributions paid to shareholders because distributions of
net short-term capital gains are taxable as ordinary income. Each Fund
will take these possibilities into account as part of its investment
strategy.
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason.
Customers of certain Institutional Clients that maintain omnibus
accounts with the Funds' transfer agent may obtain shares through those
Institutions. Such Institutional Clients may receive payments from the
Funds' distributor for account servicing, and may receive payments from
their customers for other services performed. Investors otherwise eligible
to purchase Navigator Shares can purchase them from Legg Mason without
receiving or paying for such other services.
Institutional Clients purchasing or holding Navigator Shares on behalf
of their Customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to each Fund on a timely
basis.
PURCHASE OF SHARES
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after the
close of the Exchange or on days the Exchange is closed will be executed
at the net asset value determined as of the close of the Exchange on the
next day the Exchange is open. See "How Net Asset Value is Determined" on
page 21.
Each Fund reserves the right to reject any order for its shares, to
suspend the offering of shares for a period of time, or to waive any
minimum investment requirements.
19
<PAGE>
In addition to Institutional Clients purchasing shares directly from
Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in a Fund. Information concerning
these services and any applicable charges will be provided by the
Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
financial advisors at 1-800-822-5544. Callers should have available the
number of shares (or dollar amount) to be redeemed and their account
number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange on any day when the Exchange is open will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. The proceeds of redemption or
repurchase may be more or less than the original cost. If the shares to be
redeemed or repurchased were paid for by check (including certified or
cashier's checks) within 10 business days of the redemption or repurchase
request, the proceeds may not be disbursed unless that Fund can be
reasonably assured that the check has been collected.
Emerging Markets' investment objective results in it investing a
substantial portion of its assets in thinly traded stock which can
experience large price fluctuations and whose purchase and sale can
involve significant transaction costs. The Fund is intended for long-term
investors, and short-term "market timers" who engage in frequent purchases
and redemptions affect the Fund's investment planning and create
additional transaction costs which are borne by all shareholders. For this
reason, the Fund imposes a 2% redemption fee on all redemptions, including
exchanges, of Fund shares held for less than one year.
The redemption fee will be paid directly to the Fund to help offset
the costs imposed on it by short-term trading in emerging markets. The fee
will not be paid to either LMFA or Legg Mason. No fees are charged on
redemptions from Global Government or International Equity.
The fee will not apply to any shares purchased through reinvestment of
dividends or distributions or to shares held in retirement plans such as
401(k), 403(b), 457, Keogh, SEP-IRA, profit sharing, and money purchase
pension accounts. The fee does apply to shares held in IRA accounts. The
fee may apply to shares in broker omnibus accounts.
The Fund will use the "first-in, first-out" (FIFO) method to determine
the one year holding period. Under this method, the date of redemption or
exchange will be compared with the earliest purchase date of shares held
in the account. If this holding period is less than one year, the
redemption fee will be assessed.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. A Fund may be
liable for losses due to unauthorized or fraudulent
20
<PAGE>
instructions if it does not follow reasonable procedures. Telephone
redemption privileges are available automatically to all shareholders
unless certificates have been issued. Shareholders who do not wish to have
telephone redemption privileges should call their financial advisor for
further instructions.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of a
Fund's adviser, the respective Fund could be adversely affected by
immediate payment. (The Statement of Additional Information describes
several other circumstances in which the date of payment may be postponed
or the right of redemption suspended.)
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to the investor. However, the Funds will not redeem accounts that
fall below $500 solely as a result of a reduction in net asset value per
share. If a Fund elects to redeem the shares in an account, the
shareholder will be notified that the account is below $500 and will be
allowed 60 days in which to make an additional investment in order to
avoid having the account closed.
HOW SHAREHOLDER ACCOUNTS ARE MAINTAINED
A shareholder account is established automatically for each
shareholder. Any shares the shareholder purchases or receives as a
dividend or other distribution will be credited directly to the account at
the time of purchase or receipt. Fund shares may not be held in, or
transferred to, an account with any brokerage firm other than Fairfield,
Legg Mason or their affiliates. The Funds no longer issue share
certificates.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial, or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Each Fund's securities are valued
on the basis of market quotations or, lacking such quotations, at fair
value as determined under the guidance of the Board of Directors.
Securities for which market quotations are readily available are valued at
the last sale price of the day for a comparable position, or, in the
absence of any such sales, the last available bid price for a comparable
position. Where a security is traded on more than one market, which may
include foreign markets, the securities are generally valued on the market
considered by each Fund's adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
Most securities held by Global Government are valued on the basis of
valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques 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 data.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly for
Global Government and are declared and paid annually for International
Equity and Emerging Markets. Shareholders begin to earn dividends on their
Global Government shares as of settlement date, which is normally the
third business day after their orders are placed with their financial
advisor. Dividends from net short-term capital gain and distributions of
substantially all net capital gain (the excess of net long-term capital
gain over net short-term capital loss), and any net gain from foreign
currency transactions, generally are declared and paid after the end of
the taxable year in which the gain is realized. A second distribution of
net capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Dividends and other distributions, if
any, on shares held in a qualified retirement plan and by shareholders
maintaining a
21
<PAGE>
Systematic Withdrawal Plan generally are reinvested in Navigator Shares on
the payment dates. Shareholders may elect to:
1. Receive both dividends and other distributions in Navigator Shares
of the distributing Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Navigator
fund. Please contact a financial advisor for additional information about
this option. Qualified retirement plans that obtained Navigator Shares
through exchange generally receive dividends and other distributions in
additional shares.
If no election is made, both dividends and other distributions are
credited to the Institutional Client's account in Navigator Shares of the
distributing Fund at the net asset value of the shares determined as of
the close of the Exchange on the reinvestment date. Shares received
pursuant to any of the first three (reinvestment) elections above also
will be credited to the account at that net asset value. If an investor
elects to receive dividends and/or other distributions in cash, a check
will be sent. Investors purchasing through Fairfield may elect at any time
to change the distribution option by notifying the applicable Fund in
writing at: [insert complete Fund name], c/o Fairfield Group, Inc., 200
Gibraltar Road, Horsham, Pennsylvania 19044. Those purchasing through Legg
Mason should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland, 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of federal
income tax on that part of its investment company taxable income
(generally consisting of net investment income and any net short-term
capital gain and net gains from certain foreign currency transactions) and
net capital gain that is distributed to its shareholders.
Dividends from a Fund's investment company taxable income (whether
paid in cash or reinvested in Navigator Shares) are taxable to its
shareholders (other than qualified retirement plans or other tax-exempt
investors) as ordinary income to the extent of that Fund's earnings and
profits. Distributions of a Fund's net capital gain (whether paid in cash
or reinvested in Navigator Shares), when designated as such, are taxable
to those shareholders as long-term capital gain, regardless of how long
they have held their Fund shares.
The Funds send each shareholder a notice following the end of each
calendar year specifying the amounts of all dividends and other
distributions paid (or deemed paid) during that year. Each Fund is
required to withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide that Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and other distributions payable to such shareholders who
otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of another Legg Mason fund
will generally have similar tax consequences. If Fund shares are purchased
within 30 days before or after redeeming other shares of the same Fund
(regardless of class) at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
Each Fund's dividend and interest income, and gains realized from
disposition of 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 that Fund's securities. Tax conventions between
certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or capital
22
<PAGE>
gain distribution could cause the investor to incur tax liabilities and
should not be made solely for the purpose of receiving the dividend or
other distribution.
If more than 50% of the value of International Equity's or Emerging
Markets' total assets at the close of any taxable year consists of
securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service that will enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign
and U.S. possessions' income taxes paid by it. Pursuant to any such
election, such Fund would treat those taxes as dividends paid to its
shareholders, and each shareholder would be required to (1) include in
gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) treat the shareholder's share of
those taxes and of any dividend paid by the Fund that represents income
from foreign or U.S. possessions' sources as the shareholder's own income
from those sources, and (3) either deduct the taxes deemed paid by the
shareholder in computing the shareholder's taxable income, or alternately,
use the foregoing information in calculating the foreign tax credit
against the shareholder's federal income tax. Each of the Funds will
report to its shareholders shortly after each taxable year their
respective shares of the Fund's income from sources within, and taxes paid
to, foreign countries and U.S. possessions if it makes this election.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to those considerations, which are applicable to any investment in the
Funds, there may be other federal, state, local or foreign tax
considerations applicable to a particular investor. Prospective
shareholders are urged to consult their tax advisers with respect to the
effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
Every shareholder of record will receive a confirmation of each new
share transaction with a Fund, which will also show the total number of
shares being held in safekeeping by the Fund's transfer agent for the
account of the shareholder.
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends or capital gain distributions) of Navigator
Shares made by Institutional Clients acting in a fiduciary, advisory,
custodial, or other similar capacity on behalf of persons maintaining
Customer Accounts at Institutional Clients will be sent to the
Institutional Client by the transfer agent. Beneficial ownership of shares
by Customer Accounts will be recorded by the Institutional Client and
reflected in the regular account statements provided by them to their
Customers.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by the Corporation's
independent accountants.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476 or c/o Fairfield Group Inc., 200 Gibraltar Road, Horsham,
Pennsylvania 19044.
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for the
corresponding class of shares of any of the Legg Mason Funds (including
the Legg Mason Cash Reserve Trust), the Navigator Money Market Fund, Inc.
and the Navigator Tax-Free Money Market Fund, Inc. provided that such
shares are eligible for sale under applicable state securities laws.
Investments by exchange into the other Navigator funds are made at the
per share net asset value determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your financial
advisor. To effect an exchange by telephone, please call your financial
advisor with the information described in the section "How to Purchase and
Redeem Shares," page 20. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders.
Emerging Markets imposes a 2% redemption fee on exchanges of shares
held less than one year. See page 20.
23
<PAGE>
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of the Corporation's Board of Directors.
LEGG MASON FUND ADVISER
Pursuant to separate management or advisory agreements with each Fund
(each a "Management Agreement" or "Advisory Agreement"), which were
approved by the Corporation's Board of Directors, Legg Mason Fund Adviser,
Inc., serves as manager of each Fund. As manager, LMFA manages the
non-investment affairs of each Fund, directs all matters related to the
operation of those Funds and provides office space and administrative
staff for the Funds. Pursuant to its Advisory Agreement or Management
Agreement, Global Government and International Equity each pays LMFA a fee
equal to an annual rate of 0.75% and Emerging Markets pays a fee at an
annual rate equal to 1.00% of its average daily net assets. Each Fund pays
all its other expenses which are not assumed by LMFA.
LMFA acts as manager, investment adviser or investment consultant to
eighteen investment company portfolios which had aggregate assets under
management of over $7.0 billion as of March 31, 1997. LMFA's address is
111 South Calvert Street, Baltimore, Maryland 21202. LMFA has voluntarily
agreed to waive indefinitely its fees to the extent Global Government's
expenses relating to Navigator Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during any month an annual
rate of 1.15% of the Fund's average daily net assets. These agreements are
voluntary and may or may not be renewed by LMFA.
WESTERN ASSET MANAGEMENT COMPANY
Western Asset Management Company ("Western Asset") serves as
investment adviser to Global Government pursuant to the terms of an
advisory agreement with LMFA dated May 1, 1995. Western Asset acts as the
portfolio manager for Global Government and is responsible for the actual
investment management of the Fund, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security.
For these services, LMFA (not the Fund) pays Western Asset a fee, computed
daily and payable monthly, at an annual rate equal to 53 1/3% of the fee
received by LMFA, or 0.40% of the Fund's average daily net assets.
Keith J. Gardner has been primarily responsible for the day-to-day
management of Global Government since its inception. Mr. Gardner has been
Vice President of Legg Mason since November, 1992 and Senior Portfolio
Manager at Western Asset Management Company since December, 1994. From
1985 to 1992, he served as Vice President, bond trader and portfolio
manager for both U.S. and global portfolios at T. Rowe Price Associates,
Inc.
Western Asset renders investment advice to sixteen open-end investment
companies and one closed-end investment company, which together had
aggregate assets under management of approximately $4.3 billion as of
March 31, 1997. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $22.6
billion as of that date. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, California 91105.
Western Asset has managed fixed income portfolios continuously since
its founding in 1971, and has focused exclusively on such accounts since
1984.
WESTERN ASSET GLOBAL MANAGEMENT, LTD.
Western Asset Global Management, Ltd. ("Western Asset Global") serves
as investment sub-adviser to Global Government pursuant to the terms of a
sub-advisory agreement with Western Asset dated May 1, 1997. Western Asset
Global is responsible for providing research, analytical and trading
support for the Fund's investment program, as well as exercising
investment discretion for part of the portfolio, subject to the
supervision of Western Asset and LMFA. As compensation for Western Asset
Global's services and for expenses borne by Western Asset Global under the
sub-advisory agreement, Western Asset Global will be paid monthly by
Western Asset (not the Fund) at an annual rate equal to 0.20% of the
Fund's average daily net assets.
Western Asset Global, located at 155 Bishopsgate, London EC2M 3TY,
also renders investment advice to institutional, private and commingled
fund portfolios with assets of over $2.1 billion as of March 31, 1997.
Western Asset Global has managed global fixed income assets for U.S. and
non-U.S. clients since 1984.
BATTERYMARCH FINANCIAL MANAGEMENT, INC.
Pursuant to advisory agreements with LMFA (each an "Advisory Agreement"),
which were approved by the Corporation's Board of Directors,
24
<PAGE>
Batterymarch serves as investment adviser to International Equity and
Emerging Markets. Batterymarch acts as the portfolio manager for each Fund
and is responsible for the actual investment management of the Funds,
including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security. LMFA (not the Funds) pays
Batterymarch, pursuant to each Advisory Agreement, a management fee equal
to an annual rate of 0.50% of International Equity's and 0.75% of Emerging
Markets' average daily net assets. LMFA and Batterymarch have voluntarily
agreed to waive their fees to the extent necessary to limit each Fund's
total operating expenses attributable to Navigator Shares (exclusive of
taxes, interest, brokerage and extraordinary expenses) to 1.25% of
International Equity's and 1.50% of Emerging Markets average daily net
assets. This agreement will expire on May 1, 1998, unless extended by LMFA
or Batterymarch.
Batterymarch 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 Batterymarch
were approximately $4.3 billion as of March 31, 1997. The address of
Batterymarch is 200 Clarendon Street, Boston, Massachusetts 02116.
An investment team is responsible for the day-to-day management of
International Equity and Emerging Markets.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. The Underwriting Agreement
obligates Legg Mason to pay certain expenses in connection with the
offering of shares of the Funds, including any compensation to its
financial advisors, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and reports have been
prepared, set in type and mailed to existing shareholders at each Fund's
expense, and for any supplementary sales literature and advertising costs.
Legg Mason also receives a fee from BFDS for assisting it with its
transfer agent and shareholder servicing functions.
Legg Mason is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of the Manager, the Advisers, and Fairfield.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
Fairfield Group, Inc. is a registered broker-dealer with principal
offices located at 200 Gibraltar Road, Horsham, Pennsylvania 19044.
Fairfield sells Navigator Shares pursuant to a Dealer Agreement with Legg
Mason. Neither Fairfield nor Legg Mason receives compensation from the
Fund for selling Navigator Shares.
The Chairman, President and Treasurer of the Corporation are employed
by Legg Mason.
THE FUNDS' CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and cash of each
Fund. Boston Financial Data Services, P.O. Box 953, Boston, Massachusetts
02103, serves as transfer agent for Fund shares and dividend-disbursing
agent for each Fund.
Pursuant to rules adopted under Section 17(f) of the 1940 Act, each
Fund may maintain foreign securities and cash in the custody of certain
eligible foreign banks and securities depositories. Selection of these
foreign custodial institutions is made by the Board of Directors in
accordance with SEC rules. The Board of Directors will consider a number
of factors, including, but not limited to, the relationship of the
institution to State Street, the reliability and financial stability of
the institution, the ability of the institution to capably perform
custodial services for the Funds, the reputation of the institution in its
national market, the perceived political and economic stability of the
countries in which the sub-custodians will be located and perceived risks
of potential nationalization or expropriation of Fund assets. No assurance
can be given that the Board of Directors' appraisal of the risks in
connection with foreign custodial arrangements will always be correct or
that expropriation, nationalization, freezes, or confiscation of Fund
assets will not occur. Securities traded abroad are more likely to be in
bearer form, which heightens the risk of loss through inadvertance or
theft. In such event, a Fund may be dependent on its foreign custodian,
the custodian's business insurance, or foreign law for any recovery.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
The Corporation was established as a Maryland corporation on December
31, 1992. The Articles of Incorporation authorize the Corporation to
25
<PAGE>
issue one billion shares of common stock par value $.001 per share and to
create additional series, each of which may issue separate classes of
shares.
Global Government, International Equity and Emerging Markets currently
offer two classes of shares -- Class Y (known as "Navigator Shares") and
Class A (known as "Primary Shares"). The two classes represent interests
in the same pool of assets. A separate vote is taken by a class of shares
of a Fund if a matter affects just that class of shares. Each class of
shares may bear certain differing class-specific expenses. Salespersons
and others entitled to receive compensation for selling or servicing Fund
shares may receive more with respect to one class than another.
The initial and subsequent investment minimums for Primary Shares are
$1,000 and $100, respectively. Investments in Primary Shares may be made
through a Legg Mason or affiliated financial advisor, through the Future
First Systematic Investment Plan or through automatic investment
arrangements.
Holders of Primary Shares bear distribution and service fees under
Rule 12b-1 at the rate of 0.75%, 1.00% and 1.00% of the net assets
attributable to Primary Shares of Global Government, International Equity
and Emerging Markets, respectively. Investors in Primary Shares may elect
to receive dividends and/or other distributions in cash through the
receipt of a check or a credit to their Legg Mason account. The per share
net asset value of the Navigator Class of Shares, and dividends and
distributions (if any) paid to Navigator shareholders, are generally
expected to be higher than those of Primary Shares of the Fund, because of
the lower expenses attributable to Navigator Shares. The per share net
asset value of the classes of shares will tend to converge, however,
immediately after the payment of ordinary income dividends. Primary Shares
of a Fund may be exchanged for the corresponding class of shares of other
Legg Mason Funds. Investments by exchange into the Legg Mason funds sold
with an initial sales charge are made at the per share net asset value,
plus the sales charge, determined on the same business day as redemption
of the fund shares the investors in Primary Shares wish to redeem.
LMFA and Legg Mason have agreed that they will continue to reimburse
management fees and 12b-1 fees to the extent the expenses of Primary
Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during any month an annual rate of 1.90% of the average
daily net assets of Global Government indefinitely. LMFA, Legg Mason and
Batterymarch have also agreed that until May 1, 1998 they will continue to
reimburse management fees and 12b-1 fees to the extent the expenses of
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during any month an annual rate of 2.25% of the average
daily net assets of International Equity and 2.50% of the average daily
net assets of Emerging Markets for such month. These reimbursement
agreements are voluntary and may or may not be renewed by LMFA and/or each
Fund's adviser. Reimbursement by LMFA reduces a Fund's expenses and
increases its yield and total return.
The Board of Directors of the Corporation does not anticipate that
there will be any conflicts among the interests of the holders of the
different classes of Fund shares. On an ongoing basis, the Board will
consider whether any such conflict exists and, if so, take appropriate
action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Corporation will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
26
<PAGE>
LEGG MASON GLOBAL FUNDS
LEGG MASON GLOBAL TRUST, INC.:
Legg Mason Global Government Trust
Legg Mason International Equity Trust
Legg Mason Emerging Markets Trust
Primary Shares and Navigator Shares
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other depository institution. Shares are not insured by
the FDIC, the Federal Reserve Board or any other agency, and are subject to
investment risk, including the possible loss of the principal amount invested.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for Primary Shares and for Navigator
Shares of the Funds, both dated May 1, 1997, which have been filed with the
Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Corporation's distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
Legg Mason Global Government Trust ("Global Government"), Legg Mason
International Equity Trust ("International Equity") and Legg Mason Emerging
Markets Trust ("Emerging Markets") (each separately referred to as a "Fund" and
collectively referred to as the "Funds") are separate series of Legg Mason
Global Trust, Inc. ("Corporation"), an open-end, management investment company.
Global Government, a non-diversified, professionally managed portfolio,
seeks capital appreciation and current income in order to achieve an attractive
total return, consistent with prudent investment risk, by normally investing at
least 75% of its total assets in debt securities issued or guaranteed by foreign
governments, the U. S. Government, their agencies, instrumentalities
and political subdivisions. Under normal circumstances, the Fund invests at
least 75% of its assets in debt securities of foreign or domestic
governmental entities, corporations, financial institutions or other
issuers rated within the four highest grades by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's ("S&P") or, if unrated by Moody's or S&P
("unrated securities"), judged by Western Asset Management Company ("Western
Asset"), the Fund's investment adviser, to be of comparable quality.
International Equity, a diversified, professionally managed portfolio,
seeks maximum long-term total return. In attempting to achieve the Fund's
objective, the Fund's investment adviser, Batterymarch Financial Management,
Inc. ("Batterymarch"), normally invests at least 65% of its total assets in
common stocks of companies located in at least three different countries other
than the United States. In addition, the Fund may invest in the securities of
companies located in developing countries, including countries or regions with
relatively low gross national product per capita compared to the world's major
economies, and in countries or regions with the potential for rapid but unstable
economic growth (collectively, "emerging markets").
Emerging Markets is a diversified, professionally managed portfolio
seeking long-term capital appreciation. In attempting to achieve the Fund's
objective, Batterymarch, as investment adviser to the Fund, normally invests at
least 65% of the Fund's total assets in equity securities of emerging markets
companies. The Fund considers emerging markets to include (i) countries that
have an emerging stock market as defined by the International Finance
Corporation, (ii) those markets with low- to middle-income economies according
to the World Bank, (iii) those listed in World Bank publications as developing
and (iv) countries determined by Batterymarch to be emerging markets in
accordance with the criteria of the foregoing organizations. Equity
<PAGE>
securities in which the Fund may invest include common stocks, preferred stocks,
convertible securities and warrants. Batterymarch expects that the Fund will
normally invest in at least three different emerging market countries.
Shares of Navigator Global Government, Navigator International Equity
and Navigator Emerging Markets ("Navigator Shares"), described in this Statement
of Additional Information, represent interests in Global Government,
International Equity and Emerging Markets that are currently offered for sale
only to institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own funds and funds for which they act in a fiduciary
capacity, to clients of Legg Mason Trust Company ("Trust Company") for which
Trust Company exercises discretionary investment management responsibility (such
institutional investors are referred to collectively as "Institutional Clients"
and accounts of the customers with such Clients ("Customers") are referred to
collectively as "Customer Accounts"), to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, and to The
Legg Mason Profit Sharing Plan and Trust. The Navigator Class of Shares may not
be purchased by individuals directly, but Institutional Clients may purchase
shares for Customer Accounts maintained for individuals.
The Primary Class of shares of Global Government, International Equity
and Emerging Markets ("Primary Shares") are offered for sale to all other
investors and may be purchased directly by individuals.
Primary and Navigator Shares of Global Government and International
Equity are sold and redeemed without any purchase or redemption charge.
Primary and Navigator Shares of Emerging Markets are sold without any purchase
charge but may incur a redemption fee of 2% if shares are redeemed within
one year of purchase. Institutional Clients may charge their Customer
Accounts for services provided in connection with the purchase or redemption
of Navigator Shares. Each Fund will pay management fees to Legg Mason Fund
Adviser, Inc. ("LMFA") Primary Shares pay a 12b-1 distribution fee, but
Navigator Shares pay no distribution fees. See "The Funds' Distributor."
Legg Mason Wood Walker, Incorporated
- --------------------------------------------------------------------------------
111 South Calvert Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT
LIMITATIONS AND POLICIES
The following information supplements the information concerning each
Fund's investment objectives, policies and limitations found in the
Prospectuses. Each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of a majority of each Fund's outstanding
voting securities.
Global Government may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount not to
exceed 33 1/3% of the total assets, including borrowings, less liabilities
exclusive of borrowings, of the Fund; provided that borrowings, including
reverse repurchase agreements and dollar rolls, in excess of 5% of such value
will be only from banks (although not a fundamental policy subject to
shareholder approval, the Fund will not purchase securities if borrowings,
including reverse repurchase agreements and dollar rolls, exceed 5% of its total
assets);
2. Issue senior securities, except as permitted by the Investment
Company Act of 1940 ("1940 Act");
3. Underwrite the securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
4. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
5. Purchase or sell any commodities or commodities contracts, except
that the Fund may purchase or sell currencies, interest rate and currency
futures contracts, options on currencies and securities indexes and options on
interest rate and currency futures contracts;
6. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, loans, loan participations and advances in
connection therewith or other evidences of indebtedness, the entry into
repurchase agreements, or deposits with banks and other financial institutions
may be considered loans;
7. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
International Equity may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount not to
exceed 33 1/3% of the total assets (including borrowings), less liabilities
(exclusive of borrowings), of the Fund; provided that borrowings, including
reverse repurchase agreements and dollar rolls, in excess of 5% of such value
will be only from banks (although not a fundamental policy subject to
shareholder approval, the Fund will not purchase securities if borrowings,
including reverse repurchase agreements and dollar rolls, exceed 5% of its total
assets);
2. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, or
purchase more than 10% of the voting securities of any one issuer
2
<PAGE>
(other than, in each case, cash items, securities of the U.S. Government, its
agencies and instrumentalities, and securities issued by other investment
companies);
3. Issue senior securities, except as permitted by the 1940 Act;
4. Engage in the business of underwriting the securities of other
issuers except insofar as the Fund may be deemed an underwriter under the
Securities Act of 1933, as amended, in disposing of a portfolio security;
5. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
6. Purchase or sell any commodities or commodities contracts, except
that the Fund may purchase or sell currencies; futures contracts on currencies,
securities or securities indexes, options on currencies, securities, and
securities indexes; and options on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
Emerging Markets may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount not to
exceed 33 1/3% of the total assets (including borrowings), less liabilities
(exclusive of borrowings), of the Fund; provided that borrowings, including
reverse repurchase agreements and dollar rolls, in excess of 5% of such value
will be only from banks (although not a fundamental policy subject to
shareholder approval, the Fund will not purchase securities if borrowings,
including reverse repurchase agreements and dollar rolls, exceed 5% of its total
assets);
2. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, or
purchase more than 10% of the voting securities of any one issuer (other than,
in each case, cash items, securities of the U.S. Government, its agencies and
instrumentalities, and securities issued by other investment companies);
3. Issue senior securities, except as permitted by the 1940 Act;
4. Engage in the business of underwriting the securities of other
issuers except insofar as the Fund may be deemed an underwriter under the
Securities Act of 1933, as amended, in disposing of a portfolio security;
5. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
6. Purchase or sell any commodities or commodities contracts, except
that the Fund may purchase or sell currencies; futures contracts on currencies,
securities or securities indexes, options on currencies, securities, and
securities indexes; and options on interest rate and currency futures contracts;
3
<PAGE>
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
The foregoing investment limitations of each Fund cannot be changed
without the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or (2) 67% or more of the shares of the Fund
present at a shareholders' meeting if more than 50% of the outstanding shares of
the Fund are represented at the meeting in person or by proxy. Except with
respect to the 331/3% limit in investment limitation number 1, if a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in the value of
portfolio securities or amount of total assets will not be considered a
violation of any of the foregoing limitations.
Global Government interprets fundamental investment limitation (4) and
International Equity and Emerging Markets each interpret fundamental investment
limitation (5) to prohibit investment in real estate limited partnerships.
Except as otherwise specified, the following investment limitations and
policies are non-fundamental and may be changed by the Corporation's Board of
Directors without shareholder approval.
Each Fund may not:
1. Purchase or sell any oil, gas or mineral exploration or development
programs, including leases;
2. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that a Fund may make margin
deposits in connection with the use of permitted futures contracts and options
on futures contracts as well as options on currencies, securities and securities
indexes;
3. Make short sales of securities or maintain a short position, except
that a Fund may (a) make short sales and maintain short positions in connection
with its use of options, futures contracts and options on futures contracts and
(b) sell short "against the box" (Global Government does not intend to make
short sales in excess of 5% of its net assets during the coming year and
International Equity does not intend to make short sales during the coming
year);
4. Purchase or retain the securities of an issuer if, to the knowledge
of the Fund's management, those officers and directors of that Fund and officers
and directors of its adviser, manager and sub-adviser who individually own
beneficially more than 0.5% of the outstanding securities of that issuer own in
the aggregate more than 5% of the securities of that issuer;
5. Purchase any security (except with respect to collateralized
mortgage obligations and asset- backed securities for Global Government), if, as
a result, more than 5% of a Fund's total assets would be invested in securities
of companies that together with any predecessors have been in continuous
operation for less than three years;
6. Purchase a security restricted as to resale if, as a result thereof,
more than 15% of Global Government's or Emerging Markets' or 10% of
International Equity's total assets would be invested in
4
<PAGE>
restricted securities. For purposes of this limitation, securities that can be
sold freely in the principal market in which they are traded are not considered
restricted, even if they cannot be sold in the United States.
7. Make investments in warrants if such investments, valued at the
lower of cost or market, exceed 5% of the value of its net assets, which amount
may include warrants that are not listed on the New York or American Stock
Exchanges, provided that such unlisted warrants, valued at the lower of cost or
market, do not exceed 2% of a Fund's net assets, and further provided that this
restriction does not apply to warrants attached to, or sold as a unit with,
other securities. For purposes of this restriction, the term "warrants" does not
include options on securities, stock or bond indices, foreign currencies or
futures contracts.
In addition, International Equity may not:
8. Purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and in the open market at no more than
customary brokerage and commission rates. This limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or as
a result of a reorganization, consolidation or merger.
Ratings of Debt Obligations
Moody's, S&P and other nationally recognized or foreign statistical
rating organizations ("SROs") 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 in Appendix A. A Fund
may consider these ratings in determining whether to purchase, sell or hold a
security. Ratings issued by Moody's or S&P represent only the opinions of those
agencies and are not guarantees of credit 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.
The following information about investment policies applies only to Global
Government:
Commercial Paper and Other Short-Term Instruments
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies.
The Fund 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 the federal securities laws in that
any resale must similarly be made in an exempt transaction. The Fund may or may
not regard such securities as illiquid, depending on the circumstances of each
case.
The Fund 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 if the issuer has total assets in excess of $1
billion at the time of purchase or if the principal amount of the instrument is
insured by the Federal Deposit Insurance Corporation. A bankers' acceptance is a
time draft drawn on a commercial bank by a borrower, usually in connection with
an international commercial transaction. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of time at a
specified interest rate. Certificates of deposit are negotiable short-term
obligations issued by banks against funds deposited in the issuing institution.
The interest rate on some certificates of deposit is periodically adjusted prior
to the stated
5
<PAGE>
maturity, based upon a specified market rate. While domestic bank deposits are
insured by an agency of the U.S. Government, the Fund will generally assume
positions considerably in excess of the insurance limits.
Sovereign Debt
Investments in debt securities issued by foreign governments and their
political subdivisions or agencies ("Sovereign Debt") involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal and/or interest when due
in accordance with the terms of such debt, and the Fund may have limited legal
recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, holders of commercial
bank debt issued by the same sovereign entity may contest payments to the
holders of Sovereign Debt in the event of default under commercial bank loan
agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due 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 a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The ability of some sovereign debtors to repay their obligations may
depend on the timely receipt of assistance from international agencies or other
governments, the flow of which is not assured. The willingness of such agencies
to make these payments may depend on the sovereign debtor's willingness to
institute certain economic changes, the implementation of which may be
politically difficult.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing Sovereign Debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Western Asset intends to manage investments in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the Fund to suffer a loss of
interest or principal on any of its holdings.
Mortgage-Related Securities
Mortgage-related securities represent participations in, or are secured
by and payable from, mortgage loans secured by real property. These securities
are designed to provide monthly payments of interest and, in most instances,
principal to the investor. The mortgagor's monthly payments to his/her lending
institution are "passed through" to investors such as the Fund. Many issuers or
poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. These guarantees 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 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
6
<PAGE>
are generally uniform within a pool but may vary among pools. In addition to
fixed-rate, fixed-term mortgages, the Fund 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.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments, as well as
with market interest rates. For example, securities issued by the Government
National Mortgage Association ("GNMAs") 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.
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. The compounding effect from
reinvestments of monthly payments received by the Fund will increase the yield
to shareholders compared to bonds that pay interest semi-annually.
Private Mortgage-Related Securities
The private mortgage-related securities in which the Fund 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. The Foreign Pass-Throughs
in which the Fund may invest are not guaranteed by an entity having the credit
status of the Government National Mortgage Association, but generally utilize
various types of credit enhancement.
Other Debt Securities
The rate of return or return of principal on some obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.
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 the Fund to
obtain market quotations daily. If market quotations are not available, these
securities will be valued by a method that the Fund's Board of Directors
believes 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 are available.
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
7
<PAGE>
for such securities may not be an accurate indication of its performance during
future economic downturns or periods of rising interest rates.
Bank Obligations
Bank obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances and time deposits in U.S. banks (including foreign
branches) which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation. The Fund also may invest in certificates of deposit of
savings and loan associations (federally or state chartered and federally
insured) having total assets in excess of $1 billion.
The Fund may invest in obligations of domestic or foreign branches of
foreign banks and foreign branches of domestic banks. These investments involve
risks that are different from investments in securities of domestic branches of
domestic banks. These risks include seizure of foreign deposits, currency
controls, interest limitations or other governmental restrictions which might
affect the payment of principal or interest on the bank obligations held by the
Fund.
The Fund limits its investments in foreign bank obligations to U.S.
dollar-denominated or foreign currency-denominated obligations of foreign banks
(including U.S. branches of foreign banks) which at the time of investment (1)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (2) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (3) are judged by Western
Asset to be of comparable quality to obligations of U.S. banks in which the Fund
may invest. Subject to the limitation on concentration of less than 25% of the
Fund's assets in the securities of issuers in a particular industry, there is no
limitation on the amount of the Fund's assets which may be invested in
obligations of foreign banks which meet the conditions set forth herein. Foreign
banks are not generally subject to examination by any U.S. government agency or
instrumentality.
The following information about investment policies applies to each Fund:
Foreign Investments
Investors should recognize that investing in foreign companies involves
certain special considerations which are not typically associated with investing
in U.S. companies. Certain countries prohibit or impose substantial restrictions
on investments in their capital markets, particularly their equity markets, by
foreign entities such as the Funds. These restrictions or controls may at times
limit or preclude investment in certain securities and may increase the cost and
expenses of the Fund. For example, certain countries require prior governmental
approval before investments by foreign persons may be made, or may limit the
amount of investment by foreign persons in a particular company, or may limit
the investment by foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals. Moreover, the national policies of certain
countries may restrict investment opportunities in issuers or industries deemed
sensitive to national interests.
Some countries require governmental approval for the repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors. In addition, if there is a deterioration in a country's balance of
payments or for other reasons, a country may impose restrictions on foreign
capital remittances abroad. A Fund could be adversely affected by delays in, or
a refusal to grant, any required governmental approval for repatriation.
Certain countries in which a Fund may invest may have groups that
advocate radical religious or political philosophies or support ethnic
independence. Disturbances involving such groups carry the potential
8
<PAGE>
for widespread destruction or confiscation of property owned by individuals and
entities foreign to that country or ethnic religion and could cause the loss of
a Fund's investment in those areas. Instability may also result from, among
other things: (i) authoritarian governments or military involvement in political
and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; and (iii) hostile relations
with other countries. Such political, social and economic instability could
disrupt the principal financial markets in which a Fund invests and adversely
affect the value of a Fund's assets.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries have
previously expropriated large quantities of real and personal property similar
to the property which will be represented by the securities purchased by the
Funds. The claims of property owners against those governments were never
finally settled. There can be no assurance that any property represented by
securities purchased by a Fund will not also be expropriated, nationalized, or
otherwise confiscated. If such confiscation were to occur, a Fund could lose its
entire investment in such countries.
Although a Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions, commissions on many foreign stock exchanges are
at fixed rates, and generally these are higher than negotiated commissions on
U.S. exchanges.
Delays in settlement could result in temporary periods when assets of a
Fund are uninvested and no return is earned thereon. The inability of a Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to a Fund due
to subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
The Funds may use foreign subcustodians, which may involve risks in
addition to those related to the use of U.S. custodians. Such risks include
uncertainties relating to: (i) determining and monitoring the financial
strength, reputation and standing of the foreign custodian; (ii) maintaining
appropriate safeguards to protect the Fund's investments and (iii) possible
difficulties in obtaining and enforcing judgments against such custodians.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies whose securities are held by a Fund.
Currency Fluctuations
Each Fund, under normal circumstances, will invest a substantial
portion of its total assets in the securities of foreign issuers which are
denominated in foreign currencies and may temporarily hold uninvested cash in
bank deposits in foreign currencies. Accordingly, the strength or weakness of
the U.S. dollar against such foreign currencies may account for a substantial
part of a Fund's investment performance. The rate of exchange between the U.S.
dollar and other currencies is determined by several factors, including the
supply and demand for particular currencies, central bank efforts to support
particular currencies, the relative movement of interest rates and pace of
business activity in the other countries and the U.S., and other economic and
financial conditions affecting the world economy.
A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the Fund's holdings of
securities and cash denominated in such currency and, therefore, will cause an
overall decline in the Fund's net asset value and any net investment income and
capital gains
9
<PAGE>
derived from such securities to be distributed in U.S. dollars to shareholders
of a Fund. Moreover, if the value of the foreign currencies in which the Fund
receives its income falls relative to the U.S. dollar between receipt of the
income and the making of Fund distributions, a Fund may be required to liquidate
securities in order to make distributions if the Fund has insufficient cash in
U.S. dollars to meet distribution requirements.
Fluctuations in currency exchange rates may affect the performance of
emerging market issuers in which a Fund invests without regard to the effect
such fluctuations have on income received or gains realized by a Fund. Given the
level of foreign-denominated debt owned by many countries with emerging markets,
fluctuating exchange rates 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.
Although it might be theoretically possible to hedge for anticipated income and
gains, the ongoing and indeterminate nature of the foregoing risk (and the costs
associated with hedging transactions) makes it virtually impossible to hedge
effectively against such risks.
To some extent, if forward markets are available, currency exchange
risk can be managed through hedging operations. However, governmental
regulations and limited currency exchange markets in most emerging markets make
it highly unlikely that International Equity (to the extent it invests in
emerging market securities) or Emerging Markets will be able to engage in any
hedging operations, at least in the foreseeable future. In the event hedging
opportunities become available and a Fund's adviser elects to employ them, a
Fund may incur investment risks and substantial transaction costs to which it
would not otherwise be subject. Whether or not it hedges, each Fund will incur
costs in connection with conversions between various currencies.
Restricted and Illiquid Securities
Each Fund is authorized to invest up to 15% of its net assets in
securities which cannot be expected to be sold within seven days at
approximately the price at which they are valued, which for this purpose
includes, among other things, repurchase agreements maturing in more than seven
days, over-the-counter ("OTC") options and securities used as cover for such
options. 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. Such securities may include those that are subject to
restrictions contained in the securities laws of other countries. Securities
that are freely marketable in the country where they are principally traded, but
would not be freely marketable in the United States, will not be considered to
be restricted. Where registration is required, a Fund 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 Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain
a less favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. SEC regulations permit
certain restricted securities to 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 not "illiquid." Each
Fund intends to rely on this rule, to the extent appropriate, to deem restricted
securities as not "illiquid." If the newly-developing institutional markets for
restricted securities do not develop as anticipated, it could adversely affect
the liquidity of the Fund.
Repurchase Agreements
When a Fund enters into a repurchase agreement with a foreign or
domestic entity, it will obtain from that entity securities equal in value to
102% of the amount of the repurchase agreement (or 100%, if the securities
obtained are U.S. Treasury bills, notes or bonds). Such securities will be held
for that Fund by a custodian bank, an approved foreign sub-custodian, or an
approved securities depository or book-entry system. Repurchase agreements are
usually for one week or less, but may be for longer periods. Repurchase
agreements maturing in more than seven days may be considered illiquid. In the
event that a foreign counterparty defaults on its repurchase agreement
obligations, the laws of the foreign country where that party resides may not
provide the same favorable treatment to repurchase agreements as are provided
under U.S. bankruptcy laws, which could lead to further delay or losses.
10
<PAGE>
Reverse Repurchase Agreements and Other Borrowing
A reverse repurchase agreement is a portfolio management technique in
which a Fund 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, that Fund agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment. A Fund may also enter into dollar rolls, in which a Fund sells a
security for delivery in the current month and simultaneously contracts to
repurchase a substantially similar security on a specified future date. That
Fund would be compensated by the difference between the current sales price and
the forward price for the future purchase. A Fund may engage in reverse
repurchase agreements and dollar rolls as a means of raising cash to satisfy
redemption requests or for other temporary or emergency purposes without the
necessity of selling portfolio instruments. There is a risk that the
contra-party to either a reverse repurchase agreement or a dollar roll will be
unable or unwilling to complete the transaction as scheduled, which may result
in losses to a Fund. While engaging in reverse repurchase agreements or dollar
rolls, each Fund will maintain cash, and/or appropriate liquid securities in
a segregated account at its custodian bank with a value at least equal to that
Fund's obligation under the agreements, adjusted daily.
Each Fund may borrow for temporary purposes, which borrowing may be
unsecured. The 1940 Act requires that Fund 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, the Fund may be required to sell some of its holdings within three days
(exclusive of Sundays and holidays) to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing may exaggerate the effect
on net asset value of any increase or decrease in the market value of the
portfolio. To avoid the potential leveraging effects of a Fund's borrowings,
each Fund will not make investments while borrowings are in excess of 5% of its
total assets. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. A Fund 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. For purposes of its borrowing limitation and policies, each Fund considers
reverse repurchase agreements and dollar rolls to constitute borrowing.
International Equity does not currently intend to use reverse repurchase
agreements and dollar rolls.
Short Sales
No Fund will sell securities short, other than through the use of
futures and options as described in the Prospectuses, or short sales against the
box. In a short sale against the box, a Fund sells a security and borrows the
security to make delivery, even though the Fund simultaneously owns, or has the
right to acquire, without the payment of any additional consideration,
securities identical in kind and amount to those sold short.
Options and Futures
As described in the Prospectuses, Global Government may purchase and
sell (write) both put options and call options on securities and bond indices,
may enter into interest rate and bond index futures contracts, may purchase
and sell options on such futures contracts ("futures options") and may
purchase and sell foreign currency options and futures for hedging purposes or
in other circumstances permitted by the Commodity Futures Trading Commission
("CFTC") as part of its investment strategy.
International Equity and Emerging Markets may enter into futures
contracts, options and options on futures contracts for several reasons:
to maintain cash reserves while remaining fully invested, to facilitate
trading, to reduce transaction costs, or to seek higher investment returns
when Batterymarch believes a futures contract or option is priced more
attractively than the underlying equity security or index. In addition, a
Fund may purchase and
11
<PAGE>
sell put and call options on foreign currencies, may enter into futures
contracts on foreign currencies and purchase and sell options on such futures
contracts.
Emerging Markets and International Equity are permitted to engage in
forward currency exchange transactions to protect in part against the
uncertainty in the level of future exchange rates. A Fund's dealings in foreign
currency exchange would in all cases be limited to hedges involving either
specific transactions or portfolio positions. A Fund is not permitted to
engage in currency transactions for speculation but only as a hedge against
changes in currency values. A Fund is not permitted to hedge a position to an
extent greater than the aggregate market value (at the time of the hedging
transaction) of the Fund's assets invested in cash or securities denominated in
the relevant currency. Emerging Markets will not often employ hedging
strategies because such instruments are generally not available in emerging
markets; however, the Fund reserves the right to hedge its portfolio investments
in the future.
If other types of options, futures contracts or options on futures are
traded in the future, each Fund may also use those investment strategies.
Options and futures are generally considered to be "derivatives."
Options on Securities
A Fund may purchase call options on securities that its adviser intends
to include in that Fund's investment portfolio in order to fix the cost of a
future purchase. Purchased 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 a Fund's potential loss to the option premium paid; conversely,
if the market price of the underlying security increases above the exercise
price and the Fund either sells or exercises the option, any profit realized
will be reduced by the premium.
A Fund may purchase put options in order to hedge against a decline in
the market value of securities held in its portfolio or to enhance income. The
put option enables the Fund to sell the underlying security at the predetermined
exercise price; thus the potential for loss to the Fund 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
Fund 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 Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, the Fund might write covered call options on
securities generally when its adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by the Fund declines, the amount of such decline will be offset wholly or in
part by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. The Fund would give up the ability to sell the portfolio
securities used to cover the call option while the call option was outstanding.
Such securities would also be considered illiquid in the case of OTC options
written by a Fund, and therefore subject to its limitation on investing no more
than 15% of its net assets in illiquid securities, unless the OTC options are
sold to qualified dealers who agree that the Fund may repurchase any OTC option
it writes at a maximum price to be calculated by a formula set forth in the
option agreement. The cover for an OTC call option written subject to this
procedure will be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option. In
addition, the Fund could lose the ability to participate in an increase in the
value of such securities above
12
<PAGE>
the exercise price of the call option because such an increase would likely be
offset by an increase in the cost of closing out the call option (or could be
negated if the buyer chose to exercise the call option at an exercise price
below the securities' current market value).
The sale of a put option on a security by a Fund also serves to
partially offset the cost of a security that the Fund anticipates purchasing. If
the price of the security rises, the increased cost to the Fund of purchasing
the security will be offset, in whole or in part, by the premium received. In
the event, however, that the price of the security falls below the exercise
price of the option and the option is exercised, the Fund will be required to
purchase the security from the holder of the option at a price in excess of the
current market price of the security. A Fund's loss on this transaction will be
offset, in whole or in part, to the extent of the premium received by the Fund
for writing the option.
Global Government may purchase put and call options and write covered
put and call options on bond indices in much the same manner as securities
options, except that bond index options may serve as a hedge against overall
fluctuations in the debt securities markets (or a market sector) rather than
anticipated increases or decreases in the value of a particular security. A bond
index assigns a value to the securities included in the index and fluctuates
with changes in such values. Settlements of bond index options are effected with
cash payments and do not involve the delivery of securities. Thus, upon
settlement of a bond index option, the purchaser will realize, and the writer
will pay, an amount based on the difference between the exercise price and the
closing price of the bond index. The effectiveness of hedging techniques using
bond index options will depend on the extent to which price movements in the
bond index selected correlate with price movements of the securities in which
the Fund invests.
Global Government may purchase and write covered straddles on
securities, currencies or bond indices. A long straddle is a combination of a
call and a put option purchased on the same security, index or currency where
the exercise price of the put is less than or equal to the exercise price of the
call. The Fund would enter into a long straddle when its adviser believes that
it is likely that interest rates or currency exchange rates will be more
volatile during the term of the options than the option pricing implies. A short
straddle is a combination of a call and a put written on the same security,
index or currency where the exercise price of the put is less than or equal to
the exercise price of the call. In a covered short straddle, the same issue of
security or currency is considered cover for both the put and the call that the
Fund has written. The Fund would enter into a short straddle when its adviser
believes that it is unlikely that interest rates or currency exchange rates will
be as volatile during the term of the options as the option pricing implies. In
such cases, the Fund will set aside cash and/or appropriate liquid
securities in a segregated account with its custodian equivalent in value to the
amount, if any, by which the put is "in-the-money", that is, the amount by which
the exercise price of the put exceeds the current market value of the underlying
security. Straddles involving currencies are subject to the same risks as other
foreign currency options.
Foreign Currency Options and Related Risks
A Fund may purchase and write (sell) options on foreign currencies in
order to hedge against the risk of foreign exchange rate fluctuation on foreign
securities that Fund holds or which it intends to purchase. For example, if a
Fund enters into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if a
Fund held securities denominated in a foreign currency and anticipated a decline
in the value of that currency against the U.S. dollar, it could hedge against
such a decline by purchasing a put option on the currency involved. The purchase
of an option on foreign currency may be used to hedge against fluctuations in
exchange rates although, in the event of exchange rate movements adverse to that
Fund's options position, it may forfeit the entire amount of the premium plus
related transaction costs. In addition, Global Government may purchase call
options on foreign currency to enhance income when its adviser anticipates that
the currency will appreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities.
13
<PAGE>
If a Fund writes an option on foreign currency, it will constitute only
a partial hedge, up to the amount of the premium received, and that Fund could
be required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. A Fund may use options on currency for proxy
hedging, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates of a different, but related, currency.
If a Fund uses proxy-hedging, it may experience losses on both the currency in
which it has invested and the currency used for hedging, if the two currencies
do not vary with the expected degree of correlation.
A Fund's ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. Although many
options on foreign currencies are exchange traded, the majority are traded on
the OTC market. A Fund will not purchase or write such options unless, in the
opinion of its adviser, the market for them has developed sufficiently. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. In addition, options on foreign currencies are
affected by all of those factors that influence foreign exchange rates and
investments generally. These OTC options also involve credit risks that may not
be present in the case of exchange-traded currency options.
Futures Contracts and Options on Futures Contracts
Global Government:
The Fund will limit its use of futures contracts and options on futures
contracts to hedging transactions or other circumstances permitted by regulatory
authorities. For example, the Fund might use futures contracts to attempt to
hedge against anticipated changes in interest rates that might adversely affect
either the value of the Fund's securities or the price of the securities that
the Fund intends to purchase. The Fund'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, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using futures contracts
and options on futures contracts.
The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. The
Fund may purchase a call option on a foreign currency futures contract to hedge
against a rise in the foreign exchange rate while intending to invest in a
foreign security of the same currency. The Fund may purchase put options on
foreign currency futures contracts as a hedge against a decline in the foreign
exchange rates or the value of its foreign portfolio securities. The Fund may
write a call option on a foreign currency futures contract as a partial hedge
against the effects of declining foreign exchange rates on the value of foreign
securities. The Fund may sell a put option on a foreign currency to partially
offset the cost of a security denominated in that currency that the Fund
anticipates purchasing; however, the cost will only be offset to the extent of
the premium received by the Fund for writing the option.
The Fund also may use futures contracts on fixed income instruments and
options thereon to hedge its investment portfolio against changes in the general
level of interest rates. A futures contract on a fixed income instrument 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 fixed income security
called for in the contract at a specified future time and at a specified price.
The Fund may purchase a futures contract on a fixed income security when it
intends to purchase fixed income securities 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 fixed income security that the Fund intends to purchase in the
future. A rise in the price of the fixed income security prior to its purchase
may be either offset by an increase in the value of the futures contract
purchased by the Fund or avoided by taking delivery of the fixed income
securities under the futures contract. Conversely, a fall in the market price of
the underlying fixed income security may result in a corresponding decrease in
the value of the futures position. The Fund may sell a futures contract on a
fixed income security in order to continue to receive the income from a fixed
14
<PAGE>
income security, 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.
The Fund may purchase a call option on a futures contract to hedge
against a market advance in debt securities that the Fund 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 fixed income security that can be
used as a temporary substitute for a position in the security itself. The Fund
also may write covered call options on futures contracts as a partial hedge
against a decline in the price of fixed income securities held in the Fund's
investment portfolio, or purchase put options on futures contracts in order to
hedge against a decline in the value of fixed income securities held in the
Fund's investment portfolio. The Fund may write a put option on a security that
the Fund anticipates purchasing to partially offset the cost of purchasing that
security; however, the cost will only be offset to the extent of the premium the
Fund receives for writing the option.
The Fund may sell bond index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the market
value of its investments. To the extent that a portion of the Fund's investments
correlate with a given index, the sale of futures contracts on that index could
reduce the risks associated with a market decline and thus provide an
alternative to the liquidation of securities positions. For example, if the Fund
correctly anticipates a general market decline and sells bond index futures to
hedge against this risk, the gain in the futures position should offset some or
all of the decline in the value of the portfolio. The Fund may purchase bond
index futures contracts if a significant market or market sector advance is
anticipated. Such a purchase of a futures contract would serve as a temporary
substitute for the purchase of individual debt securities, which debt securities
may then be purchased in an orderly fashion. This strategy may minimize the
effect of all or part of an increase in the market price of securities that the
Fund intends to purchase. A rise in the price of the securities should be partly
or wholly offset by gains in the futures position.
As in the case of a purchase of a bond index futures contract, the Fund
may purchase a call option on a bond index futures contract to hedge against a
market advance in securities that the Fund plans to acquire at a future date.
The Fund may write put options on bond index futures as a partial anticipatory
hedge and may write covered call options on bond index futures as a partial
hedge against a decline in the prices of bonds held in its portfolio. This is
analogous to writing covered call options on securities. The Fund also may
purchase put options on bond index futures contracts. The purchase of put
options on bond index futures contracts is analogous to the purchase of
protective put options on individual securities where a level of protection is
sought below which no additional economic loss would be incurred by the Fund.
The Fund may also write put options on interest rate, bond index or
foreign currency futures contracts while, at the same time, purchasing call
options on the same interest rate, bond index or foreign currency futures
contract in order synthetically to create a long interest rate, bond index or
foreign currency futures contract position. The options will have the same
strike prices and expiration dates. The Fund will engage in this strategy only
when its adviser believes it is more advantageous to the Fund to do so as
compared to purchasing the futures contract.
The Fund may also purchase and write covered straddles on interest
rate, foreign currency or bond index futures contracts. A long straddle is a
combination of a call and a put purchased on the same futures contract where the
exercise price of the put option is less than or equal to the exercise price
of the call option. The Fund would enter into a long straddle when it
believes that it is likely that interest rates or foreign currency exchange
rates will be more volatile during the term of the options than the option
pricing implies. A short straddle is a combination of a call and put written
on the same futures contract where the exercise price of the put option is
less than or equal to the exercise price of the call option. In a covered
short straddle, the same futures contract is considered "cover" for both
the put and the call that the Fund has written. The Fund would enter into a
short straddle when it believes that it is unlikely that interest rates or
foreign currency exchange rates will be as
15
<PAGE>
volatile during the term of the options as the option pricing implies. In
such case, the Fund will set aside cash and/or appropriate liquid
securities in a segregated account with its custodian equal in value to the
amount, if any, by which the put is "in-the-money", that is, the amount by which
the exercise price of the put exceeds the current market value of the underlying
futures contract.
International Equity and Emerging Markets:
Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific instrument at a specified
future time and at a specified price. Domestic futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Domestic futures exchanges and trading are
regulated under the Commodity Exchange Act by the CFTC, a U.S. Government
agency. Foreign futures exchanges and futures contracts may be regulated
differently, or may be unregulated.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold," "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
security) if it is not closed out prior to the specified delivery date. Minimal
initial margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements which are higher than the
exchange minimums. Futures contracts are customarily purchased and sold on
margin deposits that may range upward from less than 5% of the value of the
contract being traded.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Regulations of the CFTC applicable to each Fund limit the assets that
can be committed to futures transactions that do not constitute bona fide
hedging transactions. A Fund generally will sell futures contracts only
to protect securities it owns against price declines or purchase contracts
to protect against an increase in the price of securities it intends to
purchase. As evidence of this hedging interest, the Fund expects that
approximately 75% of its futures contract purchases will be "completed"; that
is, equivalent amounts of related securities will have been purchased or are
being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures
contracts could be used to control the exposure of Fund income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a Fund will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of underlying equity
securities.
For each Fund:
16
<PAGE>
A Fund may also purchase and sell futures contracts on a foreign
currency. A Fund may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the U.S. dollar. In addition, a Fund may sell a foreign currency futures
contract when its adviser anticipates a general weakening of the foreign
currency exchange rate that could adversely affect the market values of that
Fund's foreign securities holdings. In this case, the sale of futures contracts
on the underlying currency may reduce the risk to the Fund caused by foreign
currency variations and, by so doing, provide an alternative to the liquidation
of securities positions in the Fund and resulting transaction costs. When a
Fund's adviser anticipates a significant foreign exchange rate increase while
intending to invest in a security denominated in a foreign currency, the Fund
may purchase a foreign currency futures contract to hedge against a rise in
foreign exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against any rise
in the foreign exchange rate that may add additional costs to acquiring the
foreign security position.
A Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. A
Fund may purchase a call option or write a put option on a foreign currency
futures contract to hedge against a rise in the foreign exchange rate while
intending to invest in a foreign security of the same currency. A Fund may
purchase put options on foreign currency futures contracts as a partial hedge
against a decline in the foreign exchange rates or the value of its foreign
portfolio securities. It may also write a call option on a foreign currency
futures contract as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
When a purchase or sale of a futures contract is made by a Fund, it 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 Fund upon termination of the
contract assuming all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund 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. A Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund 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 the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract had expired on that date. In computing daily net asset
value, a Fund will mark-to-market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts and on certain foreign currencies
written by it. Such margin deposits will vary depending on the nature of the
underlying futures contract or currency (and the related initial margin
requirements), the current market value of the option and other options and
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally futures contracts are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same currency, index or underlying security and delivery month).
If an offsetting purchase price is less than the original sale price, the Fund
realizes a gain, or if it is more, the Fund realizes a loss. If an offsetting
sale price is more than the original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. A Fund will also bear
transaction costs for each contract, which must be considered in these
calculations.
17
<PAGE>
The Corporation has filed on behalf of each Fund a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which regulate
trading in the futures markets. Under Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility must include representations
that the Fund will use futures contracts and related options solely for bona
fide hedging purposes within the meaning of the CFTC regulations provided that a
Fund may hold futures contracts and related options that do not fall within the
definition of bona fide hedging transactions if, with respect to such
non-hedging transactions, the initial margin deposits plus premiums paid by that
Fund, 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 Fund's net
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. Foreign currency options traded on a
commodities exchange are considered commodity options for this purpose. In
addition, International Equity will not enter into futures contracts to the
extent that its outstanding obligations to purchase securities under those
contracts would exceed 20% of its total assets. Pursuant to an undertaking to a
state securities administrator, International Equity will not invest in puts,
calls, straddles, spreads, or any combination thereof if, as a result, the value
of its aggregate investment in such instruments would exceed 10% of its total
assets. Also pursuant to an undertaking to a state securities administrator,
International Equity will buy and sell options in the OTC market only when such
options are unavailable on exchanges, only when there is an active OTC market
for such options which could establish their pricing and liquidity, and only
with dealers having a minimum net worth of $20 million.
The requirements for qualification as a regulated investment company
for federal income tax purposes also may limit the extent to which a Fund may
engage in transactions in options, futures, or forward currency contracts. See
"Additional Tax Information."
Risks Associated with Futures and Options
In considering a Fund's use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract 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 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 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 options thereon is also subject to the maintenance of a liquid
secondary market. Consequently, it may not be possible for a Fund to close a
position and, in the event of adverse price movements, that Fund 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 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.
18
<PAGE>
(3) Successful use by a Fund of futures contracts and options
thereon will depend upon its adviser's ability to predict movements in the
direction of the overall securities, currency and interest rate markets,
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 the anticipated
levels at some point in the future. There is, in addition, the risk that the
movements in the price of the futures contract will not correlate with the
movements in prices of the securities or currencies being hedged. For example,
if the price of the futures contract moves less than the price of the
securities or currencies that are subject to the hedge, the hedge will not
be fully effective; however, if the price of securities or currencies
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at all. 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 position. In
addition, if a Fund 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, that Fund may need to sell assets at a time when such
sales are disadvantageous to it. If the price of the futures contract moves
more than the price of the underlying securities or currencies, the Fund will
experience either a loss or a gain on the futures contract 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, index, futures
contract or currency, the time remaining until expiration, the relationship of
the exercise price to the market price, the historical price volatility of
the underlying security, index, futures contract or currency and general market
conditions. For this reason, the successful use of options as a hedging
strategy depends upon a Fund's adviser's ability to forecast the direction of
price fluctuations in the underlying market or market sector.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that 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 contracts over the short term. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage and other investment strategies may result in temporary price
distortions.
(6) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security, index, futures contract or currency. Purchased
options that expire unexercised have no value, and a Fund will realize a loss in
the amount paid plus any transaction costs.
(7) Like options on securities and currencies, 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.
19
<PAGE>
(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 that could be substantial in
the event of adverse price movements. In addition, although the maximum amount
at risk when a Fund 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 Fund 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 Fund'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 Fund also may save on commissions by
using such contracts as a hedge rather than buying or selling individual
securities or currencies in anticipation or as a result of market movements.
(10) A Fund may purchase and write both exchange-traded options and
options traded on the OTC market. The ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Although each Fund intends 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 (currently the primary markets
for options on debt securities and foreign currencies) 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 a Fund will enter into OTC
options only with dealers that agree to enter into, and that are expected to be
capable of entering into, closing transactions with that Fund, there can be no
assurance that the Fund 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, the Fund 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 Fund would have to exercise those options that
it has purchased in order to realize any profit. With respect to options written
by a Fund, the inability to enter into a closing transaction may result in
material losses to the Fund. For example, because a Fund must maintain a covered
position with respect to any call option it writes on a security, futures
contract or currency, the Fund may not sell the underlying security, futures
contract or currency or invest any cash, or appropriate liquid securities used
as cover during the period it is obligated under such option. This requirement
may impair that Fund's ability to sell a portfolio security or make an
investment at a time when such a sale or investment might be advantageous.
Options traded on U.S. or other exchanges may be subject to position and daily
fluctuation limits which may limit the ability of the Fund to reduce risk using
such options and may limit their liquidity.
With respect to Global Government,
(11) Bond index options are settled exclusively in cash. If the Fund
purchases a put or call option on an index, the Fund will not know in advance
the difference, if any, between the closing value of the index on the exercise
date and the exercise price of the option itself. Thus, if the Fund exercises a
bond index option before the closing index value for that day is available, the
Fund runs the risk that the level of the underlying index may subsequently
change.
Special Risks Related to Foreign Currency Futures Contracts and Options on Such
Contracts and Options on Foreign Currencies
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described below.
20
<PAGE>
Further, settlement of a foreign currency futures contract may be required to
occur within the country issuing the underlying currency. Thus, a Fund
must accept or make delivery of the underlying foreign currency in
accordance with any U.S. or foreign restrictions or regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and may
be required to pay any fees, taxes or charges associated with such
delivery that are assessed in the issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, a Fund will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of its adviser, the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the purchase or sale
of foreign currency futures contracts, the purchase of call or put options on
futures contracts involves less potential risk to a Fund because the maximum
amount at risk is the premium paid for the option (plus transaction costs).
However, there may be circumstances when the purchase of a call or put option on
a foreign currency futures contract would result in a loss, such as when there
is no movement in the price of the underlying currency or futures contract, when
the purchase of the underlying futures contract would not result in a loss.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures, Forward Currency Exchange Contracts and Foreign Currency Options Traded
on Foreign Exchanges
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies 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) less available data than in the United States on which to make
trading decisions, (3) delays in a Fund's ability to act upon economic events
occurring in foreign markets 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) less trading volume.
Cover for Strategies Involving Options, Futures and Forward Contracts
21
<PAGE>
No Fund will use leverage in its options, futures and forward
contract strategies. A Fund will not enter into an options, futures or forward
currency strategy that exposes it to an obligation to another party unless
it owns either (1) an offsetting ("covering") position in securities,
currencies or other options, futures or forward contracts or (2) cash,
receivables and appropriate liquid securities with a value sufficient to cover
its potential obligations.
Each Fund will comply with guidelines established by the SEC with
respect to coverage of these strategies by mutual funds, and, if the guidelines
so require, will set aside cash and/or appropriate liquid securities in a
segregated account with its custodian in the amount prescribed, as
marked-to-market daily. Securities, currencies or other options, futures
or forward positions used for cover and securities held in a segregated
account cannot be sold or closed out while the 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
Fund's assets could impede portfolio management or that Fund's ability to meet
redemption requests or other current obligations.
Forward Currency Exchange Contracts
A Fund may use forward currency exchange contracts to hedge against
uncertainty in the level of future exchange rates or, with respect to Global
Government, to enhance income. Forward contracts are generally considered to be
derivatives.
A Fund may enter into forward currency exchange contracts with respect
to specific transactions. For example, when a Fund anticipates purchasing or
selling a security denominated in a foreign currency, or when it anticipates the
receipt in a foreign currency of dividend or interest payments on a security
that it holds, that Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such payment, as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars or foreign currency, of the amount of foreign currency involved in
the underlying transaction. That Fund will thereby attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the currency exchange rates during the period between the date on which
the security is purchased or sold, or on which the payment is declared, and the
date on which such payments are made or received.
A Fund also may use forward currency exchange contracts to lock in the
U.S. dollar value of its portfolio positions, to increase its exposure to
foreign currencies that its adviser believes may rise in value relative to the
U.S. dollar or to shift its exposure to foreign currency fluctuations from one
country to another. For example, when a Fund's adviser believes that the
currency of a particular foreign country may suffer a substantial decline
relative to the U.S. dollar or another currency, it may enter into a forward
contract to sell the amount of the former foreign currency approximating the
value of some or all of that Fund's securities denominated in such foreign
currency. These investment practices generally are referred to as
"cross-currency hedging" when two foreign currencies are involved. In
cross-currency hedging, a Fund may suffer losses on both currencies if their
values do not move as its adviser anticipates.
At or before the maturity date of a forward contract requiring a Fund
to sell a currency, that Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a
Fund may close out a forward contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same
amount of the same currency on the maturity date of the first contract. A
Fund would realize a gain or loss as a result of entering into such an
offsetting forward contract under either circumstance to the extent the exchange
rate or rates between the currencies involved moved between the execution
dates of the first contract and the offsetting contract.
22
<PAGE>
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that currency movements
will not be accurately predicted, causing a Fund to sustain losses on these
contracts and transaction costs. A Fund may enter into forward contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency or (2) the Fund maintains cash or appropriate
liquid securities in a segregated account with the Fund's custodian,
marked-to-market daily, in an amount not less than the value of the Fund's
total assets committed to the consummation of the contract. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer-term investment decisions made with regard to
overall diversification strategies. However, each Fund's adviser believes that
it is important to have the flexibility to enter into such forward contracts
when it determines that the best interests of that Fund will be served.
Some foreign currency forward contracts into which a Fund enters may be
illiquid.
The cost to a Fund of engaging in forward contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. The use of
forward contracts does not eliminate fluctuations in the prices of the
underlying securities a Fund owns or intends to acquire, but it does fix a rate
of exchange in advance. In addition, although forward contracts limit the risk
of loss due to a decline in the value of the hedged currencies, at the same time
they limit any potential gain that might result should the value of the
currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Each Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should that Fund
desire to resell that currency to the dealer.
The following information applies only to Global Government:
Foreign Currency Exchange-Related Securities and Foreign Currency Warrants
Foreign currency warrants entitle the holder to receive from their
issuer an amount of cash (generally, for warrants issued in the United States,
in U.S. dollars) that is calculated pursuant to a predetermined formula and
based on the exchange rate between a specified foreign currency and the U.S.
dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable upon their issuance and expire as of a specified date
and time. Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange
23
<PAGE>
risk that is inherent in the international fixed income/debt marketplace. The
formula used to determine the amount payable upon exercise of a foreign
currency warrant may make the warrant worthless unless the applicable
foreign currency exchange rate moves in a particular direction.
Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised.
The expiration date of the warrants may be accelerated if the warrants
are delisted from an exchange or if their trading is suspended permanently,
which would result in the loss of any remaining "time value" of the warrants
(i.e., the difference between the current market value and the exercise value of
the warrants) and, in the case where the warrants were "out-of-the-money," in a
total loss of the purchase price of the warrants. Warrants are generally
unsecured obligations of their issuers and are not standardized foreign currency
options issued by the Options Clearing Corporation ("OCC"). Unlike foreign
currency options issued by OCC, the terms of foreign currency warrants generally
will not be amended in the event of governmental or regulatory actions affecting
exchange rates or in the event of the imposition of other regulatory controls
affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price
that a commercial user of foreign currencies might pay in the interbank market
for a comparable option involving significantly larger amounts of foreign
currencies. Foreign currency warrants are subject to significant foreign
exchange risk, including risks arising from complex political and economic
factors.
Swaps, Caps, Collars and Floors
The Fund may enter into interest rate, currency and index swaps, and
may purchase and sell caps, collars and floors for hedging purposes or in an
effort to increase overall return. Interest rate swap transactions involve an
agreement between two parties under which one makes to the other periodic
payments based on a fixed rate of interest and receives in return periodic
payments based on a variable rate of interest; the rates are calculated on the
basis of a specified amount of principal (the "notional principal amount") for a
specified period of time. A currency swap is an agreement to exchange cash flows
based on changes in the value of an exchange rate; participants in currency
swaps may also exchange the principal amount. Index swaps link one of the
payments to the total return of a market portfolio. Cap and floor transactions
involve an agreement between two parties in which one agrees to pay the other
when a designated market interest rate, currency rate or index value goes above
(in the case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. In an interest rate
collar, one party agrees to pay the other when a designated market interest rate
either goes above a specified cap level or below a specified floor level, either
on predetermined dates or during a specified time period.
As with options and future transactions, successful use of swap
agreements depends on the Adviser's ability to predict movements in the
direction of the overall currency and interest rate markets. There might be
imperfect correlation between the value of a swap, cap, collar or floor
agreement and movements in the underlying interest rate or currency markets.
While swap agreements can offset the potential for loss on a position, they can
also limit the opportunity for gain by offsetting favorable price movements.
24
<PAGE>
Swaps, caps, collars and floors can be highly volatile instruments. The
value of these agreements is dependent on the ability of the counterparty to
perform and is therefore linked to the counterparty's creditworthiness. The Fund
may also suffer a loss if it is unable to terminate an outstanding swap
agreement.
The Fund will enter into swaps, caps, collars and floors only with
parties deemed by its adviser to present a minimal risk of default during the
period of agreement. When the Fund enters into a swap, cap, collar or floor, it
will maintain a segregated account containing cash or appropriate liquid
securities equal to the payment, if any, due to the other party; where contracts
are on a net basis, only the net payment will be segregated. The Fund regards
caps, collars and floors as illiquid, and therefore subject to the Fund's 15%
limit on illiquid securities. There can be no assurance that the Fund will be
able to terminate a swap at the appropriate time. The Fund will sell caps,
collars and floors only to close out its positions in such instruments.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps, collars and floors are
more recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps. The market for all of these
instruments is largely unregulated. Swaps, caps, collars and floors are
generally considered "derivatives."
The Fund does not intend to purchase swaps, caps, collars, or floors
if, as a result, more than 5% of the Fund's net assets would thereby be placed
at risk.
Special Considerations Affecting Emerging Markets and International Equity:
Investing in equity securities of companies in emerging markets may
entail greater risks than investing in equity securities in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property. Investing in
the securities of companies in emerging markets may entail special risks
relating to the potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions
on foreign investment, convertibility of currencies into U.S. dollars and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Fund could lose its
entire investment in any such country.
Settlement mechanisms in emerging securities markets may be less
efficient and reliable than in more developed markets. In such emerging
securities markets there may be lengthy share registration periods during which
the Fund is unable to sell its securities, and there may be delivery delays or
failures in purchases and sales.
Most Latin American countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates and corresponding currency devaluations have had
and may continue to have negative effects on the economies and securities
markets of certain Latin American countries.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
25
<PAGE>
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason and certain of
its affiliates, as well as from certain institutions having agreements with Legg
Mason. Navigator Shares are currently offered for sale only to Institutional
Clients, to clients of Trust Company for which Trust Company exercises
discretionary investment management responsibility, to qualified retirement
plans managed on a discretionary basis and having net assets of at least $200
million, and to The Legg Mason Profit Sharing Plan and Trust. Navigator Shares
may not be purchased by individuals directly, but Institutional Clients may
purchase shares for Customer Accounts maintained for individuals. Primary Shares
are available to all other investors.
Future First Systematic Investment Plan
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future First
Systematic Investment Plan. Under this plan, you may arrange for automatic
monthly investments in Primary Shares of $50 or more by authorizing Boston
Financial Data Services ("BFDS"), the Funds' transfer agent, to transfer funds
to be used to buy Primary Shares at the per share net asset value determined on
the day the funds are sent by your bank. You will receive a quarterly account
statement. You may terminate the Future First Systematic Investment Plan at any
time without charge or penalty. Forms to enroll in the Future First Systematic
Investment Plan are available from any Legg Mason or affiliated office.
Purchases by Check
In making purchases of Fund shares by check, you should be aware that
checks drawn on a member bank of the Federal Reserve System will normally be
converted to federal funds and used to purchase shares of the Fund within two
business days of receipt by Legg Mason. Legg Mason is closed on the days that
the New York Stock Exchange ("Exchange") is closed, which are listed under
"Valuation of Fund Shares" on page 36. Checks drawn on banks that are not
members of the Federal Reserve System may take up to nine business days to be
converted.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or more, you
may also elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient Primary Shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Self-Employed Individual Retirement Plan ("Keogh Plan"), Simplified Employee
Pension Plan ("SEP"), Savings Incentive Match Plan for Employees ("SIMPLE") or
other qualified retirement plan. You may change the monthly amount to be
paid to you without charge not more than once a year by notifying Legg
Mason or the affiliate with which you have an account. Redemptions will
be made at the Primary Shares' net asset value determined as of the close of
regular trading of the Exchange on the first day of each month. If the
Exchange is not open for business on that day, the shares will be redeemed at
the net asset value determined as of the close of regular trading of the
Exchange on the preceding business day. The check for the withdrawal payment
will usually be mailed to you on the next business day following redemption. If
you elect to participate in the Systematic Withdrawal Plan, dividends and
distributions on all Primary Shares in your account must be automatically
reinvested in Primary Shares. You may terminate the Systematic Withdrawal Plan
at any time without charge or penalty. Each Fund, its transfer agent, and Legg
Mason also reserve the right to modify or terminate the Systematic
Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or a capital gain distribution. These payments are taxable to the
extent that the total amount of the payments exceeds the tax
26
<PAGE>
basis of the shares sold. If the periodic withdrawals exceed reinvested
dividends and other distributions, the amount of your original investment
may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund in
which you have an account if you maintain a Systematic Withdrawal Plan because
you may incur tax liabilities in connection with such purchases and withdrawals.
Each Fund will not knowingly accept purchase orders from you for additional
shares if you maintain a Systematic Withdrawal Plan unless your purchase is
equal to at least one year's scheduled withdrawals. In addition, if you maintain
a Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
Redemption Services
Each Fund reserves the right to modify or terminate the wire or
telephone redemption services described in the Prospectuses at any time.
The date of payment may not be postponed for more than seven days, and
the right of redemption may not be suspended except (a) for any period during
which the Exchange is closed (other than for customary weekend and holiday
closings), (b) when trading in markets a Fund normally utilizes is restricted or
an emergency, as defined by rules and regulations of the SEC, exists, making
disposal of that Fund's investments or determination of its net asset value not
reasonably practicable, or (c) for such other periods as the SEC, by order, may
permit for protection of a Fund's shareholders. In the case of any such
suspension, you may either withdraw your request for redemption or receive
payment based upon the net asset value next determined after the suspension is
lifted.
Each Fund reserves the right under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part by securities valued in
the same way as they would be valued for purposes of computing that Fund's net
asset value per share. If payment is made in securities, a shareholder generally
will incur brokerage expenses in converting those securities into cash and will
be subject to fluctuation in the market price of those securities until they are
sold. Each Fund does not redeem in kind under normal circumstances, but would do
so where its adviser determines that it would be in the best interests of the
shareholders as a whole.
Foreign securities exchanges may be open for trading on days when the
Funds are not open for business. The net asset value of Fund shares may be
significantly affected on days when investors do not have access to their
respective Fund to purchase and redeem shares.
No charge is made for redemption from the Global Government and
International Equity Funds. There is a 2% redemption transaction fee charged for
redemptions within one year of purchase of Emerging Markets. The redemption
transaction fee is paid to the Fund to reimburse the Fund for transaction costs
it incurs entering into positions in emerging market securities and liquidating
them in order to fund redemptions.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting each Fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information regarding any
federal, state or local taxes that may be applicable to them.
General
27
<PAGE>
In order to qualify or continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"), a Fund must distribute annually to its shareholders at least 90% of
its investment company taxable income (generally, net investment income, net
short-term capital gain, and net gains from certain foreign currency
transactions, if any) ("Distribution Requirement") and must meet several
additional requirements. For each Fund, these requirements include the
following: (1) the Fund 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 foreign
currencies, or other income (including gains from options, futures or forward
currency contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less than
three months -- options or futures (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that are
not directly related to the Fund's principal business of investing in securities
(or options and futures with respect to securities) ("Short-Short Limitation");
(3) at the close of each quarter of the Fund'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, securities of other RICs 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 Fund's total assets and does not represent
more than 10% of the issuer's outstanding voting securities; and (4) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its total assets may be invested in the securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a 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 dividend or other distribution, the investor will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For this and other purposes, dividends and other distributions
declared by a Fund 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 Fund and
received by the shareholders on December 31 if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
Foreign Securities
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (i) at least 75% of its gross income is passive
or (ii) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC
income will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) -- which probably would have to be distributed to satisfy the
28
<PAGE>
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gain were not received by the Fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Proposed regulations have been published pursuant to which open-end
RICs, such as the Funds, would be entitled to elect to "mark-to-market" their
stock in certain PFICs. "Marking-to-market," in this context, means recognizing
as gain for each taxable year the excess, as of the end of that year, of the
fair market value of each such PFIC's stock over the adjusted basis in that
stock (including mark-to-market gain for each prior year for which an election
was in effect).
Gains or losses (i) from the disposition of foreign currencies, (ii)
from the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of each security and the date of disposition, and (iii) that
are attributable to fluctuations in exchange rates that occur between the time a
Fund accrues dividends, interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally will be
treated as ordinary income or loss. These gains or losses, referred to under the
Code as "section 988" gains or losses, may increase or decrease the amount of a
Fund's investment company taxable income to be distributed to its shareholders.
Options, Futures, Forward Currency Contracts and Foreign Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses a Fund realizes in connection
therewith. Gains from the disposition of foreign currencies (except certain
gains that may be excluded by future regulations), and gains from options,
futures and forward currency contracts derived by a Fund with respect to its
business of investing in securities and foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held for
less than three months. Income from the disposition of foreign currencies, and
options, futures and forward contracts on foreign currencies, that are not
directly related to a Fund's principal business of investing in securities (or
options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain, if any, from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not so qualify, it may be forced
to defer the closing out of certain options, futures, forward currency
contracts and/or foreign currency positions beyond the time when it otherwise
would be advantageous to do so, in order for that Fund to qualify as a RIC.
Certain options and futures in which a Fund may invest will be "section
1256 contracts." Section 1256 contracts held by a Fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, must be "marked-to-market" (that is, treated as sold for
their fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the
29
<PAGE>
balance will be treated as short-term capital gain or loss. Section 1256
contracts also may be marked-to- market for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation
of options and futures contracts in which a Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to a
Fund of straddle transactions are not entirely clear.
Global Government may invest in Brady Bonds (as described in the Fund's
Prospectus) and other Sovereign Debt that are purchased with "market discount"
(collectively, "market discount securities"). For these purposes, market
discount is the amount by which a security's purchase price is exceeded by its
stated redemption price at maturity or, in the case of a security that was
issued with original issue discount ("OID"), the sum of its issue price plus
accrued OID, except that market discount less than the product of (i) 0.25% of
the redemption price at maturity times (ii) the number of complete years to
maturity after the taxpayer acquired the security is disregarded. Market
discount generally is accrued ratably, on a daily basis, over the period from
the acquisition date to the date of maturity. Gain on the disposition of a
market discount security (other than one with a fixed maturity date within one
year from its issuance), generally is treated as ordinary income, rather than
capital gain, to the extent of the security's accrued market discount at the
time of disposition. In lieu of treating the disposition gain as above, Global
Government may elect to include market discount in its gross income currently,
for each taxable year to which it is attributable.
Miscellaneous
If a Fund invests in shares of common stock or preferred stock or
otherwise holds dividend-paying securities as a result of exercising a
conversion privilege, a portion of the dividends from its investment company
taxable income (whether paid in cash or reinvested in additional Fund shares)
may be eligible for the dividends-received deduction allowed to corporations.
The eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. 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.
Original Issue Discount and "Pay-in-Kind" Securities (Global Government only)
Global Government may purchase zero coupon or other debt securities
issued with OID. As a holder of those securities, the Fund must include in its
income the OID that accrues thereon during the taxable year, even if it receives
no corresponding payment on the securities during the year. Similarly, the Fund
must include in its gross income securities it receives as "interest" on
pay-in-kind securities. Because the Fund annually must distribute substantially
all of its investment company taxable income, including any OID and other
non-cash income, to satisfy the Distribution Requirement and avoid imposition
of the Excise Tax, it may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from the Fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The Fund may
realize capital gains or losses from those dispositions, which would increase or
decrease its 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.
30
<PAGE>
Because of the Short-Short Limitation, any such gains would reduce the Fund's
ability to sell other securities (and certain options, futures, forward
currency contracts and foreign currencies) held for less than three months
that it might wish to sell in the ordinary course of its portfolio management.
PERFORMANCE INFORMATION
The following performance information relates to Primary Shares. As of
the date of this Statement of Additional Information, Navigator Shares have no
performance history.
TOTAL RETURN CALCULATIONS Average annual total return quotes used in a
Fund's advertising and other promotional materials ("Performance
Advertisements") are calculated according to the following formula:
n
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of
a hypothetical $1,000 payment made
at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by a Fund are assumed to have been reinvested
at net asset value on the reinvestment dates during the period.
For Global Government:
YIELD Yields used in the Fund's Performance Advertisements are
calculated by dividing the Fund's net investment income for a 30-day period
("Period"), by the average number of shares entitled to receive dividends during
the Period, and expressing the result as an annualized percentage (assuming
semi-annual compounding) of the maximum offering price per share at the end of
the Period. Yield quotations are calculated according to the following formula:
<TABLE>
<S> <C>
6
YIELD = 2 [(a-b + 1) ] - 1
---
cd
where: a = dividends and interest earned during the Period
b = expenses accrued for the Period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
Period.
</TABLE>
Except as noted below, in determining net investment income earned
during the Period (variable "a" in the above formula), the Fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest). Once interest earned is calculated in this
fashion for each debt obligation held by the Fund, interest earned during the
Period is then determined by totaling the interest earned on all debt
obligations. For purposes of these calculations,
31
<PAGE>
the maturity of an obligation with one or more call provisions is assumed
to be the next on which the obligation reasonably can be expected to be
called or, if none, the maturity date. The Fund's yield for the thirty-day
period ended December 31, 1996 was 6.41%.
With respect to the treatment of discount and premium on
mortgage-backed and other asset-backed obligations that are expected to be
subject to monthly payments of principal and interest ("paydowns"): (1) the Fund
accounts for gain or loss attributable to actual paydowns as an increase or
decrease in interest income during the period and (2) the Fund accrues the
discount and amortizes the premium on the remaining obligation, based on the
cost of the obligation, to the weighted average maturity date or, if weighted
average maturity information is not available, to the remaining term of the
obligation.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in Global Government at the Fund's
commencement of operations on April 15, 1993. The table assumes that all
dividends and other distributions are reinvested in the Fund. It includes the
effect of all charges and fees applicable to shares the Fund has paid. (There
are no fees for investing or reinvesting in the Fund, and there are no
redemption fees. It does not include the impact of any income taxes that an
investor would pay on such distributions.
<TABLE>
<CAPTION>
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ---------------- -------------------------------------- ---------------------------------- ----------------------
<S><C>
1993* $10,311 $365 $10,676
1994 9,578 948 10,526
1995 10,361 2,355 12,716
1996 10,582 3,179 13,761
</TABLE>
*April 15, 1993 (commencement of operations) to December 31, 1993.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1996 would
have been $10,410, and the investor would have received a total of $2,866 in
distributions. Returns would have been lower if Global Government's adviser had
not waived/reimbursed certain Fund expenses during the fiscal years 1993 through
1994.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in International Equity at the
Fund's commencement of operations on February 17, 1995. The table assumes that
all dividends and other distributions are reinvested in the Fund. It includes
the effect of all charges and fees applicable to shares the Fund has paid.
(There are no fees for investing or reinvesting in the Fund, and there are no
redemption fees.) It does not include the impact of any income taxes that an
investor would pay on such distributions.
32
<PAGE>
<TABLE>
<CAPTION>
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ---------------- -------------------------------------- ---------------------------------- ----------------------
<S><C>
1995* $10,771 $40 $10,811
1996 12,501 93 12,594
</TABLE>
*February 17, 1995 (commencement of operations) to December 31, 1995.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1996 would
have been $12,090, and the investor would have received a total of $485 in
distributions. Returns would have been lower if International Equity's adviser
had not waived/reimbursed certain Fund expenses during the fiscal years ended
1995 and 1996.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in Emerging Markets at the Fund's
commencement of operations on May 28, 1996. The table assumes that all dividends
and other distributions are reinvested in the Fund. It includes the effect of
all charges and fees applicable to shares the Fund has paid. (There are no fees
for investing or reinvesting in the Fund, but there is a 2% redemption fee if
shares are redeemed within one year of purchase. The following table assumes no
redemption fees were paid.) It does not include the impact of any income taxes
that an investor would pay on such distributions.
<TABLE>
<CAPTION>
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ---------------- -------------------------------------- ----------------------------------- ----------------------
<S><C>
1996* $10,510 $30 $10,540
</TABLE>
*May 28, 1996 (commencement of operations) to December 31, 1996.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1996 would
have been $10,510, and the investor would have received a total of $30 in
distributions. Returns would have been lower if Emerging Markets adviser had not
waived/reimbursed certain Fund expenses during the fiscal years ended 1995 and
1996.
The tables above are based only on Primary Shares. As of the date of
this Statement of Additional Information, Navigator Shares have no performance
history.
For each Fund:
In performance advertisements each Fund may compare its total return
with data published by Lipper Analytical Services, Inc. ("Lipper") for U.S.
government funds and corporate bond (BBB) funds, CDA Investment Technologies,
Inc. ("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"), or
Morningstar Mutual Funds ("Morningstar"), or with the performance of U.S.
Treasury securities of various maturities, recognized stock, bond and other
indexes, including (but not limited to) the Salomon Brothers Bond Index,
Shearson Lehman Bond Index, Shearson Lehman Government/Corporate Bond Index, the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Morgan Stanley
Capital International World Indices, including, among others, the Morgan Stanley
Capital International Europe, Australia, Far East Index ("EAFE
33
<PAGE>
Index"), Morgan Stanley Capital International Emerging Markets Free Index
("EMF"), Salomon Brothers World Government Bond Index, Value Line, the Dow
Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce.
A Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels with
funds having similar investment objectives, published by Lipper, CDA,
Wiesenberger or Morningstar. Performance Advertisements also may refer to
discussions of a Fund and comparative mutual fund data and ratings reported in
independent periodicals, including (but not limited to) THE WALL STREET JOURNAL,
MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRONS, FORTUNE and THE
NEW YORK TIMES.
Global Government invests primarily in fixed-income securities and
International Equity and Emerging Markets each invests primarily in global
equity securities, as described in the Prospectuses. Each Fund does not
generally invest in the equity securities that make up the S&P 500 or the Dow
Jones indices. Comparison with such indices is intended to show how an
investment in either Fund behaved as compared to indices that are often taken as
a measure of performance of the equity market as a whole. The indices, like each
Fund's total return, assume reinvestment of all dividends and other
distributions. They do not take into account the costs or the tax consequences
of investing.
Each Fund may include discussions or illustrations describing the
effects of compounding in performance advertisements. "Compounding" refers to
the fact that, if dividends or other distributions on an investment in a Fund
are reinvested in additional Fund shares, any future income or capital
appreciation of that Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
Each Fund may also compare its performance with the performance of bank
certificates of deposit (CDS) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index. In
comparing a Fund's performance to CD performance, investors should keep in mind
that bank CDS are insured in whole or in part by an agency of the U.S.
Government and offer fixed principal and fixed or variable rates of interest,
and that bank CD yields may vary. Fund shares are not insured or guaranteed by
the U.S. Government and returns and net asset value will fluctuate. The
securities held by a Fund generally have longer maturities than most CDS and may
reflect interest rate fluctuations for longer-term securities. An investment in
each Fund involves greater risks than an investment in certificates of deposit.
Fund advertisements may reference the history of the distributor and
its affiliates, and the education and experience of the portfolio manager.
Advertisements may also describe techniques each Fund's adviser employs in
selecting among the sectors of the fixed-income market and adjusting average
portfolio maturity. In particular, the advertisements may focus on the
techniques of 'value investing'. With value investing, a Fund's adviser invests
in those securities it believes to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be undervalued
because of many factors, including market decline, poor economic conditions,
tax-loss selling, or actual or anticipated unfavorable developments affecting
the issuer of the security. Batterymarch believes that the securities of sound,
well-managed companies that may be temporarily out of favor due to earnings
declines or other adverse developments are likely to provide a greater total
return than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any unfavorable
developments occur.
In advertising, a Fund 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
34
<PAGE>
Data and Research may supply data concerning interest rates, college tuitions,
the rate of inflation, Social Security benefits, mortality statistics and
other relevant information. A Fund may use other recognized sources as they
become available.
A Fund 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.
A Fund 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.
A Fund may also include in advertising biographical information on key
investment and managerial personnel.
A Fund 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 periods of low prices.
A Fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors address their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisors for private accounts and mutual
funds with assets of more than $43 billion as of March 31, 1997.
In advertising, a Fund 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.
A Fund may include in advertising and sales literature descriptive
material relating to both domestic and international economic conditions
including but not limited to discussions regarding the effects of inflation as
well as discussions which compare the growth of various world equity markets. A
Fund may depict the historical performance of the securities in which that Fund
may invest over periods reflecting a variety of market or economic conditions
whether alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size, the number and make-up of its
shareholder base and other descriptive factors concerning that Fund.
A Fund may discuss its investment adviser's philosophy regarding
international investing. Recognizing the differing evolutionary stages of the
distinct emerging market segments, each Fund's adviser, intent on participating
in all of these marketplaces, does not apply a uniform investment process and
approach to its different marketplaces. As a result, an adviser's investment
processes for the U.S., non-U.S. developed countries and emerging markets are
distinct. Well-defined disciplines appropriate to the respective markets
35
<PAGE>
are applied within the company's framework of strong, experienced
management, sound fundamental research and analysis, and superior data and
modeling resources.
Batterymarch, adviser to International Equity and Emerging Markets, is
recognized as a "pioneer" in international investing and is well-known in the
investment community. Batterymarch has been applying a consistent investment
discipline in the international markets for over 10 years.
VALUATION OF FUND SHARES
As described in the Prospectuses, securities 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 each
Fund's adviser as the primary market. Trading in securities on European and Far
Eastern securities exchanges and over-the-counter markets is normally completed
well before the close of the business day in New York. Each Fund is open for
business and its net asset value is calculated each day the Exchange is open for
business. The Exchange currently observes the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
All investments valued in foreign currency are valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined. Foreign currency exchange rates are generally
determined prior to the close of trading on the Exchange. Occasionally, events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of trading on the Exchange.
Such investments will be valued at their fair value, as determined in good faith
by or under the direction of the Board of Directors. Foreign currency exchange
transactions of a Fund occurring on a spot basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market.
Securities trading in emerging markets may not take place on all days
on which the Exchange is open. Further, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days on which the
Exchange is not open. Consequently, the calculation of a Fund's net asset value
therefore may not take place contemporaneously with the determination of the
prices of securities held by the Fund.
TAX-DEFERRED RETIREMENT PLANS
Investors may invest in shares of a Fund through IRAs, Keogh Plans,
SEPs, SIMPLEs and other qualified retirement plans. In general, income earned
through the investment in assets of qualified retirement plans is not
taxed to the beneficiaries thereof until the income is distributed to them.
Investors who are considering establishing such a plan should consult their
attorneys or tax advisers with respect to individual tax questions. The
option of investing in these plans through regular payroll deductions may be
arranged with a Legg Mason or affiliated investment executive and your
employer. Additional information with respect to these plans is available
upon request from any Legg Mason or affiliated investment executive.
Individual Retirement Account - IRA
- -----------------------------------
Certain Primary Share investors may obtain tax advantages by
establishing an IRA. Specifically, if neither you nor your spouse is an active
participant in a qualified employer or government retirement plan, or if either
you or your spouse is an active participant in such a plan and your adjusted
gross income does not exceed a certain level, then each of you may
deduct cash contributions made to an IRA in an amount for each taxable year
not exceeding the lesser of 100% of your earned income or $2,000. In
addition, if your spouse is not employed and you file a joint return,
you may establish a separate IRA for your spouse and contribute up to
36
<PAGE>
a total of $4,000 to the two IRAs, provided that the contribution to either
does not exceed $2,000. If your employer's plan qualifies as a SEP, permits
voluntary contributions and meets certain other requirements, you may make
voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your Primary Shares are then not immediately
taxable to you or the IRA; they become taxable only when distributed to you. To
avoid penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than the end of the taxable year in which you
attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability, where the distribution is rolled over
into another qualified plan, or certain other situations.
Self-Employed Individual Retirement Plan - Keogh Plan
- -----------------------------------------------------
Legg Mason makes available to self-employed individuals a Plan and
Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. You have the right to use a bank of your own choice to provide these
services at your own cost. There are penalties for distributions from a Keogh
Plan prior to age 59 1/2, except in the case of death or disability.
Simplified Employee Pension Plan - SEP
- --------------------------------------
Legg Mason also makes available to corporate and other employers a
Simplified Employee Pension Plan for investment in Primary Shares.
Savings Incentive Match Plan for Employees--SIMPLE
- --------------------------------------------------
Although a salary reduction SEP, or SARSEP, may no longer be
established after December 31, 1996, an employer with no more than 100 employees
that does not maintain another retirement plan instead may establish a SIMPLE
either as separate IRAs or as part of a Code section 401(k) plan. A SIMPLE,
which is not subject to the complicated nondiscrimination rules that generally
apply to qualified retirement plans will allow certain employees to make
elective contributions of up to $6,000 per year and will require the employer
to make matching contributions up to 3% of each such employee's salary.
Withholding at the rate of 20% is required for federal income tax
purposes on distributions eligible for rollover from the foregoing retirement
plans (except IRAs and SEPs), unless the recipient transfers the distribution
directly to an "eligible retirement plan" (including IRAs and other qualified
plans) that accepts those distributions. Other distributions generally are
subject to regular wage withholding or to withholding at the rate of 10%
(depending on the type and amount of the distribution), unless the recipient
elects not to have any withholding apply. Primary Share investors should consult
your plan administrator or tax advisor for further information.
THE CORPORATION'S DIRECTORS AND OFFICERS
The Corporation's officers are responsible for the operation of the
Corporation under the direction of the Board of Directors. The officers and
directors and their principal occupations during the past five years are set
forth below. An asterisk (*) indicates those officers and/or directors who are
"interested persons" of the Corporation as defined by the 1940 Act. The business
address of each officer and director is 111 South Calvert Street, Baltimore,
Maryland, unless otherwise indicated.
JOHN F. CURLEY, JR.,* [07/24/39] Chairman of the Board and Director;
Vice Chairman and Director of Legg Mason Wood Walker, Inc. and Legg Mason, Inc.;
Director of Legg Mason Fund Adviser, Inc. and Western Asset Management Company;
Officer and/or Director of various other affiliates of Legg Mason, Inc.;
President and Director of three Legg Mason funds; Chairman of the Board and
Trustee of one Legg Mason
37
<PAGE>
fund; Chairman of the Board, President and Trustee of one Legg Mason fund;
Chairman of the Board and Director of three Legg Mason funds.
EDWARD A. TABER, III,* [08/25/43] President and Director; Senior
Executive Vice President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.;
Vice Chairman and Director of Legg Mason Fund Adviser, Inc.; Director of three
Legg Mason funds; Trustee of two Legg Mason funds; President and Director of
two Legg Mason funds; and Vice President of Worldwide Value Fund, Inc.
Formerly: Executive Vice President of T. Rowe Price-Fleming International, Inc.
(1986-1992) and Director of the Taxable Fixed Income Division at T. Rowe Price
Associates, Inc. (1973-1992).
RICHARD G. GILMORE, [06/09/27] Director; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company engaged in the manufacture and sale of decorative
paper products, business forms, and specialty metal packaging); Director of PECO
Energy Company (formerly Philadelphia Electric Company); Director of six Legg
Mason funds; Trustee of two Legg Mason funds. Formerly: Senior Vice President
and Chief Financial Officer of Philadelphia Electric Company (now PECO Energy
Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company (bank holding
company) and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH, [12/27/25] Director; 14201 Laurel Park Drive, Laurel,
Maryland. Real Estate Developer and Investor; President and Director of Resource
Enterprises, Inc. (real estate brokerage); Chairman of Resource Realty LLC
(management of retail and office space); Partner in Greater Laurel Health Park
Ltd. Partnership (real estate investment and development); Director of six Legg
Mason funds; Trustee of two Legg Mason funds.
ARNOLD L. LEHMAN, [07/18/44] Director; The Baltimore Museum of Art, Art
Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of Art;
Director of six Legg Mason funds; Trustee of two Legg Mason funds.
JILL E. McGOVERN, [08/29/44] Director; 1500 Wilson Boulevard,
Arlington, Virginia. Chief Executive Officer of the Marrow Foundation;
Director of six Legg Mason funds; Trustee of two Legg Mason funds. Formerly:
Executive Director of the Baltimore International Festival (January 1991 - March
1993); Senior Assistant to the President of The Johns Hopkins University
(1986-1991).
T. A. RODGERS, [10/22/34] Director; 2901 Boston Street, Baltimore,
Maryland. Principal, T. A. Rodgers & Associates (management consulting);
Director of six Legg Mason funds; Trustee of two Legg Mason funds. Formerly:
Director and Vice President of Corporate Development, Polk Audio, Inc.
(manufacturer of audio components) (1991-1992).
The executive officers of the Corporation, other than those who also
serve as directors, are:
MARIE K. KARPINSKI*, [1/1/49] Vice-President and Treasurer; Treasurer
of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of eight Legg
Mason funds; Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice President
of Legg Mason.
KATHI D. BAIR*, [12/15/64] Secretary and Assistant Treasurer; Secretary
and/or Assistant Treasurer of three Legg Mason funds; employee of Legg Mason.
38
<PAGE>
Officers and directors of the Corporation who are "interested persons"
thereof, as defined in the 1940 Act, receive no salary or fees from the
Corporation. Independent directors of the Corporation receive an annual
retainer and a per meeting fee based on average net assets of each Fund at
December 31, as follows:
December 31 Annual Per Meeting
Avg. Net Assets Retainer Fee
--------------- -------- -----------
Up to $250 million $ 600 $150
$250 million - $1 billion $1,200 $300
Over $1 billion $2,000 $400
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Gilmore, Haugh, Lehman and Rodgers and Dr. McGovern.
At April 15, 1997, the directors and officers of the Corporation
beneficially owned, in the aggregate, less than 1% of each Fund's outstanding
shares.
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended December
31, 1996. None of the Legg Mason funds has any retirement plan for its
directors.
COMPENSATION TABLE
<TABLE>
<CAPTION>
==========================================================================================================
Total Compensation From
Corporation and Fund
Aggregate Compensation Complex Paid to
Name of Person and Position From Corporation(A) Directors(B)
- ----------------------------------------------------------------------------------------------------------
<S><C>
John F. Curley, Jr. -
Chairman of the Board and Director None None
Edward A. Taber, III -
President and Director None None
Richard G. Gilmore - $3,000 $25,100
Director
Charles F. Haugh - $3,000 $25,600
Director
Arnold L. Lehman - $3,000 $25,600
Director
Jill E. McGovern - $3,000 $25,600
Director
T. A. Rodgers - $3,000 $25,100
Director
==========================================================================================================
</TABLE>
(A) Represents fees paid to each director during the fiscal year ended
December 31, 1996.
(B) Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1996. There are nine open-end investment
companies in the Legg Mason Complex (with a total of seventeen funds).
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA
39
<PAGE>
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland corporation, is
located at 111 South Calvert Street, Baltimore, Maryland 21202. LMFA is a wholly
owned subsidiary of Legg Mason, Inc., which also is the parent of Legg Mason.
LMFA served as Global Government's investment adviser and manager under an
Investment Advisory and Management Agreement ("Advisory Agreement") dated April
5, 1993. A revised Management Agreement dated May 1, 1995 ("Management
Agreement") between Global Government and LMFA was approved by the vote of a
majority of the Fund's outstanding shares on April 21, 1995. Pursuant to the
revised Management Agreement, and subject to overall direction by the Board of
Directors, LMFA manages the investment and other affairs of Global Government.
Continuation of the Agreement was most recently approved by the Board of
Directors on November 15, 1996. LMFA is responsible for managing the Fund
consistent with the Fund's investment objectives and policies described in the
Prospectus and this Statement of Additional Information. LMFA also is obligated
to (a) furnish the Fund with office space and executive and other personnel
necessary for the operations of the Fund; (b) supervise all aspects of the
Fund's operations; (c) bear the expense of certain informational and purchase
and redemption services to the Fund's shareholders; (d) arrange, but not pay
for, the periodic updating of prospectuses, proxy material, tax returns and
reports to shareholders and state and federal regulatory agencies; and (e)
report regularly to the Corporation's officers and directors. LMFA and its
affiliates pay all the compensation of directors and officers of the Corporation
who are employees of LMFA. LMFA has delegated the portfolio management functions
for Global Government to its adviser, Western Asset Management Company.
As explained in the Prospectus, LMFA receives for its services a
management fee, calculated daily and payable monthly, at an annual rate equal to
0.75% of Global Government's average daily net assets. LMFA voluntarily agreed
to waive its fees and reimburse the Fund if and to the extent its expenses
attributable to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceeded during any month an annual rate of the
Fund's average daily net assets in accordance with the following schedule:
0.20% annually until September 30, 1993; 0.35% annually until December 31,
1993; 0.50% annually until January 31, 1994; 0.70% annually until February
28, 1994; 0.90% annually until March 31, 1994; 1.10% annually until April 30,
1994; 1.30% annually until May 31, 1994; 1.50% annually until June 30, 1994,
1.70% annually until July 31, 1994; and 1.90% indefinitely. For the years
ended December 31, 1996, 1995 and 1994, LMFA waived management fees of $0, $0
and $765,018, respectively. For the years ended December 31, 1996, 1995
and 1994, the Fund paid management fees of $1,150,265, $1,120,329 and $428,854,
respectively.
40
<PAGE>
LMFA also serves as the manager for International Equity and Emerging
Markets under separate Management Agreements (each a "Management Agreement").
Continuation of International Equity's and Emerging Markets' Management
Agreements was most recently approved by the Board of Directors on November 15,
1996. Each Management Agreement provides that, subject to overall direction by
the Board of Directors, LMFA will manage the investment and other affairs of
International Equity and Emerging Markets. LMFA is responsible for managing
International Equity's and Emerging Markets' investments and for making
purchases and sales of securities consistent with the investment objectives and
policies described in the Prospectus and this Statement of Additional
Information. LMFA is obligated to furnish the Funds with office space and
certain administrative services as well as executive and other personnel
necessary for the operation of the Funds. LMFA and its affiliates also are
responsible for the compensation of directors and officers of the Corporation
who are employees of LMFA and/or its affiliates. LMFA has delegated the
portfolio management functions for International Equity and Emerging Markets to
its adviser, Batterymarch Financial Management, Inc.
As explained in the Funds' Prospectuses, LMFA receives for its services
a management fee, calculated daily and payable monthly, at an annual rate equal
to 0.75% of International Equity's average daily net assets and 1.00% of
Emerging Markets' average daily net assets. LMFA and Batterymarch have
voluntarily agreed to waive their fees if and to the extent necessary to limit
International Equity's and Emerging Markets' total annual operating expenses
attributable to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) to 2.25% and 2.50%, respectively, of each Fund's average
daily net assets. This agreement will expire on May 1, 1998, unless extended by
LMFA and Batterymarch. For the year ended December 31, 1996 and the period
February 17, 1995 (commencement of operations of International Equity) to
December 31, 1995, LMFA waived $91,764 and $201,121, respectively, in management
fees. For the same period, the Fund paid management fees of $933,951 and
$26,166, respectively.
For the period May 28, 1996 (commencement of operations of Emerging
Markets) to December 31, 1996, LMFA waived all management fees.
Under each Management Agreement, LMFA will not be liable for any error
of judgment or mistake of law or for any loss suffered by any Fund in connection
with the performance of each Management Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or losses resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.
Each Management Agreement terminates automatically upon assignment and
is terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the outstanding voting securities of
that Fund or by LMFA, on not less than 60 days' written notice to the other
party, and may be terminated immediately upon the mutual written consent of
LMFA and the respective Fund.
Each Fund pays all its other expenses which are not expressly assumed
by LMFA. These expenses include, among others, interest expense, taxes,
brokerage fees, commissions, 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, distribution fees to the Fund's distributor,
compensation of the independent directors, legal and audit expenses, insurance
expenses, expenses of registering and qualifying shares of the Fund for sale
under federal and state law, governmental fees and expenses incurred in
connection with membership in investment company organizations.
41
<PAGE>
Under its Management Agreement, each Fund has the non-exclusive right
to use the name "Legg Mason" until that Agreement is terminated or until the
right is withdrawn in writing by LMFA.
Western Asset
Western Asset Management Company ("Western Asset"), 117 East Colorado
Boulevard, Pasadena, CA 91105, an affiliate of Legg Mason, serves as investment
adviser to Global Government under an Advisory Agreement dated May 1, 1995,
between Western Asset and LMFA ("Advisory Agreement"). The Advisory Agreement
was approved by the Board of Directors, including a majority of the directors
who are not "interested persons" of the Corporation, Western Asset or LMFA, on
February 14, 1995, and was approved by the shareholders of Global Government on
April 21, 1995. Continuation of the Advisory Agreement was most recently
approved by the Board of Directors on November 15, 1996. Under the Advisory
Agreement, Western Asset is responsible, subject to the general supervision of
LMFA and the Corporation's Board of Directors, for the actual management of
Global Government's assets, including the responsibility for making decisions
and placing orders to buy, sell or hold a particular security. For Western
Asset's services, LMFA (not the Funds) pays Western Asset a fee, computed daily
and payable monthly, at an annual rate equal to 531/3% of the fee received by
LMFA or 0.40% of the Fund's average daily net assets. For the years ended
December 31, 1996 and 1995, LMFA paid Western $613,478 and $407,240.
Under the Advisory Agreement, Western Asset will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory 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 thereunder.
The Advisory Agreement terminates automatically upon assignment. It
also is terminable at any time without penalty by vote of the Corporation's
Board of Directors, by vote of a majority of the Fund's outstanding voting
securities, or by Western Asset, on not less than 60 days' notice to the other
party to the Agreement and may be terminated immediately upon the mutual written
consent of both parties to the Agreement.
Batterymarch
Batterymarch Financial Management, Inc. is a wholly owned subsidiary of
Legg Mason, Inc., which also is the parent of Legg Mason. Batterymarch serves as
International Equity's and Emerging Markets' investment adviser under separate
Investment Advisory Agreements (each an "Advisory Agreement"). Under each
Advisory Agreement, Batterymarch is responsible, subject to the general
supervision of LMFA and the Corporation's Board of Directors, for the actual
management of International Equity's and Emerging Markets' assets, including the
responsibility for making decisions and placing orders to buy, sell or hold a
particular security. For Batterymarch's services, LMFA (not the Funds) pays
Batterymarch a fee, computed daily and payable monthly, at an annual rate equal
to 0.50% and 0.75% of the average daily net assets of International Equity and
Emerging Markets, respectively.
For the year ended December 31, 1995 and the period February 17, 1995
(commencement of operations) to December 31, 1995, Batterymarch received
$539,873 and $16,946, respectively for its services to International Equity
Trust. For the period May 28, 1996 (commencment of operations) to December 31,
1996, Batterymarch waived its fees for its services to Emerging Markets.
Under each Advisory Agreement, Batterymarch will not be liable for any
error of judgment or mistake of law or for any loss suffered by either Fund in
connection with the performance of the Advisory 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 thereunder.
Each Advisory Agreement terminates automatically upon assignment. It
also is terminable at any time without penalty by vote of the Corporation's
Board of Directors, by vote of a majority of the Fund's outstanding
42
<PAGE>
voting securities, or by Batterymarch, on not less than 60 days' notice to the
other party to the Agreement and may be terminated immediately upon the mutual
written consent of both parties to the Agreement.
SUB-ADVISORY AGREEMENT
FOR GLOBAL GOVERNMENT TRUST
Western Asset Global Management, Ltd. ("Western Asset Global"), 155
Bishopsgate, London EC2M 3TY, an affiliate of Legg Mason, serves as an
investment sub-adviser to Global Government under a Sub- Advisory Agreement
dated May 1, 1997, between Western Asset Global and Western Asset ("Sub-Advisory
Agreement"). The Sub-Advisory Agreement was approved by the Board of Directors,
including a majority of the directors who are not "interested persons" of the
Corporation, Western Asset Global, Western Asset or LMFA, on February 14,
1997, and was approved by the shareholders of Global Government on April 30,
1997.
Western Asset Global is responsible for providing research, analytical
and trading support for the Fund's investment program, as well as
exercising investment discretion for part of the portfolio, subject to the
supervision of Western Asset and LMFA and the overall direction of the
directors. As compensation for Western Asset Global's services and for expenses
borne by Western Asset Global under the Sub-Advisory Agreement, Western Asset
will pay Western Asset Global monthly at an annual rate equal to 0.20% of the
Fund's average daily net assets. In addition, beginning May 1, 1997, LMFA will
pay Western Asset Global a fee at an annual rate equal to 0.10% of the Fund's
average daily net assets for certain administrative expenses.
Under the Sub-Advisory Agreement, Western Asset Global will not be
liable for any error of judgment or mistake of law or for any loss suffered by
LMFA or by the Fund in connection with the performance of the Sub-Advisory
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 thereunder.
The Sub-Advisory Agreement terminates automatically upon assignment and
is terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the Fund's outstanding voting securities, by
LMFA, by Western Asset or by Western Asset Global, on not less than 60 days'
notice to the Fund and/or the other party(ies). The Sub-Advisory Agreement
terminates immediately upon any termination of the Advisory Agreement or upon
the mutual written consent of LMFA, Western Asset, Western Asset Global and the
Fund.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, the Corporation, LMFA, Batterymarch, Western Asset and
Western Asset Global have adopted policies that restrict securities trading in
the personal accounts of portfolio managers and others who normally come into
advance possession of information on portfolio transactions. These policies
comply, in all material respects, with the recommendations of the Investment
Company Institute.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of the Funds' shares pursuant to
separate Underwriting Agreements with the Corporation. Each Underwriting
Agreement obligates Legg Mason to promote the sale of Fund shares and to pay
certain expenses in connection with its distribution efforts, including the
printing and distribution of prospectuses and periodic reports used in
connection with the offering to prospective investors (after the prospectuses
and reports have been prepared, set in type and mailed to existing shareholders
at each Fund's expense) and for supplementary sales literature and advertising
costs.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits a Fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. 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
43
<PAGE>
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.
The Plan was adopted, as required by Rule 12b-1 under the 1940 Act, by
a vote of the Board of Directors on February 5, 1993 (for Global Government),
October 21, 1994 (for International Equity) and February 7, 1996 (for Emerging
Markets), including a majority of the directors who are not "interested persons"
of the Corporation as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plan or the
Underwriting Agreement ("12b-1 Directors"). Amendment of the Plan to conform to
new rules of the National Association of Securities Dealers, Inc., was approved
by the Board on May 14, 1993. Continuation of the Plan was most recently
approved by the Board of Directors on November 15, 1996, including a majority of
the 12b-1 Directors. In approving the continuance of the Plan, in accordance
with the requirements of Rule 12b-1, the directors determined that there was a
reasonable likelihood that the Plan would benefit each Fund and its
shareholders. The directors noted that, to the extent the Plan results in
additional sales of Primary Shares of a Fund, the Plan may enable the Fund to
achieve economies of scale that could reduce expenses and to minimize the
prospects that the Fund will experience net redemptions and the accompanying
description of portfolio management.
As compensation for its services and expenses, Legg Mason receives from
each Fund an annual distribution fee equivalent to 0.50% (for Global Government)
and 0.75% (for International Equity and Emerging Markets) of its average daily
net assets attributable to Primary Shares and a service fee equivalent to
0.25% of its average daily net assets attributable to Primary Shares in
accordance with the Plan. The distribution and service fees are calculated daily
and payable monthly. Legg Mason voluntarily agreed to waive its fees and
reimburse each Fund if and to the extent its expenses attributable to Primary
Shares (exclusive of taxes, interest, brokerage and extraordinary expenses)
exceeded during any month an annual rate of each Fund's average daily net assets
in accordance with the following schedule:
GLOBAL GOVERNMENT: 0.20% until September 30, 1993; 0.35% until December 31,
1993; 0.50% until January 31, 1994; 0.70% until February 28, 1994; 0.90% until
March 31, 1994; 1.10% until April 30, 1994; 1.30% until May 31, 1994; 1.50%
until June 30, 1994, 1.70% until July 31, 1994; and 1.90% indefinitely.
INTERNATIONAL EQUITY: 2.25% until May 1, 1998.
EMERGING MARKETS: 2.50% until May 1, 1998.
For the years ended December 31, 1996, 1995 and 1994, Global Government
paid full distribution and service fees of $1,150,140, $1,120,329 and
$1,193,872, respectively.
For the year ended December 31, 1996 and the period February 17, 1995
(commencement of operations) to December 31, 1995, International Equity paid
full distribution and service fees of $1,245,267 and $303,049, respectively.
For the period May 28, 1996 (commencement of operations) to December
31, 1996, Emerging Markets paid distribution and service fees of $84,388 (prior
to fees waived of $17,498).
The Plan continues 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 with respect to each
Fund by a vote of a majority of 12b-1 Directors or by vote of a majority of the
outstanding voting Primary Class securities of that Fund. Any change in the
Plan that would materially increase the distribution costs to a Fund
requires Primary Class shareholder approval; otherwise, the Plan may be
amended by the directors, including a majority of the 12b-1 Directors.
Rule 12b-1 requires that any person authorized to direct the
disposition of monies paid or payable by a Fund, pursuant to the Plan or any
related agreement shall provide to that Fund's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which the expenditures were made. Rule 12b-1 also
provides that a Fund may rely on that Rule only if, while the Plan is in effect,
the nomination and selection of that Fund's independent directors is committed
to the discretion of such independent directors.
44
<PAGE>
For the year ended December 31, 1996, Legg Mason incurred the following
expenses:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Global International Emerging
Government Equity Markets
- ---------------------------------------------------------------------------------------------------------------------
<S><C>
Compensation to sales personnel $784,000 $798,000 $45,000
- ---------------------------------------------------------------------------------------------------------------------
Advertising 10,000 18,000 27,000
- ---------------------------------------------------------------------------------------------------------------------
Printing and mailing of prospectuses to prospective
shareholders 64,000 77,000 90,000
- ---------------------------------------------------------------------------------------------------------------------
Other 296,000 772,000 259,000
- ---------------------------------------------------------------------------------------------------------------------
Total $1,154,000 $1,665,000 $421,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the years ended December 31, 1996 and 1995, Global
Government's portfolio turnover rate was 172% and 169%. For the year ended
December 31, 1996 and the period February 17, 1995 (commencement of operations)
to December 31, 1995, International Equity's annualized portfolio turnover rates
were 83% and 58%. For the period May 28, 1996 (commencement of operations) to
December 31, 1996, Emerging Markets' annualized portfolio turnover rate was 46%.
Under each Advisory Agreement, each Fund's adviser is responsible for
the execution of portfolio transactions. Corporate and government debt
securities are generally traded on the OTC market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. Prices paid to a dealer in debt securities will generally include a
"spread," which is the difference between the price at which the dealer is
willing to purchase and sell the specific security at the time, and includes the
dealer's normal profit. Some portfolio transactions may be executed through
brokers acting as agent. In selecting brokers or dealers, each adviser must seek
the most favorable price (including the applicable dealer spread or brokerage
commission) and execution for such transactions, subject to the possible
payment as described below of higher brokerage commissions or spreads to
brokers/dealers who provide research and analysis. A Fund may not always pay
the lowest commission or spread available. Rather, in placing orders on
behalf of a Fund, each adviser also takes into account such factors as size
of the order, difficulty of execution, efficiency of the executing
broker's facilities (including the services described below) and any risk
assumed by the executing broker.
Consistent with the policy of most favorable price and execution, each
adviser may give consideration to research and statistical services furnished by
brokers or dealers to that adviser for its use, may place orders with
broker-dealers who provide supplemental investment and market research and
securities and economic analysis, and may pay to these broker-dealers a higher
brokerage commission than may be charged by other broker-dealers. Such research
and analysis may be useful to each adviser in connection with services to
clients other than the Funds. On the other hand, research and analysis received
by the adviser from broker/dealers executing orders for clients other than the
Funds may be used for the Fund's benefit. Each adviser's fee is not reduced by
reason of its receiving such brokerage and research services. For the years
ended December 31, 1996 and 1995, Global Government paid $0 and $517 in
brokerage commissions with respect to futures transactions. For the year
ended December 31, 1996 and the period February 17, 1995 (commencement of
operations) to December 31, 1995, International Equity paid $498,457 and
$195,150 in brokerage commissions. For the period May 28, 1996 (commencement
of operations) to December 31, 1996, Emerging Markets paid $90,935 in
brokerage commissions.
Although Global Government does not expect to purchase securities on a
commission basis, each Fund may use Legg Mason to effect agency transactions in
listed securities at commission rates and under circumstances consistent with
the policy of best execution. Commissions paid to Legg Mason will not exceed
"usual and customary brokerage commissions." Rule 17e-1 under the 1940 Act
defines "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission,
45
<PAGE>
fee or other remuneration received by other brokers in connection with
comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time." In the OTC
market, a Fund generally will deal with responsible primary market makers
unless a more favorable execution can otherwise be obtained.
No Fund may buy securities from, or sell securities to, Legg Mason or
its affiliated persons as principal. However, the Corporation's Board of
Directors has adopted procedures in conformity with Rule 10f-3 under the 1940
Act whereby a Fund may purchase securities that are offered in certain
underwritings in which Legg Mason or any of its affiliated persons is a
participant.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg
Mason from retaining compensation for executing transactions on an exchange for
its affiliates, such as the Funds, unless the affiliate expressly consents by
written contract. Each Advisory Agreement expressly provides such consent in
accordance with Rule 11a2-2(T).
Investment decisions for each Fund are made independently from those of
other funds and accounts advised by LMFA, Batterymarch, Western or Western Asset
Global. 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
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 large-volume transactions may produce better executions and
prices.
THE CORPORATION'S CUSTODIAN AND
TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston
Massachusetts, serves as custodian of each Fund's assets. Boston Financial Data
Services, P.O. Box 953, Boston, Massachusetts 02103 serves as transfer and
dividend-disbursing agent and administrator of various shareholder services.
Legg Mason also assists BFDS with certain of its duties as transfer agent, for
which BFDS pays Legg Mason a fee. Each Fund reserves the right, upon 60 days'
written notice, to make other charges to investors to cover administrative
costs.
THE CORPORATION'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036-1800, serves as counsel to the Corporation.
THE CORPORATION'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore, Maryland
21202, has been selected by the directors to serve as the Corporation's
independent accountants.
FINANCIAL STATEMENTS
The Statement of Net Assets as of December 31, 1996; the Statement of
Operations for the period ended December 31, 1996; the Statement of Changes in
Net Assets for the periods ended December 31, 1996 and December 31, 1995 (for
Global Government and International Equity Trust); the Financial Highlights for
the periods presented; the Notes to Financial Statements and the Report of the
Independent Accountants, all of which are included in the Corporation's annual
report for the period ended December 31, 1996, are hereby incorporated by
reference in this Statement of Additional Information.
46
<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.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca-Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Description of Standard & Poor's ("S&P") corporate bond ratings:
- ----------------------------------------------------------------
AAA-This is the highest rating assigned by S&P 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.
A - 1
<PAGE>
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.
D-Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
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 "a" 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 S&P'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>
APPENDIX B
The Funds may use the following instruments for the purposes described
on pages 13-21.
Options on Debt Securities and Foreign Currencies (Global Government)
A call option is a short-term contract pursuant to which the purchaser
of the option, in return for a premium, has the right to buy the security or
currency underlying the option at a specified price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security or currency at the exercise price.
Option on a Bond Index (Global Government)
An option on a bond index is similar to an option on a security or
foreign currency, except that settlement of a bond index option is effected with
a cash payment based on the value of the bond index and does not involve the
delivery of the securities included in the index. Thus, upon settlement of a
bond index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price of the option and the
closing price of the bond index.
Interest Rate, Foreign Currency and Bond Index Futures Contracts (Global
Government)
Interest rate and foreign currency futures contracts are bilateral
agreements pursuant to which one party agrees to make, and the other party
agrees to accept, delivery of a specified type of debt security or currency at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities or
currency, in most cases the contracts are closed out before the settlement date
without the making or taking of delivery. A bond index futures contract is
similar to any other futures contract except that settlement of a bond index
futures contract is effected with a cash payment based on the value of the bond
index and does not involve the delivery of the securities included in the index.
Options on Futures Contracts
Options on futures contracts are similar to options on securities or
currencies, except that an option on a futures contract gives the purchaser the
right, in return for the premium, to assume a position in a futures contract (a
long position if the option is a call, and a short position if the option is a
put), rather than to purchase or sell a security or currency, at a specified
price at any time during the option term. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by delivery of the accumulated balance that represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the future. The
writer of an option, upon exercise, will assume a short position in the case of
a call, and a long position in the case of a put. An option on a bond index
futures contract is similar to any other option on a futures contract except
that the purchaser has the right, in return for the premium, to assume a
position in a bond index futures contract at a specified price at any time
during the option term.
Forward Currency Contracts
A forward currency contract involves an obligation to purchase or sell
a specific currency at a specified future date, which may be any fixed number of
days from the contract date agreed upon by the parties, at a price set at the
time the contract is entered into.
B - 1
<PAGE>
TABLE OF CONTENTS
Page
----
Additional Information About Investment Limitations and
Policies 2
Additional Purchase and Redemption Information 30
Additional Tax Information 32
Performance Information 36
Valuation of Fund Shares 41
Tax-Deferred Retirement Plans 42
The Corporation's Directors and Officers 43
The Funds' Investment Adviser/Manager 45
Sub-Advisory Agreement 48
The Funds' Distributor 49
Portfolio Transactions and Brokerage 51
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent 52
The Corporation's Legal Counsel 52
The Corporation's Independent Accountants 52
Financial Statements 53
Appendix A A-1
Appendix B B-1
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by any Fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by any
Fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
<PAGE>
Legg Mason Global Trust, Inc.
Part C. Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements: The financial statements for the
Legg Mason Global Government Trust for the year ended
December 31, 1996 and the Report thereon of the
independent accountants are incorporated into the
Statement of Additional Information by reference to its
Annual Report to Shareholders for the same period.
The financial statements for the Legg Mason International
Equity Trust for the year ended December 31, 1996 and the
Report thereon of the independent accountants are
incorporated into the Statement of Additional Information
by reference to its Annual Report to Shareholders for the
same period.
The financial statements for the Legg Mason Emerging
Markets Trust for the period May 28, 1996 (commencement of
operations) to December 31, 1996 and the Report thereon of
the independent accountants are incorporated into the
Statement of Additional Information by reference to its
Annual Report to Shareholders for the same period.
The financial data schedules with respect to the Legg
Mason Global Government Trust, Legg Mason International
Equity Trust and Legg Mason Emerging Markets Trust are
included as Exhibits 17.1, 17.2 and 17.3, respectively.
(b) Exhibits
(1) (a) Articles of Incorporation -- filed
herewith
(b) Articles Supplementary -- filed herewith
(c) Articles of Amendment -- filed herewith
(d) Articles Supplementary (2)
(e) Articles of Amendment -- filed herewith
(2) By-Laws -- filed herewith
(3) Voting trust agreement -- none
(4) Specimen security -- not applicable
(5) (a) Investment Advisory Agreement--
International Equity Trust (1)
(b) Management Agreement--International
Equity Trust (1)
(c) Amended Investment Advisory Agreement --
Global Government Trust -- filed
herewith
(c) (i) Investment Sub-Advisory Agreement --
Global Government Trust -- (form of)
filed herewith
(d) Management Agreement--Global Government
Trust (1)
(e) Investment Advisory Agreement--Emerging
Markets Trust (3)
(f) Management Agreement--Emerging Markets
Trust (3)
(6) Underwriting Agreement
(a) Global Government Trust -- filed herewith
(b) International Equity Trust -- filed
herewith
(c) Emerging Markets Trust (3)
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian Agreement -- filed herewith
(a) Amendment to Custodian Agreement -- filed
herewith
(9) Transfer Agency and Service Agreement -- filed
herewith
(10) Opinion and consent of counsel
<PAGE>
(a) Global Government Trust -- filed herewith
(b) International Equity Trust -- filed
herewith
(c) Emerging Markets Trust (2)
(11) Other opinions, appraisals, rulings and consents
-- Accountant's consent
(a) Global Government Trust -- filed herewith
(b) International Equity Trust -- filed
herewith
(c) Emerging Markets Trust -- filed herewith
(12) Financial statements omitted from Item 23 -- none
(13) Agreement for providing initial capital -- filed
herewith
(14) (a) Prototype IRA Plan (4)
(b) Prototype Corporate Simplified Employee
Pension Plan (4)
(c) Prototype Keogh Plan (4)
(15) Plan pursuant to Rule l2b-1
(a) Global Government Trust -- filed herewith
(b) International Equity Trust -- filed
herewith
(c) Emerging Markets Trust (3)
(16) Schedule for computation of performance
quotations
(a) Global Government Trust -- filed herewith
(b) International Equity Trust -- filed
herewith
(c) Emerging Markets Trust -- filed herewith
(17) Financial Data Schedules -- filed herewith
(18) Copies of Plans Pursuant to Rule 18f-3 -- none
- -----------------
(1) Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 7 to the registration statement, SEC File No. 33-56672, filed
August 31, 1995.
(2) Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 8 to the registration statement, SEC File No. 33-56672, filed
February 16, 1996.
(3) Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 9 to the registration statement, SEC File No. 33-56672, filed
November 18, 1996.
(4) Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 8 to the registration statement of Legg Mason Income Trust, Inc.,
SEC File No. 33-12092, filed April 28, 1991.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
None.
Item 26. Number of Holders of Securities
-------------------------------
Number of Recordholders
Title of Class as of April 18, 1997
-------------- ----------------------
Capital Stock
par value $.001
Legg Mason Global Government Trust 10,139
Legg Mason International Equity Trust 20,302
Legg Mason Emerging Markets Trust 5,953
<PAGE>
Item 27. Indemnification
---------------
Article ELEVENTH of the Articles of Incorporation provides that to
the maximum extent permitted by applicable law (including Maryland law and the
Investment Company Act of 1940 "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
By-Laws 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.
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
1940 Act). 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 2-418(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 of 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 By-Laws sets forth the procedures
by which the Registrant will indemnify its directors, officers, employees and
agents. Section 10.2 of Article X of the By-Laws provides that the Registrant
may purchase and maintain insurance on behalf of the above-mentioned persons to
the extent permitted by law.
Registrant undertakes to carry out all indemnification provisions
of its Articles of Incorporation and By-Laws in accordance with Investment
Company Act Release No. 11330 (September 4, 1980) and successor releases.
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
Securities Act of 1933 "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.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
I. Legg Mason Fund Adviser, Inc. ("Manager"), investment manager to
the Registrant, is a registered investment adviser incorporated on January 20,
1982. The Manager is engaged primarily in the investment advisory business. The
Manager also serves as manager and/or investment adviser to seventeen open-end
investment company portfolios and as investment consultant for one closed-end
investment company. Information as to the officers and directors of the Manager
is included in its Form ADV filed June 28, 1996 with the Securities and Exchange
Commission (registration number 801-16958) and is incorporated herein by
reference.
II. Western Asset Management Company ("Western"), adviser to the
Registrant's Legg Mason Global Government Trust series, is a registered
investment adviser incorporated on October 5, 1971. Western is primarily engaged
in the investment advisory business. Western also serves as investment adviser
for sixteen open-end investment company portfolios and one closed-end
investment company. Information as to the officers and directors of Western is
included in its Form ADV filed on November 26, 1996 with the Securities and
Exchange Commission (registration number 801-08162) and is incorporated herein
by reference.
III. Batterymarch Financial Management, Inc. ("Batterymarch"),
investment adviser to the Registrant's Legg Mason International Equity Trust and
Legg Mason Emerging Markets Trust series, is a registered investment adviser
incorporated on September 19, 1994. Batterymarch is engaged primarily in the
investment advisory business. Information as to the officers and directors of
Batterymarch is included in its Form ADV filed October 30, 1996 with the
Securities and Exchange Commission (registration number 801-48035) and is
incorporated herein by reference.
IV. Western Asset Global Management Limited ("Western Asset
Global"), investment sub-adviser to the Registrant's Legg Mason Global
Government Trust series, 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 Investment Management Regulatory
Organization under the UK Financial Services Act of 1986. 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 June 25, 1996 with the Securities and Exchange
Commission (registration number 801- 21068) and is incorporated herein by
reference.
Item 29. 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 Investors Trust, Inc.
Western Asset 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").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ------------------ ------------------ -------------
<PAGE>
Raymond A. Mason Chairman of the
Board None
John F. Curley, Jr. Vice Chairman Chairman
of the Board 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
Edward A. Taber III Senior Executive Vice President
President and
Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary 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
<PAGE>
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 President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. 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
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Seth J. Lehr Senior Vice None
1735 Market St. President
Philadelphia, PA 19103
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
Gail Reichard Senior Vice None
<PAGE>
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
Cheryl Allen Vice President None
221 West Sixth St.
Austin, TX 78701
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
John R. Gilner Vice President None
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
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
Anne S. Morse Vice President None
1735 Market St.
Philadelphia, PA 19103
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Jonathan M. Pearl Vice President None
<PAGE>
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Carl W. Riedy, Jr. Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
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
F. James Tennies Vice President, None
Asst. Secretary &
Asst. General Counsel
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
- ---------------
* All addresses are 111 South Calvert Street, Baltimore, Maryland 21202,
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.
Item 30. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services - None
-------------------
Item 32. Undertakings
------------
Registrant hereby undertakes to provide each person to whom a
prospectus is delivered with
<PAGE>
a copy of its latest annual report to shareholders upon
request and without charge.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Global Trust, Inc.
certifies that it meets all the requirements for effectiveness in this
Post-Effective Amendment No. 12 to its Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Baltimore and State of Maryland, on the 28th day of
April, 1997.
LEGG MASON GLOBAL TRUST, INC.
By:/s/John F. Curley, Jr.
------------------------------------
John F. Curley, Jr.
Chairman of the Board and Director
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 12 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S><C>
/s/ John F. Curley, Jr. Chairman of the Board April 28, 1997
- ------------------------ and Director
John F. Curley, Jr.
/s/ Edward A. Taber, III President and Director April 28, 1997
- ------------------------
Edward A. Taber, III
/s/ Richard G. Gilmore* Director April 28, 1997
- ------------------------
Richard G. Gilmore*
/s/ Charles F. Haugh* Director April 28, 1997
- ------------------------
Charles F. Haugh*
/s/ Arnold L. Lehman* Director April 28, 1997
- ------------------------
Arnold L. Lehman*
/s/ Jill E. McGovern* Director April 28, 1997
- ------------------------
Jill E. McGovern*
/s/ T. A. Rodgers* Director April 28, 1997
- ------------------------
T. A. Rodgers*
/s/ Marie K. Karpinski Vice President April 28, 1997
- ------------------------ and Treasurer
Marie K. Karpinski
</TABLE>
* Signatures affixed by Marie K. Karpinski pursuant to powers of attorney dated
May 14, 1993, incorporated herein by reference to Post-Effective Amendment No.
11, filed February 28, 1997.
Exhibit 1
ARTICLES OF INCORPORATION
OF
LEGG MASON GLOBAL TRUST, INC.
FIRST: The undersigned, ARTHUR C. DELIBERT, whose post office address
is South Lobby-Ninth Floor, 1800 M Street, N.W., Washington, D.C. 20036, being
at least eighteen years of age, under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations, is acting as sole
incorporator with the intention of forming a corporation.
SECOND: The name of the corporation is LEGG MASON GLOBAL TRUST (the
"Corporation").
THIRD: The duration of the Corporation shall be perpetual.
FOURTH: The purposes for which the Corporation is formed are to act as
an open-end management investment company, as contemplated by the Investment
Company Act of 1940, as amended ("1940 Act"), and to exercise and enjoy all of
the powers, rights and privileges granted to, or conferred upon, corporations by
the General Laws of the State of Maryland now or hereafter in force, including,
without limitation:
(a) To hold, invest and reinvest the funds of the Corporation, and
in connection therewith to hold part or all of its funds in
cash, and to purchase, subscribe for or otherwise acquire, to
hold for investment or otherwise, to trade and deal in, write,
sell, assign, negotiate, transfer, exchange, lend, pledge or
otherwise dispose of or turn to account or realize upon,
securities of any corporation, company, association, trust,
firm, partnership, or other organization however or wherever
established or organized, as well as securities created or
issued by any United States or foreign issuer (which term
- 1 -
<PAGE>
"issuer" shall, for the purpose of these Articles of
Incorporation, without limiting the generality thereof, be
deemed to include any persons, firms, associations,
partnerships, corporations, syndicates, combinations,
organizations, governments or subdivisions, agencies or
instrumentalities of any government); and to exercise, as
owner or holder of any securities, all rights, powers and
privileges in respect thereof, including the right to vote
thereon; to aid by further investment any issuer, any
obligation of or interest in which is held by the Corporation
or in the affairs of which the Corporation has any direct or
indirect interest; to guarantee or become surety on any or all
of the contracts, stocks, bonds, notes, debentures and other
obligations of any corporation, company, trust, association or
firm; and to do any and all acts and things for the
preservation, protection, improvement and enhancement in value
of any and all such securities.
For the purposes of these Articles of Incorporation, as the
same may be supplemented or amended, the term "securities"
shall be deemed to include, without limiting the generality
thereof, any stocks, shares, bonds, debentures, bills, notes,
mortgages and any other obligations or evidences of
indebtedness, and any options, certificates, receipts,
warrants, futures or forward contracts, or other instruments
representing rights to receive, purchase, subscribe for or
sell the same, or evidencing or representing any other direct
or indirect rights or interests therein, including all rights
of equitable ownership therein, or in any property or assets;
and any negotiable or non-negotiable instruments, including
money market instruments, bank certificates of deposit,
finance paper, commercial paper, bankers' acceptances and all
types of repurchase or reverse repurchase agreements; interest
rate protection instruments; and derivative or synthetic
instruments.
(b) To acquire all or any part of the goodwill, rights, property
and business of any person, firm, association or corporation
heretofore or hereafter engaged in any
- 2 -
<PAGE>
business similar to any business which the Corporation has the
power to conduct, and to hold, utilize, enjoy and in any
manner dispose of the whole or any part of the rights,
property and business so acquired, and to assume in connection
therewith any liabilities of any such person, firm,
association or corporation.
(c) To apply for, obtain, purchase or otherwise acquire, any
patents, copyrights, licenses, trademarks, trade names and the
like, which may be capable of being used for any of the
purposes of the Corporation; and to use, exercise, develop,
grant licenses in respect of, sell and otherwise turn to
account, the same.
(d) To issue and sell shares of its own capital stock and
securities convertible into such capital stock in such amounts
and on such terms and conditions, for such purposes and for
such amount or kind of consideration (including without
limitations, securities) now or hereafter permitted by the
laws of the State of Maryland, by the 1940 Act and by these
Articles of Incorporation, as its Board of Directors may, and
is hereby authorized to, determine.
(e) To allocate assets, liabilities and expenses of the
Corporation to a particular series or class or to apportion
the same between or among two or more series or classes, as
applicable, provided that any liabilities or expenses incurred
by a particular series or class shall be payable solely by
that series or class as provided for in Article VI.
(f) To purchase, repurchase or otherwise acquire, hold, dispose
of, resell, transfer, reissue or cancel (all without the vote
or consent of the stockholders of the Corporation) shares of
its capital stock in any manner and to the extent now or
hereafter permitted by the laws of the State of Maryland, by
the 1940 Act and by these Articles of Incorporation.
(g) To conduct its business in all branches at one or more offices
in any part of the world, without restriction or limit as to
extent.
- 3 -
<PAGE>
(h) To exercise and enjoy, in any states, territories, districts
and United States dependencies and in foreign countries, all
of the powers, rights and privileges granted to, or conferred
upon, corporations by the General Laws of the State of
Maryland now or hereafter in force.
(i) To enjoy all rights, powers and privileges of ownership or
interest in all securities held by the Corporation, including
the right to vote and otherwise act with respect thereto and
to do all acts for the preservation, protection, improvement,
and enhancement in value of all such securities;
(j) In general, to carry on any other business in connection with
or incidental to its corporate purposes, to do everything
necessary, suitable or proper for the accomplishment of such
purposes or for the attainment of any object or the
furtherance of any power set forth in these Articles of
Incorporation, either alone or in association with others, to
do every other act or thing incidental or appurtenant to or
growing out of or connected with its business or purposes,
objects or powers, and, subject to the foregoing, to have and
exercise all the powers, rights and privileges granted to, or
conferred upon, corporations by the laws of the State of
Maryland as in force from time to time.
The foregoing objects and purposes shall, except as otherwise expressly
provided, be in no way limited or restricted by reference to, or inference from,
the terms of any other clause of this or any other Article of these Articles of
Incorporation, and shall each be regarded as independent and construed as a
power as well as an object and a purpose, and the enumeration of specific
purposes, objects and powers shall not be construed to limit or restrict in any
manner the meaning of general terms or the general powers of the Corporation now
or hereafter conferred by the laws of Maryland, nor shall the expression of one
thing be deemed to exclude another though it be of like nature, not expressed;
provided however, that the Corporation shall not have power to carry on within
the State of Maryland any business whatsoever the carrying on of which would
preclude it from being
- 4 -
<PAGE>
classified as an ordinary business corporation under the laws of said State; nor
shall it carry on any business, or exercise any powers, in any other state,
territory, district or country except to the extent that the same may lawfully
be carried on or exercised under the laws thereof.
Incident to meeting the purposes specified above, the Corporation also
shall have the power, without limitation:
(1) To acquire (by purchase, lease or otherwise) and to take,
receive, own, hold, use, employ, maintain, develop, dispose of
(by sale or otherwise) and otherwise deal with any real or
personal property, wherever located, and any interest therein.
(2) To make contracts and guarantees, incur liabilities and borrow
money and, in this connection, issue notes or other evidence
of indebtedness.
(3) To buy, hold, sell, and otherwise deal in and with
commodities, indices of commodities or securities, and foreign
exchange, including the purchase and sale of futures
contracts, options on futures contracts related thereto and
forward contracts, subject to any applicable provisions of
law.
(4) To sell, lease, exchange, transfer, convey, mortgage, pledge
and otherwise dispose of any or all of its assets.
FIFTH: The post office address of the principal office of the
Corporation in the State of Maryland is 111 South Calvert Street, Baltimore,
Maryland 21202. The name of the resident agent of the Corporation in the State
of Maryland is Charles A. Bacigalupo, whose post office address is 111 South
Calvert Street, Baltimore, Maryland 21202. The resident agent is a citizen of
the State of Maryland and actually resides therein.
SIXTH: Section 6.1. Capital Stock. The total number of shares of
capital stock which the Corporation shall have authority to issue is one billion
(1,000,000,000) shares, of the par value of one tenth of one cent ($.001)
("Shares"), and of the aggregate par value of one million dollars ($1,000,000).
The
- 5 -
<PAGE>
Board of Directors shall have full power and authority, in its sole discretion
and without obtaining any prior authorization or vote of the Stockholders, to
create and establish and to change in any manner Shares having such preferences,
terms of conversion, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption as shall be
fixed and determined from time to time by resolution or resolutions providing
for the issuance of such Shares adopted by the Board of Directors.
The Shares may be issued by the Board of Directors in such
separate and distinct series ("Series") and classes ("Classes") as the Board of
Directors shall from time to time create and establish. The Board of Directors
is authorized, from time to time, to divide or combine the Shares into a greater
or lesser number, to classify or reclassify any unissued Shares of the
Corporation into one or more separate Series or Classes of Shares, and to take
such other action with respect to the Shares as the Board of Directors may deem
desirable. In addition, the Board of Directors is hereby expressly granted
authority to increase or decrease the number of Shares of any Series or Class,
but the number of Shares of any Series or Class shall not be decreased by the
Board of Directors below the number of Shares thereof then outstanding. The
Board of Directors, in its discretion without a vote of the Stockholders, may
divide the shares of any Series into Classes. The Shares of any Series or Class
of stock shall have such preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as shall be fixed and determined from time to time by the Board of
Directors.
The Corporation may hold as treasury Shares, reissue for such
consideration and on such terms as the Board of Directors may determine, or
cancel, at its discretion from time to time, any Shares reacquired by the
Corporation. No holder of any of the Shares shall be entitled as of right to
subscribe for, purchase, or otherwise acquire any Shares of the Corporation
which the Corporation proposes to issue or reissue.
Without limiting the authority of the Board of Directors set
forth herein to establish and designate any further Series, and to classify and
reclassify any unissued Shares, there is hereby established and classified, one
Series of stock
- 6 -
<PAGE>
comprising two hundred fifty million (250,000,000) Shares, to be known as the
Legg Mason Global Government Trust.
The corporation shall have authority to issue any additional
Shares hereafter authorized and any Shares redeemed or repurchased by the
Corporation. All Shares of any Series or Class when properly issued in
accordance with these Articles of Incorporation shall be fully paid and
nonassessable.
Section 6.2. Establishment of Series and Classes. The
establishment of any Series or Class of Shares in addition to those established
in Section 6.1 hereof shall be effective upon the adoption of a resolution by
the Board of Directors setting forth such establishment and designation and the
relative rights and preferences of the Shares of such Series or Class. At any
time that there are no Shares outstanding of any particular Series or Class
previously established and designated, the Directors may by a majority vote
abolish that Series or Class and the establishment and designation thereof.
Section 6.3. Dividends. Dividends and distributions on Shares
with respect to each Series or Class may be declared and paid with such
frequency, in such form and in such amount as the Board of Directors may from
time to time determine. Dividends may be declared daily or otherwise pursuant to
a standing resolution or resolutions adopted only once or with such frequency as
the Board of Directors may determine.
All dividends on Shares of each Series or Class shall be paid
only out of the income belonging to that Series or Class and capital gains
distributions on Shares of each Series or Class shall be paid only out of the
capital gains belonging to that Series or Class. All dividends and distributions
on Shares of each Series or Class shall be distributed pro rata to the holders
of that Series or Class in proportion to the number of Shares of that Series or
Class held by such holders at the date and time of record established for the
payment of such dividends or distributions, except that such dividends and
distributions shall appropriately reflect expenses allocated to a particular
Series or Class. In connection with any dividend or distribution program or
procedure the Board of Directors may determine that no dividend or distribution
shall be payable on Shares as to which the Shareholder's purchase order and/or
payment have not been
- 7 -
<PAGE>
received by the time or times established by the Board of Directors under such
program or procedure.
The Board of Directors shall have the power, in its sole
discretion, to distribute in any fiscal year as dividends (including dividends
designated in whole or in part as capital gain distributions) amounts
sufficient, in the opinion of the Board of Directors, to enable each Series of
the Corporation to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended, or any successor or comparable statute
thereto, and regulations promulgated thereunder, and to avoid liability of each
Series of the Corporation for Federal income tax in respect of that year.
However, nothing in the foregoing shall limit the authority of the Board of
Directors to make distributions greater than or less than the amount necessary
to qualify as a regulated investment company and to avoid liability of any
Series of the Corporation for such tax.
Dividends and distributions may be paid in cash, property or
Shares, or a combination thereof, as determined by the Board of Directors or
pursuant to any program that the Board of Directors may have in effect at the
time. Any such dividend or distribution paid in Shares will be paid at the
current net asset value thereof as defined in Section 6.7.
Section 6.4. Assets and Liabilities of Series and Classes. All
consideration received by the Corporation for the issue or sale of Shares of a
particular Series or Class, together with all assets in which such consideration
is invested or reinvested, all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such proceeds
in whatever form the same may be, shall be referred to as "assets belonging to"
that Series or Class, as the case may be. In addition, any assets, income,
earnings, profits, and proceeds thereof, funds, or payments which are not
readily identifiable as belonging to any particular Series or Class shall be
allocated between and among one or more of the Series or Classes in such manner
as the Board of Directors, in its sole discretion, deems fair and equitable.
Each such allocation shall be conclusive and binding upon the Stockholders of
all Series or Classes for all purposes, and shall be referred to as assets
belonging to that Series or Class. The
- 8 -
<PAGE>
assets belonging to a particular Series or Class shall be so recorded upon the
books of the Corporation. The assets belonging to each particular Series or
Class shall be charged with the liabilities of that Series or Class and all
expenses, costs, charges and reserves attributable to that Series or Class, as
the case may be. Any general liabilities, expenses, costs, charges or reserves
of the Corporation which are not readily identifiable as belonging to any
particular Series or Class shall be allocated between or among any one or more
of the Series or Classes in such a manner as the Board of Directors in its sole
discretion deems fair and equitable. Each such allocation shall be conclusive
and binding upon the Stockholders of all Series or Classes for all purposes.
Section 6.5. Voting. On each matter submitted to a vote of the
Stockholders, each holder of a Share shall be entitled to one vote for each
Share and fractional votes for fractional Shares standing in his name on the
books of the Corporation; provided, however, that when required by the 1940 Act
or rules thereunder or when the Board of Directors has determined that the
matter affects only the interests of one Series or Class, matters may be
submitted to a vote of the Stockholders of such Series or Class only, and each
holder of Shares thereof shall be entitled to votes equal to the number of full
and fractional Shares of the Series or Class standing in his name on the books
of the Corporation. The presence in person or by proxy of the holders of
one-third of the Shares of capital stock of the Corporation outstanding and
entitled to vote thereat shall constitute a quorum for the transaction of
business at a Stockholders' meeting, except that where any provision of law or
of these Articles of Incorporation permits or requires that holders of any
Series or Class shall vote as a Series or Class, then one-third of the aggregate
number of Shares of that Series or Class outstanding and entitled to vote shall
constitute a quorum for the transaction of business by that Series or Class.
Section 6.6. Redemption by Stockholders. Each holder of Shares
shall have the right at such times as may be permitted by the Corporation to
require the Corporation to redeem all or any part of his Shares at a redemption
price per Share equal to the net asset value per Share as of such time as the
Board of Directors shall have prescribed by resolution, minus any applicable
sales charge or redemption or repurchase fee. In the
- 9 -
<PAGE>
absence of such resolution, the redemption price per Share shall be the net
asset value next determined (in accordance with Section 6.7) after receipt by
the Corporation of a request for redemption in proper form less such charges as
are determined by the Board of Directors and described in the Corporation's
registration statement under the Securities Act of 1933. The Board of Directors
may specify conditions, prices, and places of redemption, and may specify
binding requirements for the proper form or forms of requests for redemption.
The Corporation may require Stockholders to pay a sales charge to the
Corporation, the underwriter or any other person designated by the Board of
Directors upon redemption or repurchase of Shares of any Series or Class, in
such amount as shall be determined from time to time by the Directors. Payment
of the redemption price may be wholly or partly in securities or other assets at
the value of such securities or assets used in such determination of net asset
value, or may be in cash. Notwithstanding the foregoing, the Board of Directors
may postpone payment of the redemption price and may suspend the right of the
holders of Shares to require the Corporation to redeem Shares during any period
or at any time when and to the extent permissible under the 1940 Act.
Section 6.7. Net Asset Value per Share. The net asset value of
each Share of each Series or Class, shall be the quotient obtained by dividing
the value of the total assets of the Series or Class, less liabilities and
expenses of that Series or Class, by the total number of Shares of the Series or
Class outstanding. The Board of Directors shall have the power and duty to
determine the net asset value per Share at such times and by such methods as it
shall determine subject to any restrictions or requirements under the 1940 Act
and the rules, regulations and interpretations thereof promulgated or issued by
the Securities and Exchange Commission or insofar as permitted by any order of
the Securities and Exchange Commission applicable to the Corporation. The Board
of Directors may delegate such power and duty to any one or more of the
directors and officers of the Corporation, to the Corporation's investment
adviser, to the custodian or depository of the Corporation's assets, or to
another agent of the Corporation.
Section 6.8. Redemption by the Corporation. The Board of
Directors may cause the Corporation to redeem at current net asset value all
Shares owned or held by any one Stockholder
- 10 -
<PAGE>
having an aggregate current net asset value of less than one thousand dollars
($1,000). No such redemption shall be effected unless the Corporation has given
the Stockholder at least sixty (60) days' notice of its intention to redeem the
Shares and an opportunity to purchase a sufficient number of additional Shares
to bring the aggregate current net asset value of his Shares to one thousand
dollars ($1,000). Upon redemption of Shares pursuant to this Section, the
Corporation shall promptly cause payment of the full redemption price, in any
permissible form, to be made to the holder of Shares so redeemed. The Board of
Directors may by a majority vote establish from time to time amounts less than
one thousand dollars ($1,000) at which the Corporation will redeem Shares
pursuant to this Section.
SEVENTH: Section 7. 1. Issuance of New Stock. The Board of Directors
is authorized to issue and sell or cause to be issued and sold from time to time
(without the necessity of offering the same or any part thereof to existing
stockholders) all or any portion or portions of the entire authorized but
unissued Shares of the Corporation, and all or any portion or portions of the
Shares of the Corporation from time to time in its treasury, for cash or for any
other lawful consideration or considerations and on or for any terms,
conditions, or prices consistent with the provisions of law and of the Articles
of Incorporation at the time in force; provided, however, that in no event shall
Shares of the Corporation having a par value be issued or sold for a
consideration or considerations less in amount or value than the par value of
the Shares so issued or sold, and provided further that in no event shall any
Shares of the Corporation be issued or sold, except as a stock dividend
distributed to stockholders, for a consideration (which shall be net to the
Corporation after underwriting discounts or commissions) less in amount or value
than the net asset value of the Shares so issued or sold determined as of such
time as the Board of Directors shall have by resolution prescribed. In the
absence of such a resolution, such net asset value shall be that next determined
after an unconditional order in proper form to purchase such Shares is accepted,
except that Shares may be sold to an underwriter at (a) the net asset value next
determined after such orders are received by a dealer with whom such underwriter
has a sales agreement or (b) the net asset value determined at a later time.
- 11 -
<PAGE>
Section 7.2. Fractional Shares. The Corporation may issue and
sell fractions of Shares having pro rata all the rights of full Shares,
including, without limitation, the right to vote and to receive dividends, and
wherever the words "Share" or "Shares" are used in these Articles or in the
By-Laws they shall be deemed to include fractions of Shares, where the context
does not clearly indicate that only full Shares are intended.
EIGHTH: Except as otherwise required by the 1940 Act, a majority of all
the votes cast at a Stockholders' meeting at which a quorum is present is
sufficient to approve any matter which properly comes before the meeting.
Notwithstanding any provision of law requiring a greater proportion than a
majority of the votes of all classes or series (or of any class or series
entitled to vote thereon as a separate class or series) to take or authorize any
action, the Corporation is hereby authorized in accordance with the authority
granted by Section 2-104(b)(5) of the Maryland General Corporation Law, to take
such action upon the concurrence of a majority of the aggregate number of Shares
entitled to vote thereon (or of a majority of the aggregate number of Shares of
a Class or Series entitled to vote thereon as a separate Class or Series). The
right to cumulate votes in the election of directors is expressly prohibited.
NINTH: Section 9.1. Board of Directors. All corporate powers and
authority of the Corporation (except as otherwise provided by statute, by these
Articles of Incorporation, or by the By-Laws of the Corporation) shall be vested
in and exercised by the Board of Directors. The number of directors constituting
the Board of Directors shall be such number as may from time to time be fixed in
or in accordance with the By-Laws of the Corporation, provided that if there is
no stock outstanding, the number of directors may be less than three but not
less than one, and further provided that if there is stock outstanding and so
long as there are less than three Stockholders, the number of directors may be
less than three but not less than the number of Stockholders. Except as provided
in the By-Laws, the election of directors may be conducted in any way approved
at the meeting (whether of stockholders or directors) at which the election is
held, provided that such election shall be by ballot whenever requested by any
person entitled to vote. The names of the persons who shall act as initial
directors until stock is issued to more than one stockholder or the first
meeting of
- 12 -
<PAGE>
stockholders, whichever shall occur earlier, and until their successors have
been duly chosen and qualified are John F. Curley, Jr. and Marie K. Karpinski.
Section 9.2. By-Laws. Except as may otherwise be provided in
the By-Laws, the Board of Directors of the Corporation is expressly authorized
to make, alter, amend and repeal By-Laws or to adopt new By-Laws of the
Corporation, without any action on the part of the Stockholders; but the ByLaws
made by the Board of Directors and the power so conferred may be altered or
repealed by the Stockholders.
Section 9.3. Inspection of Records. The Board of Directors
shall have the power to determine whether and to what extent, and at what times
and places, and under what conditions and regulations, the accounts and books of
the Corporation (other than the stock ledger), or any of them, shall be open to
inspection by stockholders. No stockholders shall have any right to inspect any
account, book, or document of the Corporation, except to the extent permitted by
statute or the By-laws.
Section 9.4. Net Asset Value. The Board of Directors shall
have the power to determine, in accordance with generally accepted accounting
principles, the net income, total assets and liabilities and the net asset value
of the Corporation and of each Series or Class of the Shares of capital stock of
the Corporation. The Board of Directors may delegate such power to any one or
more of the directors or officers of the Corporation, its investment adviser,
administrator, custodian, or depository of the Corporation's assets, or another
agent of the Corporation appointed for such purposes.
TENTH: Section 10.1. The Board of Directors may in its discretion from
time to time enter into an exclusive or nonexclusive distribution contract or
contracts providing for the sale of Shares whereby the Corporation may either
agree to sell Shares to the other party to the contract or appoint such other
party its sales agent for such shares (such other party being herein sometimes
called the "underwriter"), and in either case on such terms and conditions as
may be prescribed in the By-Laws, if any, and such further terms and conditions
as the Board of Directors may in its discretion determine not inconsistent with
the provisions of these Articles of Incorporation. Such contract
- 13 -
<PAGE>
may also provide for the repurchase of Shares of the Corporation by such other
party or parties as agent of the Corporation. The Board of Directors may also in
its discretion from time to time enter into an investment advisory or management
contract or contracts whereby the other party to such contract shall undertake
to furnish to the Board of Directors such management, investment advisory,
statistical and research facilities and services and such other facilities and
services, if any, and all upon such terms and conditions, as the Board of
Directors may in its discretion determine.
Section 10.2. Any contract of the character described in
Section 10.1 or for services as administrator, custodian, transfer agent or
disbursing agent or related services may be entered into with any corporation,
firm, trust or association, although any one or more of the directors or
officers of the Corporation may be an officer, director, trustee, stockholder or
member of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Corporation under or
by reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article
TENTH. The same person (including a firm, corporation, trust, or association)
may be the other party to any or all of the contracts entered into pursuant to
Section 10.1 above, and any individual may be financially interested or
otherwise affiliated with persons who are parties to any or all of the contracts
mentioned in this Section 10.2.
ELEVENTH: Section 11.1. To the maximum extent permitted by applicable
law (including Maryland law and the 1940 Act) as currently in effect or as it
may hereafter be amended, no director or officer of the Corporation shall be
liable to the Corporation or its stockholders for money damages.
Section 11.2. To the maximum extent permitted by applicable
law (including Maryland law and the 1940 Act) currently in effect or as it may
hereafter be amended, the Corporation shall indemnify and advance expenses to
its present and past directors, officers, or employees, and persons who are
- 14 -
<PAGE>
serving or have served at the request of the Corporation as a director, officer,
employee, partner, trustee or agent or in similar capacities for other entities.
The Board of Directors may determine that the Corporation shall provide
indemnification or advance expenses to an agent.
Section 11.3. Repeal or Modification. No repeal or
modification of this Article ELEVENTH by the stockholders of the Corporation, or
adoption or modification of any other provision of the Articles of Incorporation
or By-Laws inconsistent with this Article ELEVENTH, shall repeal or narrow any
limitation on (1) the liability of any director, officer or employee of the
Corporation or (2) right of indemnification available to any person covered by
these provisions with respect to any act or omission which occurred prior to
such repeal, modification or adoption.
TWELFTH: The Corporation reserves the right from time to time to make
any amendment of these Articles of Incorporation, now or hereafter authorized by
law, including any amendment which alters contract rights, as expressly set
forth in these Articles of Incorporation, of any outstanding Shares. Any
amendment to these Articles of Incorporation may be adopted at any meeting of
the stockholders upon receiving an affirmative vote of a majority of all votes
entitled to be cast thereon. The Board of Directors may, without a shareholder
vote, order the filing of Articles Supplementary increasing or decreasing the
aggregate number of Shares or the number of Shares of any Series or Class that
the Corporation has authority to issue, establishing new Series or Classes and
describing the Shares thereof.
IN WITNESS WHEREOF, the undersigned incorporator of LEGG MASON GLOBAL
TRUST, INC. has executed the foregoing Articles of Incorporation and hereby
acknowledges the same to be his act and further acknowledges that, to the best
of his knowledge, information, and belief, the matters and facts set forth
therein are true in all material respects under the penalties of perjury.
On the 31st day of December, 1992.
/s/ Arthur C. Delibert
_______________________
Arthur C. Delibert
- 15 -
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON GLOBAL TRUST, INC.
FIRST: The Board of Directors ("Board") of Legg Mason Global Trust,
Inc., a Maryland Corporation ("Corporation") organized on December 31, 1992,
has, by action on October 21, 1994, classified two hundred fifty million
(250,000,000) shares of authorized, but previously unissued and unclassified,
capital stock of the Corporation as a series to be known as Legg Mason
International Equity Trust. Of these two hundred fifty million (250,000,000)
shares, the Board has designated one hundred twenty-five million (125,000,000)
shares as Legg Mason International Equity Trust, Class A shares and one hundred
twenty-five million (125,000,000) shares as Legg Mason International Equity
Trust, Class Y shares.
The par value of the shares of capital stock of the Corporation remains
one tenth of one cent ($0.001) per share. Before the classification and
designation described herein, the aggregate par value of all of the authorized
shares was one million (1,000,000) dollars and so remains.
The Class A and Class Y shares shall represent investment in the same
pool of assets and shall have the same preferences, conversion and other rights,
voting powers, restrictions, limitations as to
<PAGE>
dividends, qualifications and terms and conditions of redemption, except as
provided in the Corporation's Articles of Incorporation and as set forth below:
(1) The net asset values of Class A shares and Class Y shares
shall be calculated separately. In calculating the net asset
values,
(a) Each class shall be charged with the transfer agency fees
and Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 fees (or equivalent fees by any other
name) attributable to any other class;
(b) Each class shall be charged separately with such
other expenses as may be permitted by SEC rule or order
and as the board of directors shall deem appropriate;
(c) All other fees and expenses shall be charged to both
classes, in the proportion that the net asset value of
that class bears to the net asset value of the Legg Mason
International Equity Trust, except as the Securities
and Exchange Commission may otherwise require;
(2) Dividends and other distributions shall be paid on Class A
shares and Class Y shares at the same time. The amounts of all
dividends and other distributions shall be calculated separately for
Class A shares and Class Y shares. In calculating the amount of any
dividend or other distribution,
- 2 -
<PAGE>
(a) Each class shall be charged with the transfer agency fees
and Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 fees (or equivalent fees by any other
name) attributable to any other class;
(b) Each class shall be charged separately with such
other expenses as may be permitted by SEC rule or order
and as the board of directors shall deem appropriate;
(c) All other fees and expenses shall be charged to both
classes, in the proportion that the net asset value of
that class bears to the net asset value of the Legg Mason
International Equity Trust, except as the Securities
and Exchange Commission may otherwise require;
(3) Each class shall vote separately on matters pertaining only to that
class, as the directors shall from time to time determine. On all other
matters, all classes shall vote together, and every share, regardless
of class, shall have an equal vote with every other share.
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
- 3 -
<PAGE>
THIRD: The total number of shares of capital stock that the
Corporation has authority to issue remains unchanged.
FOURTH: The reclassification described herein was effected by the Board
of Directors of the Corporation pursuant to a power contained in Sections 6.1
and 6.2 of the Corporation's Articles of Incorporation.
IN WITNESS WHEREOF, the undersigned Vice President of Legg Mason Global
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of his knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: November 4, 1994 /s/ Edward A. Taber, III
------------------------
Edward A. Taber, III
President
Attest: /s/Kathi D. Glenn
-----------------
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 7th day of November, 1994.
/s/Melody N. McFaddin
- ---------------------
Notary Public
- 4 -
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
LEGG MASON GLOBAL TRUST, INC.
FIRST: The Board of Directors ("Board") of Legg Mason Global Trust,
Inc., a Maryland Corporation ("Corporation") organized on December 31, 1992,
has, by action on March 17, 1995, changed the name of the series of the
Corporation heretofore known as "Legg Mason International Equity Trust" to "Legg
Mason Global Equity Trust", changed the name of the class of shares heretofore
known as "Legg Mason International Equity Trust, Class A shares" to "Legg Mason
Global Equity Trust, Class A shares", and changed the name of the class of
shares heretofore known as "Legg Mason International Equity Trust, Class Y
shares" to "Legg Mason Global Equity Trust, Class Y shares".
SECOND: The renamings described herein were approved by a majority of
the entire Board of Directors of the Corporation. The actions described herein
are limited to changes expressly permitted by Section 2-605 of the Corporations
and Associations Article to be made without action by the stockholders.
THIRD: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
<PAGE>
FOURTH: This action is to be effective April 11, 1995.
IN WITNESS WHEREOF, the undersigned Vice President of Legg Mason Global
Trust, Inc. hereby executes these Articles of Amendment on behalf of the
Corporation, and hereby acknowledges these Articles of Amendment to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of her knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: April 11, 1995 /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President
Attest: /s/Kathi D. Glenn
-----------------
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 11th day of April, 1995.
/s/Melody N. McFaddin
- ---------------------
Notary Public
- 2 -
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON GLOBAL TRUST, INC.
FIRST: The Board of Directors ("Board") of Legg Mason Global Trust,
Inc., a Maryland Corporation ("Corporation") organized on December 31, 1992,
has, by action on February 7, 1996, classified two hundred fifty million
(250,000,000) shares of authorized, but previously unissued and unclassified,
capital stock of the Corporation as a series to be known as Legg Mason Emerging
Markets Trust. Of these two hundred fifty million (250,000,000) shares, the
Board has designated one hundred twenty-five million (125,000,000) shares as
Legg Mason Emerging Markets Trust, Class A shares and one hundred twenty-five
million (125,000,000) shares as Legg Mason Emerging Markets Trust, Class Y
shares.
The previous designations of shares of capital stock of the series
known as Legg Mason Global Government Trust and Legg Mason Global Equity Trust,
each into Class A and Class Y shares remain the same.
The par value of the shares of capital stock of the Corporation remains
one tenth of one cent ($0.001) per share. Before the classification and
designation described herein, the aggregate par
<PAGE>
value of all of the authorized shares was one million (1,000,000) dollars and so
remains.
The Class A and Class Y shares of Legg Mason Emerging Markets Trust
shall represent investment in the same pool of assets and shall have the same
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, except as provided in the Corporation's Articles of Incorporation
and as set forth below:
(1) The net asset values of Class A shares and Class Y shares
shall be calculated separately. In calculating the net asset values,
(a) Each class shall be charged with the transfer agency fees
and Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 fees (or equivalent fees by any other
name) attributable to any other class;
(b) Each class shall be charged separately with such
other expenses as may be permitted by SEC rule or order
and as the board of directors shall deem appropriate;
(c) All other fees and expenses shall be charged to both
classes, in the proportion that the net asset value of
that class bears to the net asset value of the Legg Mason
Emerging Markets Trust, except as the Securities and
Exchange Commission may otherwise require;
- 2 -
<PAGE>
(2) Dividends and other distributions shall be paid on Class A shares
and Class Y shares at the same time. The amounts of all dividends and
other distributions shall be calculated separately for Class A shares
and Class Y shares. In calculating the amount of any dividend or other
distribution,
(a) Each class shall be charged with the transfer agency fees
and Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 fees (or equivalent fees by any other
name) attributable to any other class;
(b) Each class shall be charged separately with such
other expenses as may be permitted by SEC rule or order
and as the board of directors shall deem appropriate;
(c) All other fees and expenses shall be charged to both
classes, in the proportion that the net asset value of
that class bears to the net asset value of the Legg Mason
Emerging Markets Trust, except as the Securities and
Exchange Commission may otherwise require;
(3) Each class shall vote separately on matters pertaining only to that
class, as the directors shall from time to time determine. On all other
matters, all classes shall vote together, and every share, regardless
of class, shall have an equal vote with every other share.
- 3 -
<PAGE>
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
THIRD: The total number of shares of capital stock that the
Corporation has authority to issue remains unchanged.
FOURTH: The reclassification described herein was effected by the
Board of Directors of the Corporation pursuant to a power contained in Sections
6.1 and 6.2 of the Corporation's Articles of Incorporation.
IN WITNESS WHEREOF, the undersigned Vice President of Legg Mason Global
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of his knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: February 15, 1996 /s/Marie K. Karpinski
---------------------
Marie K. Karpinski
Vice President
- 4 -
<PAGE>
Attest: /s/Kathi D. Bair
----------------
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 15th day of February, 1996.
/s/Melody N. McFaddin
- ---------------------
Notary Public
- 5 -
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
LEGG MASON GLOBAL TRUST, INC.
FIRST: The Board of Directors ("Board") of Legg Mason Global Trust,
Inc., a Maryland Corporation ("Corporation") organized on December 31, 1992,
has, by action on April 19, 1996, changed the name of the series of the
Corporation heretofore known as "Legg Mason Global Equity Trust" to "Legg Mason
International Equity Trust", changed the name of the class of shares heretofore
known as "Legg Mason Global Equity Trust, Class A shares" to "Legg Mason
International Equity Trust, Class A shares", and changed the name of the class
of shares heretofore known as "Legg Mason Global Equity Trust, Class Y shares"
to "Legg Mason International Equity Trust, Class Y shares".
SECOND: The renamings described herein were approved by a majority of
the entire Board of Directors of the Corporation. The actions described herein
are limited to changes expressly permitted by Section 2-605 of the Corporations
and Associations Article to be made without action by the stockholders.
THIRD: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
<PAGE>
FOURTH: This action is effective as of May 1, 1996.
IN WITNESS WHEREOF, the undersigned Vice President of Legg Mason Global
Trust, Inc. hereby executes these Articles of Amendment on behalf of the
Corporation, and hereby acknowledges these Articles of Amendment to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of her knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: June 6, 1996 /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President
Attest: /s/Kathi D. Bair
----------------
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 6th day of June, 1996.
/s/Melody N. McFaddin
- ---------------------
Notary Public
- 2 -
LEGG MASON GLOBAL TRUST, INC.
A Maryland Corporation
BY-LAWS
December 31, 1992
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S><C>
ARTICLE I NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL............................................. 1
1.01. Name................................................................................... 1
1.02. Principal Offices...................................................................... 1
1.03. Seal................................................................................... 1
ARTICLE II STOCKHOLDERS.................................................................................. 2
2.01. Annual Meetings........................................................................ 2
2.02. Special Meetings....................................................................... 2
2.03. Place of Meetings...................................................................... 3
2.04. Notice of Meetings..................................................................... 3
2.05. Voting - In General.................................................................... 4
2.06. Stockholders Entitled to Vote.......................................................... 5
2.07. Voting - Proxies....................................................................... 5
2.08. Quorum................................................................................. 6
2.09. Absence of Quorum...................................................................... 6
2.10. Stock Ledger and List of Stockholders.................................................. 7
2.11. Action Without Meeting................................................................. 9
ARTICLE III BOARD OF DIRECTORS............................................................................ 9
3.01. Number of Term of Office............................................................... 9
3.02. Qualifications of Directors............................................................ 9
3.03. Election of Directors.................................................................. 10
3.04. Removal of Directors................................................................... 10
3.05. Vacancies and Newly Created Directorships.............................................. 10
3.06. General Powers......................................................................... 11
3.07. Power to Issue and Sell Stock.......................................................... 12
3.08. Power to Declare Dividends............................................................. 12
3.09. Annual and Regular Meetings............................................................ 13
3.10. Special Meetings....................................................................... 14
3.11. Notice................................................................................. 14
3.12. Waiver of Notice....................................................................... 15
3.13. Quorum and Voting...................................................................... 15
3.14. Compensation........................................................................... 16
3.15. Action Without a Meeting............................................................... 16
3.16. Chairman of the Board.................................................................. 16
ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES...................................................... 17
4.01. How Constituted........................................................................ 17
4.02. Powers of the Executive Committee...................................................... 17
4.03. Proceedings, Quorum and Manner of Acting............................................... 18
4.04. Other Committees....................................................................... 18
</TABLE>
- i -
<PAGE>
<TABLE>
<S><C>
ARTICLE V OFFICERS...................................................................................... 19
5.01. General................................................................................ 19
5.02. Election, Term of Office and
Qualifications..................................................................... 19
5.03. Resignation............................................................................ 20
5.04. Removal................................................................................ 20
5.05. Vacancies and Newly Created Offices.................................................... 20
5.06. President.............................................................................. 21
5.07. Vice President......................................................................... 21
5.08. Treasurer and Assistant Treasurers..................................................... 22
5.09. Secretary and Assistant Secretaries.................................................... 22
5.10. Subordinate Officers................................................................... 23
5.11. Remuneration........................................................................... 24
5.12. Surety Bonds........................................................................... 24
ARTICLE VI CUSTODY OF SECURITIES......................................................................... 25
6.01. Employment of a Custodian.............................................................. 25
6.02. Action Upon Termination of Custodian
Agreement.......................................................................... 25
6.03. Provisions of Custodian Contract....................................................... 26
6.04. Other Arrangements..................................................................... 32
ARTICLES VII EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES................................................ 33
7.01. General................................................................................ 33
7.02. Checks, Notes, Drafts, Etc............................................................. 33
7.03. Voting of Securities................................................................... 34
ARTICLE VIII CAPITAL STOCK................................................................................. 34
8.01. Certificates of Stock.................................................................. 34
8.02. Transfer of Capital Stock.............................................................. 36
8.03. Transfer Agents and Registrars......................................................... 36
8.04. Transfer Regulations................................................................... 37
8.05. Fixing of Record Date.................................................................. 37
8.06. Lost, Stolen or Destroyed Certificates................................................. 38
ARTICLE IX FISCAL YEAR, ACCOUNTANT....................................................................... 38
9.01. Fiscal Year............................................................................ 38
9.02. Accountant............................................................................. 39
ARTICLE X INDEMNIFICATION AND INSURANCE................................................................. 40
10.01. Indemnification of Officers, Directors,
Employees and Agents............................................................... 40
10.02. Insurance of Officers, Directors,
Employees and Agents............................................................... 43
10.03. Non-exclusivity........................................................................ 43
ARTICLE XI AMENDMENTS.................................................................................... 44
</TABLE>
- ii -
<PAGE>
<TABLE>
<S><C>
11.01. General................................................................................ 44
11.02. By Stockholders Only................................................................... 44
11.03. Limitation on Amendment................................................................ 45
</TABLE>
- iii -
<PAGE>
ARTICLE I
---------
NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL
-------------------------------------------------
Section 1.01. Name: The name of the Corporation is Legg Mason Global
Trust, Inc.
Section 1.02. Principal Offices: The principal office of the
Corporation in the State of Maryland shall be located in the City of Baltimore.
The Corporation may establish and maintain such other offices and places of
business as the board of directors may, from time to time, determine. Except as
provided in Section 2.10, the board of directors may keep the books of the
Corporation at any office of the Corporation or at any other place within the
United States as it may from time to time determine.
Section 1.03. Seal: The corporate seal of the Corporation shall be
circular in form and shall bear the name of the Corporation, the year of the
incorporation, and the words "Corporate Seal, Maryland". The form of the seal
shall be subject to alteration by the board of directors and the seal may be
used by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. Any officer or director of the Corporation shall have
authority to affix the corporate seal of the Corporation to any document
requiring the same.
ARTICLE II
----------
STOCKHOLDERS
------------
Section 2.01. Annual Meetings: There shall be no stockholder's
meetings for the election of directors and the transaction of other business
except as required by law or as hereinafter provided.
Section 2.02. Special Meetings: Special meetings of the stockholders
may be called at any time by the chairman of the board,
<PAGE>
the president, any vice president, or a majority of the board of directors.
Special meetings of the stockholders shall be called by the secretary upon the
written request of the holders of shares entitled to vote not less than 25% of
all the shares entitled to be voted at such meeting, provided that (a) such
request shall state the purposes of such meeting and the matters proposed to be
acted on, and (b) the stockholders requesting such meeting shall have paid to
the Corporation the reasonably estimated cost of preparing and mailing the
notice thereof, which the secretary shall determine and specify to such
stockholders. No special meeting need be called upon the request of the holders
of shares entitled to vote less than a majority of all the shares entitled to be
voted at such meeting to consider any matter which is substantially the same as
a matter voted upon at any special meeting of the stockholders held during the
preceding 12 months. Notwithstanding the foregoing, a special meeting of the
stockholders for the purpose of voting upon the removal of any director or
directors shall be called by the secretary upon the written request of the
holders of shares entitled to vote not less than 10% of all the outstanding
shares.
Section 2.03. Place of Meetings: All stockholders' meetings shall be
held at the principal office of the Corporation, except that the board of
directors may fix a different place of meeting, which shall be specified in each
notice or waiver of notice of the meeting.
Section 2.04. Notice of Meetings: The secretary shall cause notice of
the place, date and hour, and, in the case of a special meeting or as otherwise
required by law, the purpose or purposes for which the meeting is called, to be
mailed, not less than 10 nor more than 90 days before the date of the meeting,
to each stockholder entitled to vote at such meeting, at his address as it
appears on the records of the Corporation at the time of such mailing. Notice of
any
- 2 -
<PAGE>
stockholders' meeting need not be given to any stockholder who shall sign a
written waiver of such notice whether before or after the time of such meeting,
which waiver shall be filed with the record of such meeting, or to any
stockholder who shall attend such meeting in person or by proxy. Notice of
adjournment of a stockholders' meeting to another time or place need not be
given, if such time and place are announced at the meeting.
Section 2.05. Voting - In General: At every stockholders' meeting each
stockholder shall be entitled to one vote for each share and a fractional vote
for each fraction of a share of stock of the Corporation validly issued and
outstanding and held by such stockholder, except that no shares held by the
Corporation shall be entitled to a vote. Except as otherwise specifically
provided in the Articles of Incorporation or these By-Laws or as required by
provisions of the Investment Company Act of 1940, as amended from time to time,
all matters shall be decided by a vote of the majority of the votes validly cast
at a meeting at which a quorum is present. The vote upon any question shall be
by ballot whenever requested by any person entitled to vote, but, unless such a
request is made, voting may be conducted in any way approved by the meeting.
At any meeting at which there is an election of Directors, the chairman
of the meeting may, and upon the request of the holders of 10% of the stock
entitled to vote at such election shall, appoint two inspectors of election who
shall first subscribe an oath or affirmation to execute faithfully the duties of
inspectors at such election with strict impartiality and according to the best
of their ability, and shall, after the election, make a certificate of the
result of the vote taken. No candidate for the office of Director shall be
appointed as an inspector.
- 3 -
<PAGE>
Section 2.06. Stockholders Entitled to Vote: If, pursuant to Section
8.05 hereof, a record date has been fixed for the determination of stockholders
entitled to notice of or to vote at any stockholders' meeting, each stockholder
of the Corporation shall be entitled to vote, in person or by proxy, each share
of stock and fraction of a share of stock of the appropriate Series or Class
standing in his name on the books of the Corporation on such record date and
outstanding at the time of the meeting. If no record date has been fixed by the
Board of Directors for the determination of stockholders entitled to notice of
or to vote at a meeting, the record date for the meeting of stockholders shall
be (a) at the close of business (i) on the day ten days before the day on which
notice of the meeting is mailed or (ii) on the day 30 days before the meeting,
whichever is the closer date to the meeting; or, (b) if notice is waived by all
stockholders, at the close of business on the tenth day next preceding the day
on which the meeting is held.
Section 2.07. Voting - Proxies: A stockholder may vote the stock he
owns of record by written proxy executed by the stockholder himself or by his
duly authorized attorney in fact. No proxy shall be voted after eleven months
from its date unless it provides for a longer period. Each proxy shall be dated,
but need not be sealed, witnessed or acknowledged. Proxies shall be delivered to
an inspector of election or, if no inspector has been appointed, then to the
secretary of the Corporation, or person acting as secretary of the meeting,
before being voted. A proxy with respect to stock held in the name of two or
more persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives from any one of them written
notice to the contrary and a copy of the instrument or order which so provides.
A proxy purporting to be executed by or on behalf of a stockholder shall be
deemed valid unless challenged at or prior to its exercise. A proxy in the form
of
- 4 -
<PAGE>
a telegram, datagram or telex shall not be valid; however, a mechanical or
electronic facsimile of an otherwise valid proxy shall be valid.
Section 2.08. Quorum: Except as otherwise provided in the Articles of
Incorporation, the presence at any stockholders' meeting, in person or by proxy,
of stockholders entitled to cast one-third of all the votes entitled to be cast
thereat shall be necessary and sufficient to constitute a quorum for the
transaction of business.
Section 2.09. Absence of Quorum: In the absence of a quorum, the
holders or proxies of a majority of the shares present at the meeting in person
or by proxy and entitled to vote thereat, or, if no stockholder entitled to vote
is present thereat in person or by proxy, any officer present thereat entitled
to preside or act as secretary of such meeting, may adjourn the meeting without
determining the date of the new meeting or, from time to time, without further
notice to a date not more than 120 days after the original record date. Any
business that might have been transacted at the meeting originally called may be
transacted at any such adjourned meeting at which a quorum is present.
Section 2.10. Stock Ledger and List of Stockholders: It shall be the
duty of the secretary or assistant secretary of the Corporation to cause an
original or duplicate stock ledger to be maintained at the office of the
Corporation's transfer agent. Such stock ledger may be in written form or any
other form capable of being converted into written form within a reasonable time
for visual inspection. Any one or more persons, each of whom has been a
stockholder of record of the Corporation for at least the six months next
preceding such request, and who own in the aggregate 5% or more of the
outstanding capital stock of the Corporation, may, in person or by agent, upon
written
- 5 -
<PAGE>
request, inspect and copy during usual business hours the corporation's stock
ledger at its principal office in Maryland; and may submit (if the Corporation
at the time of the request does not maintain a duplicate stock ledger at its
principal office in Maryland) a written request to any officer of the
Corporation or its resident agent in Maryland for a list of the stockholders of
the Corporation. Within 20 days after such a request, there shall be prepared
and filed at the Corporation's principal office in Maryland a list containing
the names and addresses of all stockholders of the Corporation and the number of
shares of each class held by each stockholder, certified as correct by an
officer of the Corporation, by its stock transfer agent, or by its registrar.
Notwithstanding the foregoing, whenever ten or more shareholders of record who
have been such for at least six months preceding such request, and who own in
the aggregate either shares having a net asset value of at least $25,000 or at
least one percent of the outstanding shares, whichever is less, shall apply to
the secretary in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to a request for a special
meeting of shareholders to vote upon the removal of one or more directors, and
including with the application a form of communication and request which they
wish to transmit, the Fund shall, within five business days after receipt of
such application, either: (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Fund; or
(2) inform the applicants as to the approximate cost of mailing to them the
proposed communication and form of request, and, upon the written request of the
applicants, accompanied by a tender of the material to be mailed and of
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all shareholders of record; provided, however, that the Fund may
avail itself of any of the rights afforded to a common law trust pursuant to
Section 16(c) of the Investment Company Act of 1940.
- 6 -
<PAGE>
Section 2.11. Action Without Meeting: Any action to be taken by
stockholders may be taken without a meeting if all stockholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of the meetings of stockholders. Such consent shall be
treated for all purposes as a vote at a meeting.
ARTICLE III
-----------
BOARD OF DIRECTORS
------------------
Section 3.01. Number and Term of Office: The board of directors shall
consist of seven directors, which number may be increased or decreased by a
resolution of a majority of the entire board of directors; provided that the
number of directors shall not be less than three nor more than twenty; and
further provided that if there is no stock outstanding the number of directors
may be less than three but not less than one, and if there is stock outstanding
and so long as there are less than three stockholders, the number of directors
may be less than three but not less than the number of stockholders. Each
director (whenever selected) shall hold office until his successor is elected
and qualified or until his earlier death, resignation or removal.
Section 3.02. Qualifications of Directors: After stock has been issued
to more than one person, at least one of the members of the board of directors
shall be a person who is not an "interested person" of the Corporation, as
defined in the Investment Company Act of 1940, as amended.
Section 3.03. Election of Directors: The initial director or
directors of the Corporation shall be that person or those persons named as such
in the Articles of Incorporation. Thereafter, except as otherwise provided in
Section 3.04 and 3.05 hereof, the directors
- 7 -
<PAGE>
shall be elected by the stockholders on a date fixed by the Board of Directors.
A plurality of all the votes validly cast at a meeting at which a quorum is
present in person or by proxy is sufficient to elect a director.
Section 3.04. Removal of Directors: At any stockholders' meeting duly
called, provided a quorum is present, any director may be removed (either with
or without cause) by the affirmative vote of a majority of all the votes
entitled to be cast for the election of directors, and at the same meeting a
duly qualified person may be elected in his stead by a plurality of the votes
validly cast.
Section 3.05. Vacancies and Newly Created Directorships: If any
vacancies shall occur in the board of directors by reason of death, resignation,
removal or otherwise, or if the authorized number of directors shall be
increased, the directors then in office shall continue to act, and such
vacancies (if not previously filled by the stockholders) may be filled by a
majority of the directors then in office, although less than a quorum, except
that a newly created directorship may be filled only by a majority vote of the
entire board of directors, provided that in either case immediately after
filling such vacancy, at least two-thirds of the directors then holding office
shall have been elected to such office by the stockholders of the Corporation.
In the event that at any time, other than the time preceding the first
stockholders' meeting, less than a majority of the directors of the Corporation
holding office at that time were so elected by the stockholders, a meeting of
the stockholders shall be held promptly and in any event within 60 days (unless
the Securities and Exchange Commission shall by rule or order extend such
period) for the purpose of electing directors to fill any existing vacancies in
the board of directors.
- 8 -
<PAGE>
Section 3.06. General Powers:
(a) The property, affairs and business of the Corporation shall be
managed by or under the direction of the board of directors, which may exercise
all the powers of the Corporation except those powers vested solely in the
stockholders of the Corporation by statute, by the Articles of Incorporation, or
by these By-Laws.
(b) All acts done by any meeting of the directors or by any person
acting as a director, so long as his successor shall not have been duly elected
or appointed, shall, notwithstanding that it be afterwards discovered that there
was some defect in the election of the directors or of such person acting as
aforesaid or that they or any of them were disqualified, be as valid as if the
directors or such other person, as the case may be, had been duly elected and
were or was qualified to be directors or a director of the Corporation.
Section 3.07. Power to Issue and Sell Stock: The board of directors may
from time to time issue and sell or cause to be issued and sold any of the
Corporation's authorized shares to such persons and for such consideration as
the board of directors shall deem advisable, subject to the provisions of
Articles Sixth and Seventh of the Articles of Incorporation.
Section 3.08. Power to Declare Dividends:
(a) The board of directors, from time to time as it may deem advisable,
may declare and pay dividends in stock, cash or other property of the
Corporation, out of any source available for dividends, to the stockholders
according to their respective rights and interests in accordance with the
provisions of the Articles of Incorporation.
- 9 -
<PAGE>
(b) The board of directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than:
(i) the Corporation's accumulated undistributed net income (determined
in accordance with good accounting practice and the rules and
regulations of the Securities and Exchange Commission then in effect)
and not including profits or losses realized upon the sale of
securities or other properties; or
(ii) the Corporation's net income so determined for the current or
preceding fiscal year.
Such statement shall adequately disclose the source or sources of such payment
and the basis of calculation, and shall be in such form as the Securities and
Exchange Commission may prescribe.
Section 3.09. Annual and Regular Meetings: The annual meeting of the
board of directors for choosing officers and transacting other proper business
shall be held at such time and place as the Board may determine. The board of
directors from time to time may provide by resolution for the holding of regular
meetings and fix their time and place, which need not be in the State of
Maryland. Except as otherwise provided under the Investment Company Act of 1940,
notice of such annual and regular meetings need not be given, provided that
notice of any change in the time or place of such meetings shall be sent
promptly, in the manner provided for notice of special meetings, to each
director not present at the meeting at which such change was made. Except as
otherwise provided under the Investment Company Act of 1940, as amended, members
of the board of directors or any committee designated thereby may participate in
a meeting of such board or committee by means of a conference telephone or
similar
- 10 -
<PAGE>
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time; and participation by such means
shall constitute presence in person at a meeting.
Section 3.10. Special Meetings: Special meetings of the board of
directors shall be held whenever called by the chairman of the board, the
president (or, in the absence or disability of the president, by any vice
president), the treasurer, or two or more directors, at the time and place
(which need not be in the State of Maryland) specified in the respective notices
or waivers of notice of such meetings.
Section 3.11. Notice: Except as otherwise provided, notice of any
special meeting shall be given by the secretary to each director, by mailing to
him, postage prepaid, addressed to him at his address as registered on the books
of the Corporation or, if not so registered, at his last known address, a
written or printed notification of such meeting at least three days before the
meeting or by delivering such notice to him at least two days before the
meeting, or by sending such notice to him at least 24 hours before the meeting,
by prepaid telegram, addressed to him at his said registered address, if any, or
if he has no such registered address, at his last known address.
Section 3.12. Waiver of Notice: No notice of any meeting need be given
to any director who attends such meeting in person or to any director who waives
notice of such meeting in writing (which waiver shall be filed with the records
of such meeting), whether before or after the time of the meeting.
Section 3.13. Quorum and Voting: At all meetings of the board of
directors the presence of one-half or more of the number of directors then in
office shall constitute a quorum for the transaction
- 11 -
<PAGE>
of business, provided that there shall be present no fewer than two directors
(unless the Corporation, at the time, has only one director). In the absence of
a quorum, a majority of the directors present may adjourn the meeting, from time
to time, until a quorum shall be present. The action of a majority of the
directors present at a meeting at which a quorum is present shall be the action
of the board of directors unless the concurrence of a greater proportion is
required for such action by law, by the Articles of Incorporation or by these
By-Laws.
Section 3.14. Compensation: Each director may receive such
remuneration for his services as shall be fixed from time to time by resolution
of the board of directors.
Section 3.15. Action Without a Meeting: Except as otherwise provided
under the Investment Company Act of 1940, as amended, any action required or
permitted to be taken at any meeting of the board of directors may be taken
without a meeting if written consents thereto are signed by all members of the
board and such written consents are filed with the records of the meetings of
the board.
Section 3.16. Chairman of the Board: The board of directors, at its
first meeting and thereafter at its annual meeting, shall elect from among the
directors a chairman of the board, who shall serve at the pleasure of the board
of directors. If the board of directors does not elect a chairman at any annual
meeting, it may do so at any subsequent regular or special meeting. The chairman
of the board shall hold office until the next annual meeting of the board of
directors and until his successor shall have been chosen and qualified. If the
office of chairman of the board shall become vacant for any reason, the board of
directors may fill such vacancy at any regular or special meeting. The chairman
of the board shall preside
- 12 -
<PAGE>
at all stockholders' meetings and at all meetings of the board of directors and
shall have such powers and perform such duties as may be assigned to him from
time to time by the board of directors. The chairman of the board shall not be
considered an officer of the Corporation by reason of holding said position.
ARTICLE IV
----------
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
----------------------------------------
Section 4.01. How Constituted: By resolution adopted by the board of
directors, the board may designate an executive committee, consisting of not
less than three nor more than five directors. The board may also designate
additional committees consisting of at least two directors. Each member of a
committee shall be a director and shall hold office during the pleasure of the
board. The chairman of the board, if any, and the president shall be members of
the executive committee.
Section 4.02. Powers of the Executive Committee: Unless otherwise
provided by resolution of the board of directors, when the board of directors is
not in session the executive committee shall have and may exercise all powers of
the board of directors in the management of the business and affairs of the
Corporation that may lawfully be exercised by the full board of directors,
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.
Section 4.03. Proceedings, Quorum and Manner of Acting: In the
absence of an appropriate resolution of the board of directors, each committee
may adopt such rules and regulations governing its
- 13 -
<PAGE>
proceedings, quorum and manner of acting as it shall deem proper and desirable,
provided that the quorum shall not be less than two directors. In the absence of
such rules, the proceedings, quorum and manner of acting of a committee shall be
governed by the rules applicable to the full board of directors. In the absence
of any member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint a member of the board of
directors to act in the place of such absent member.
Section 4.04. Other Committees: The board of directors may appoint
other committees, each consisting of one or more persons, who need not be
directors. Each such committee shall have such powers and perform such duties as
may be assigned to it from time to time by the board of directors, but shall not
exercise any power which may lawfully be exercised only by the board of
directors or a committee thereof.
ARTICLE V
---------
OFFICERS
--------
Section 5.01. General: The officers of the Corporation shall be a
president, a secretary and a treasurer, and may include one or more vice
presidents, assistant secretaries or assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.10
hereof.
Section 5.02. Election, Term of Office and Qualifications: The officers
of the Corporation (except those appointed pursuant to Section 5.10 hereof)
shall be elected by the board of directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting, and
thereafter annually at its annual meeting. If any officers are not elected at
any annual meeting, such
- 14 -
<PAGE>
officers may be elected at any subsequent regular or special meeting of the
board. Except as provided in Section 5.03, 5.04 and 5.05 hereof, each officer
chosen by the board of directors shall hold office until the next annual meeting
of the board of directors and until his successor shall have been chosen and
qualified. Any person may hold one or more offices of the Corporation except
that the president may not hold the office of vice president, and provided
further that a person who holds more than one office may not act in more than
one capacity to execute, acknowledge or verify an instrument required by law to
be executed, verified or acknowledged by more than one officer. No officer need
be a director.
Section 5.03. Resignation: Any officer may resign his office at any
time by delivering a written resignation to the board of directors, the
president, the secretary, or any assistant secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 5.04. Removal: Any officer may be removed from office whenever
in the board's judgment the best interest of the Corporation will be served
thereby, by the vote of a majority of the board of directors given at a regular
meeting or any special meeting called for such purpose. In addition, any officer
or agent appointed in accordance with the provisions of Section 5.10 hereof may
be removed, either with or without cause, by any officer upon whom such power of
removal shall have been conferred by the board of directors.
Section 5.05. Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the board of directors at any regular or
special meeting or, in the
- 15 -
<PAGE>
case of any office created pursuant to Section 5.10 hereof, by any officer upon
whom such power shall have been conferred by the board of directors.
Section 5.06. President: The president shall be the chief executive
officer of the Corporation and, in the absence of the chairman of the board,
shall preside at all stockholders' meetings and at all meetings of the board of
directors. Subject to the supervision of the board of directors, he shall have
general charge of the business, affairs and property of the Corporation and
general supervision over its officers, employees and agents. Subject to the
provisions of Section 7.01 and except as the board of directors may otherwise
order, he may sign in the name and on behalf of the Corporation all deeds,
bonds, contracts or agreements. He shall exercise such other powers and perform
such other duties as from time to time may be assigned to him by the board of
directors.
Section 5.07. Vice President: The board of directors may from time to
time designate and elect one or more vice presidents who shall have such powers
and perform such duties as from time to time may be assigned to them by the
board of directors or the president. At the request or in the absence or
disability of the president, the vice president (or, if there are two or more
vice presidents, then the senior of the vice presidents present and able to act)
may perform all the duties of the president and, when so acting, shall have all
the powers of and be subject to all the restrictions upon the president.
Section 5.08. Treasurer and Assistant Treasurers: The treasurer shall
be the principal financial and accounting officer of the Corporation. He shall
deliver all funds and securities of the Corporation which may come into his
hands to such bank or trust company as the board of directors shall employ as
Custodian. He shall
- 16 -
<PAGE>
prepare annually a full and correct statement of the affairs of the Corporation,
including a balance sheet and a financial statement of operations for the
preceding fiscal year, which shall be filed at the Corporation's principal
office within 120 days after the end of the fiscal year. The treasurer shall
furnish such other reports regarding the business and condition of the
Corporation as the board of directors may from time to time require and perform
such duties additional to the foregoing as the board of directors may from time
to time designate.
Any assistant treasurer may perform such duties of the treasurer as the
treasurer or the board of directors may assign, and, in the absence of the
treasurer, may perform all the duties of the treasurer.
Section 5.09. Secretary and Assistant Secretaries: The secretary shall
attend to the giving and serving of all notices of the Corporation and shall act
as secretary at, and record all proceedings of, the meetings of the stockholders
and directors in the books to be kept for that purpose. He shall keep in safe
custody the seal of the Corporation, and shall have charge of the records of the
Corporation, including the stock books and such other books and papers as the
board of directors may direct and such books, reports, certificates and other
documents required by law to be kept, all of which shall at all reasonable times
be open to inspection by any director. At every meeting of the stockholders, he
shall receive and take charge of and/or canvass all proxies and/or ballots, and
shall decide all questions affecting the qualification of voters, the validity
of proxies and the acceptance or rejection of votes, except that the chairman
may assign such duties to inspectors of election pursuant to Section 2.05
hereof. He shall perform such other duties as appertain to his office or as may
be required by the board of directors.
- 17 -
<PAGE>
Any assistant secretary may perform such duties of the secretary as the
secretary or the board of directors may assign, and, in the absence of the
secretary, may perform all the duties of the secretary.
Section 5.10. Subordinate Officers: The board of directors from time to
time may appoint such other officers or agents as it may deem advisable, each of
whom shall have such title, hold office for such period, have such authority and
perform such duties as the board of directors may determine. The board of
directors from time to time may delegate to one or more officers or agents the
power to appoint and remove any such subordinate officers or agents and to
prescribe their respective rights, terms of office, authorities and duties.
Section 5.11. Remuneration: The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by resolution of
the board of directors, except that the board of directors may by resolution
delegate to any person or group of persons the power to fix the salaries or
other compensation of any subordinate officers or agents appointed in accordance
with the provisions of Section 5.10 hereof.
Section 5.12. Surety Bonds: The board of directors may require any
officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or sureties as the board of
directors may determine, conditioned upon the faithful performance of his duties
to the Corporation, including responsibility for negligence and for the
accounting of any of the Corporation's property, funds or securities that may
come into his hands.
- 18 -
<PAGE>
ARTICLE VI
----------
CUSTODY OF SECURITIES
---------------------
Section 6.01. Employment of a Custodian: The Corporation shall place
and at all times maintain in the custody of a custodian (including any
sub-custodian for the custodian) all funds, securities and similar investments
owned by the Corporation. The custodian (and any sub-custodian) shall be a bank
or similar financial institution having not less than $2,000,000 aggregate
capital, surplus and undivided profits and shall be appointed from time to time
by the board of directors, which shall fix its remuneration.
Section 6.02. Action Upon Termination of Custodian Agreement: Upon
termination of a custodian agreement or inability of the custodian to continue
to serve, the board of directors shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the board of directors shall call as
promptly as possible a special meeting of the stockholders to determine whether
the Corporation shall function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding shares of stock
of the Corporation, the custodian shall deliver and pay over all property of the
Corporation held by it as specified in such vote.
Section 6.03. Provisions of Custodian Contract: The custodian employed
by the Corporation pursuant to the Articles of Incorporation shall be required
to enter into a contract with the Corporation which shall contain in substance
the following provisions:
(a) The Corporation will cause all securities and funds owned by the
Corporation to be delivered or paid to the custodian.
- 19 -
<PAGE>
(b) The custodian will receive and receipt for any monies due to the
Corporation and deposit the same in its own banking department and in such other
banking institutions, if any, as the custodian and the board of directors may
approve. The custodian shall have the sole power to draw upon such account.
(c) The custodian shall release and deliver securities owned by the
Corporation in the following cases only:
(1) Upon the sale of such securities for the account of the
Corporation and receipt of payment therefor:
(2) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case the cash or other consideration is to be delivered to the custodian;
(3) To the issuer thereof or its agent for transfer into the
name of the Corporation, the custodian or a nominee of either, or into the name
or nominee name of any agent or any sub-custodian, if applicable, or for
exchange for a different number of bonds or certificates, or other evidence
representing the same aggregate face amount or number of units; provided that,
in any such case, the new securities are to be delivered to the custodian;
(4) To the broker or its clearing agent, against a receipt,
selling the same for examination, in accordance with the "street delivery"
custom;
(5) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or
- 20 -
<PAGE>
pursuant to provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided, that in any such case the new securities and
cash, if any, are to be delivered to the custodian;
(6) In the case of warrants, rights, or similar securities,
the surrender thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts of temporary securities for
definitive securities; provided that, in any such case, the new securities and
cash, if any, are to be delivered to the custodian;
(7) For deposit in a system for the central handling of
securities;
(8) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered into by the Corporation;
(9) To the depository agent in connection with tender or
other similar offers for securities of the Corporation;
(10) For delivery in connection with any loans of securities
made by the Corporation, but only against receipt of adequate collateral as
agreed upon from time to time by the custodian and the fund on behalf of the
Corporation;
(11) For delivery as security in connection with any
borrowings by the Corporation requiring a pledge of assets, but only against
receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any
agreement among the Corporation, the custodian and a broker-dealer
- 21 -
<PAGE>
registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of the National Association of Securities Dealers, Inc., relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Corporation;
(13) For delivery in accordance with the provisions of any
agreement among the Corporation, the custodian, and a Futures Commission
Merchant registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding account deposits
in connection with transactions by the Corporation;
(14) Upon receipt of instructions from the transfer agent, for
delivery to such transfer agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time in the currently
effective prospectus and statement of additional information related to the fund
("Prospectus") in satisfaction of requests by holders of Shares for repurchase
or redemption; and
(15) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions from the Corporation, a certified
copy of an appropriate resolution of the Board of Directors or of the Executive
Committee.
(d) The custodian shall pay out monies of the Corporation only upon the
purchase of securities, options, futures contracts or options on futures
contracts for the account of the Corporation and the
- 22 -
<PAGE>
delivery in due course of such securities or evidence of title to such options,
futures contracts or options on futures contracts to the custodian, or in
connection with the conversion, exchange or surrender of securities owned by the
Corporation as set forth in (c), or for the redemption or repurchase of Shares
issued by the Corporation, or for the payment of any expense or liability
incurred by the Corporation, or for the payment of any dividends on Shares of
the Corporation, or for payment of the amount of dividends received in respect
of securities sold short, or for any other proper purpose, but only upon receipt
of, in addition to proper instructions from the Corporation, a certified copy of
an appropriate resolution of the Board of Directors or of the Executive
Committee; provided that, in every case where payment is made by the custodian
in advance of receipt of the securities purchased, the custodian shall be
absolutely liable to the Corporation for such securities to the same extent as
if the securities had been received by the custodian.
(e) The custodian shall make deliveries of securities and payments of
cash only upon written instructions signed or initialled by such officer or
officers or other agent or agents of the Corporation as may be authorized to
sign or initial such instructions by resolution of the board of directors, it
being understood that the board of directors may from time to time authorize a
different person or persons to sign or initial instructions for different
purposes.
The contract between the Corporation and the custodian may contain any
other provisions that are not inconsistent with the provisions of the Articles
of Incorporation or with these By-Laws as the board of directors may approve.
Such contract shall be terminable by either party upon written notice
to the other within such time not exceeding sixty (60) days as
- 23 -
<PAGE>
may be specified in the contract; provided, however, that upon termination of
the contract or inability of the custodian to continue to serve, the custodian
shall, upon written notice of appointment of another bank or trust company as
custodian, deliver and pay over to such successor custodian all securities and
monies held by it for account of the Corporation. In such case, the board of
directors shall promptly implement the procedures described in Section 6.02
hereof.
Such contract shall also provide that, pending appointment of a
successor custodian or vote of the shareholders specifying some other
disposition of the funds and property, the custodian shall not deliver funds and
property of the Corporation to the Corporation, but may deliver them to a bank
or trust company doing business in the United States, of its own selection
having an aggregate capital, surplus and undivided profits, as shown by its last
published report, of not less than $2,000,000. The property of the Corporation
is to be held under terms similar to those on which they were held by the
retiring custodian.
Any sub-custodian employed by the custodian pursuant to authorization
to do so granted by the Corporation pursuant to Section 6.01 hereof shall be
required to enter into a contract with the custodian containing in substance the
same provisions as those described in paragraphs (a) through (e) above, except
that any contract with a sub-custodian performing its duties outside the United
States and its territories and possessions, may omit or limit any of such
conditions, provided that any such contract shall be expressly approved by a
majority of the directors of the Corporation.
Section 6.04. Other Arrangements: The Corporation may make such other
arrangements for the custody of its assets (including deposit
- 24 -
<PAGE>
arrangements) as may be required by any applicable law, rule or regulation.
ARTICLES VII
------------
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
----------------------------------------------
Section 7.01. General: Subject to the provisions of Sections 5.07,
6.03, 7.02 and 8.03 hereof, all deeds documents, transfers, contracts,
agreements and other instruments requiring execution by the Corporation shall be
signed by the president or a vice president and by the treasurer or secretary or
an assistant treasurer or an assistant secretary, or as the board of directors
may otherwise, from time to time, authorize. Any such authorization may be
general or confined to specific instances.
Section 7.02. Checks, Notes, Drafts, Etc.: So long as the Corporation
shall employ a custodian to keep custody of the cash and securities of the
Corporation, all checks and drafts for the payment of money by the Corporation
may be signed in the name of the Corporation by the custodian. Except as
otherwise authorized by the board of directors, all requisitions or orders for
the assignment of securities standing in the name of the custodian or its
nominee, or for the execution of powers to transfer the same, shall be signed in
the name of the Corporation by the president or a vice president and by the
treasurer or an assistant treasurer. Promissory notes, checks or drafts payable
to the Corporation may be endorsed only to the order of the custodian or such
nominee and only by the treasurer or president or a vice president or by such
other person or persons as shall be authorized by the board of directors.
- 25 -
<PAGE>
Section 7.03. Voting of Securities: Unless otherwise ordered by the
board of directors, the president or any vice president shall have full power
and authority on behalf of the Corporation to attend and to act and to vote, or
in the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any company in which the Corporation may hold stock. At any such
meeting such officer shall possess and may exercise (in person or by proxy) any
and all rights, powers and privileges incident to the ownership of such stock.
The board of directors may by resolution from time to time confer like powers
upon any other person or persons.
ARTICLE VIII
------------
CAPITAL STOCK
-------------
Section 8.01. Certificates of Stock:
(a) Certificates of stock shall not be issued unless requested in
writing by a shareholder. If properly requested, certificates of each series of
shares ("Series") or class of shares ("Class") of the Corporation shall be in
the form approved by the board of directors, signed in the name of the
Corporation by the president or any vice president and by the treasurer or any
assistant treasurer or the secretary or any assistant secretary, sealed with the
seal of the Corporation and certifying the number and kind of shares owned by
him in the Corporation. Such signatures and seal may be a facsimile and may be
mechanically reproduced thereon. The certificates containing such facsimiles
shall be valid for all intents and purposes.
(b) In case any officer who shall have signed any such certificate, or
whose facsimile signature has been placed thereon, shall cease to be such an
officer (because of death, resignation or otherwise) before such certificate is
issued, such certificate may be
- 26 -
<PAGE>
issued and delivered by the Corporation with the same effect as if he were such
officer at the date of issue.
(c) The number of each certificate issued, the name of the person
owning the shares represented thereby, the number of such shares and the date of
issuance shall be entered upon the stock books of the Corporation at the time of
issuance.
(d) Every certificate exchanged, surrendered for redemption or
otherwise returned to the Corporation shall be marked "Canceled" with the date
of cancellation.
- 27 -
<PAGE>
Section 8.02. Transfer of Capital Stock:
(a) Transfers of shares of any Series or Class of the Corporation shall
be made on the books of the Corporation by the holder of record thereof (in
person or by his attorney thereunto duly authorized by a power of attorney duly
executed in writing and filed with the secretary of the Corporation) (i) if a
certificate or certificates have been issued, upon the surrender of the
certificate or certificates, properly endorsed or accompanied by proper
instruments of transfer, representing such shares, or (ii) as otherwise
prescribed by the board of directors.
(b) The Corporation shall be entitled to treat the holder of record of
any share of stock as the absolute owner thereof for all purposes, and
accordingly shall not be bound to recognize any legal, equitable or other claim
or interest in such share on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by the statutes of the State of Maryland.
Section 8.03. Transfer Agents and Registrars: The board of directors
may, from time to time, appoint or remove transfer agents or registrars of
shares of any Series or Class of the Corporation. Upon any such appointment
being made, all certificates representing shares of any such Series or Class of
the Corporation thereafter issued shall be countersigned by one of such transfer
agents or registrars or by both and shall not be valid unless so countersigned.
Section 8.04. Transfer Regulations: Except as provided in the
Articles of Incorporation, the shares of any Series of the Corporation may be
freely transferred, subject to the charging of customary transfer fees, and the
board of directors may, from time to time,
- 28 -
<PAGE>
adopt rules and regulations with reference to the method of transfer of the
shares of any Series or Class of the Corporation.
Section 8.05. Fixing of Record Date: The board of direc-tors may fix in
advance a date as a record date for the determination of the stockholders
entitled to notice of or to vote at any stockholders' meeting or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action; provided that
such record date shall be a date not more than 90 nor less than 10 days prior to
the date on which the particular action requiring such determination of
stockholders of record will be taken, except as otherwise provided by law.
Section 8.06. Lost, Stolen or Destroyed Certificates: Before issuing a
new certificate for stock of the Corporation alleged to have been lost, stolen
or destroyed, the board of directors or any officer authorized by the board may,
in its or his discretion, require the owner of the lost, stolen or destroyed
certificate (or his legal representative) to give the Corporation a bond or
other indemnity, in such form and in such amount as the board or any such
officer may direct and with such surety or sureties as may be satisfactory to
the board or any such officer, sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
- 29 -
<PAGE>
ARTICLE IX
----------
FISCAL YEAR, ACCOUNTANT
-----------------------
Section 9.01. Fiscal Year: The fiscal year of the Corporation shall,
unless otherwise ordered by the board of directors, be twelve calendar months
ending on the 31st day of December in each year.
Section 9.02. Accountant:
(a) The Corporation shall employ an independent accountant or firm of
independent accountants as its accountant to examine the accounts of the
Corporation and to sign and certify financial statements filed by the
Corporation. The accountant's certificates and reports shall be addressed both
to the board of directors and to the stockholders.
(b) A majority of the members of the board of directors who are not
"interested persons" (as such term is defined in the Investment Company Act of
1940, as amended) of the Corporation shall select the accountant at any meeting
held within 90 days before or after the beginning of the fiscal year of the
Corporation or before the annual stockholders' meeting (if any) in that year.
Such selection shall be submitted for ratification or rejection at the next
succeeding stockholders' meeting, when and if such meeting is held. If such
meeting shall reject such selection, the accountant shall be selected by
majority vote of the Corporation's outstanding voting securities, either at the
meeting at which the rejection occurred or at a subsequent meeting of
stockholders called for the purpose.
(c) Any vacancy occurring between meetings, due to the death or
resignation of the accountant, may be filled by a majority of the members of the
board of directors who are not such interested persons.
- 30 -
<PAGE>
ARTICLE X
---------
INDEMNIFICATION AND INSURANCE
-----------------------------
Section 10.01. Indemnification of Officers, Directors, Employees and
Agents: The Corporation shall indemnify each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
("Proceeding"), by reason of the fact that he or she is or was a director,
officer or employee of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee, partner, trustee or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against all reasonable expenses (including attorneys' fees) actually incurred,
and judgments, fines, penalties and amounts paid in settlement in connection
with such Proceeding to the maximum extent permitted by law, now existing or
hereafter adopted. Notwithstanding the foregoing, the following provisions shall
apply with respect to indemnification of the Corporation's directors, officers,
and investment adviser (as defined in the Investment Company Act of 1940, as
amended):
(a) Whether or not there is an adjudication of liability in such
Proceeding, the Corporation shall not indemnify any such
person for any liability arising by reason of such person's
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her
office or under any contract or agreement with the Corporation
("disabling conduct").
(b) The Corporation shall not indemnify any such person unless:
- 31 -
<PAGE>
(1) the court or other body before which the Proceeding
was brought (a) dismisses the Proceeding for
insufficiency of evidence of any disabling conduct,
or (b) reaches a final decision on the merits that
such person was not liable by reason of disabling
conduct; or
(2) absent such a decision, a reasonable determination is
made, based upon a review of the facts, by (a) the
vote of a majority of a quorum of the directors of
the Corporation who are neither interested persons of
the Corporation as defined in the Investment Company
Act of 1940, as amended, nor parties to the
Proceeding, or (b) if a majority of a quorum of
directors described above so directs, or if such
quorum is not obtainable, based upon a written
opinion by independent legal counsel, that such
person was not liable by reason of disabling conduct.
(c) Reasonable expenses (including attorney's fees) incurred in
defending a Proceeding involving any such person will be paid by the Corporation
in advance of the final disposition thereof upon an undertaking by such person
to repay such expenses unless it is ultimately determined that he or she is
entitled to indemnification, if:
(1) such person shall provide adequate security for his
or her undertaking;
(2) the Corporation shall be insured against losses
arising by reason of such advance; or
- 32 -
<PAGE>
(3) a majority of a quorum of the directors of the
Corporation who are neither "interested persons" of
the Corporation as defined in the Investment Company
Act of 1940, as amended, nor parties to the
Proceeding, or independent legal counsel in a written
opinion, shall determine, based on a review of
readily available facts, that there is reason to
believe that such person will be found to be entitled
to indemnification.
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
The Corporation may purchase and maintain insurance or other sources of
reimbursement to the extent permitted by law on behalf of any person who is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee,
partner, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him or her and
incurred by him or her in or arising out of his position.
Section 10.03. Non-exclusivity: The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article X shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under the Articles of Incorporation,
these By-Laws, any agreement, vote of stockholders or directors, or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office.
- 33 -
<PAGE>
ARTICLE XI
----------
AMENDMENTS
----------
Section 11.01. General: Except as provided in Sections 11.02 and 11.03
hereof, all By-Laws of the Corporation, whether adopted by the board of
directors or the stockholders, shall be subject to amendment, alteration or
repeal, and new By-Laws may be made, by the affirmative vote of a majority of
either:
(a) the holders of record of the outstanding shares of stock of the
Corporation entitled to vote, at any meeting, the notice or waiver of notice of
which shall have specified or summarized the proposed amendment, alteration,
repeal or new By-Law; or
(b) the directors, at any regular or special meeting the notice or
waiver of notice of which shall have specified or summarized the proposed
amendment, alteration, repeal or new By-Law.
Section 11.02. By Stockholders Only:
(a) No amendment of any section of these By-Laws shall be made except
by the stockholders of the Corporation if the By-Laws provide that such section
may not be amended, altered or repealed except by the stockholders.
(b) From and after the issuance of any shares of the capital stock of
the Corporation, no amendment of this Article XI shall be made except by the
stockholders of the Corporation.
Section 11.03. Limitation on Amendment: No amendment to Article X of
these By-Laws shall narrow or eliminate any right to expenses, indemnification
or insurance for any claim or proceeding arising out of conduct occurring prior
to said amendment.
- 34 -
Exhibit 5c
AMENDED
INVESTMENT ADVISORY AGREEMENT
LEGG MASON GLOBAL TRUST, INC.
AGREEMENT made this 1st day of May, 1997 by and between Legg Mason Fund
Adviser, Inc. ("Manager"), a Maryland corporation, and Western Asset Management
Company("Western"), a California corporation, each of which is registered as an
investment adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Global Trust, Inc. (the
"Corporation"), an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and
WHEREAS, Manager wishes to retain Western to provide it with certain
investment advisory services in connection with Manager's management of the Legg
Mason Global Government Trust ("Fund"), a series of shares of the Corporation;
and
WHEREAS, Western is willing to furnish such services on the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. Appointment. Manager hereby appoints Western Asset Management
Company as investment adviser for the Fund for the period and on the terms set
forth in this Agreement. Western accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
Western may enter into a contract ("Sub-advisory Agreement")
with an investment adviser in which Western delegates to such investment adviser
any or all of its duties specified in Paragraph 3 hereunder, porvided that such
Sub-advisory Agreement imposes on the investment adviser bound thereby all
duties and conditions to which Western in subject hereunder with respect to the
duties so delegated. Such Sub-advisory Agreement must meet all the requirements
of the 1940 Act and rules thereunder.
- 1 -
<PAGE>
2. Delivery of Documents. Manager has furnished Western with
copies properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on December 31, 1992 and all amendments thereto (such Articles
of Incorporation, as presently in effect and as they shall from time to
time be amended, are herein called the "Articles");
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Manager as the manager and Western Asset
Management Company as investment adviser and approving the Management
Agreement between Manager and the Fund dated May 1, 1995 (the
"Management Agreement") and this Agreement;
(d) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and the 1940 Act (File
No. 33-56672) as filed with the Securities and Exchange Commission most
recently, including all exhibits thereto, relating to shares of common
stock of the Fund, par value $.001 per share (herein called "Shares")
and all amendments thereto;
(e) The Fund's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are
herein called the "Prospectus"); and
(f) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
- 2 -
<PAGE>
The Manager will furnish Western from time to time with copies of all amendments
of or supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the supervision of the
Corporation's Board of Directors and the Manager, Western shall as requested by
the Manager regularly provide the Fund with investment research, advice,
management and supervision and shall furnish a continuous investment program for
the Fund's portfolio of securities consistent with the Fund's investment
objective, policies, and limitations as stated in the Fund's current Prospectus
and Statement of Additional Information. Western shall as requested by the
Manager determine from time to time what securities will be purchased, retained
or sold by the Fund, and shall implement those decisions, all subject to the
provisions of the Corporation's Articles of Incorporation and By-Laws, the 1940
Act, the applicable rules and regulations of the Securities and Exchange
Commission, and other applicable federal and state law, as well as the
investment objective, policies, and limitations of the Fund. Western will as
requested by the Manager place orders pursuant to its investment determinations
for the Fund either directly with the issuer or with any broker or dealer. In
placing orders with brokers and dealers, Western will attempt to obtain the best
net price and the most favorable execution of its orders; however, Western may,
in its discretion, purchase and sell portfolio securities from and to brokers
and dealers who provide the Fund with research, analysis, advice and similar
services, and Western may pay to these brokers, in return for research and
analysis, a higher commission than may be charged by other brokers. In no
instance will portfolio securities be purchased from or sold to Western or any
affiliated person thereof except in accordance with the rules, regulations or
orders promulgated by the Securities and Exchange Commission pursuant to the
1940 Act. Western shall also perform such other functions of management and
supervision as may be requested by the Manager and agreed to by Western.
(b) Western will as requested by the Manager oversee the maintenance of
all books and records with respect to the securities transactions of the Fund in
accordance with all applicable federal and state laws and regulations, and will
furnish the Board of Directors of the Corporation with such
- 3 -
<PAGE>
periodic and special reports as the Board or the Manager reasonably may request.
(c) The Corporation hereby authorizes any entity or person associated
with Western which is a member of a national securities exchange to effect any
transaction on the exchange for the account of the Corporation which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder, and the Corporation hereby consents to the retention by
such person associated with Western of compensation for such transactions,
whether in accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise.
4. Services Not Exclusive. Western's services hereunder are not deemed
to be exclusive, and Western shall be free to render similar services to others.
It is understood that persons employed by Western to assist in the performance
of its duties hereunder might not devote their full time to such service.
Nothing herein contained shall be deemed to limit or restrict the right of
Western or any affiliate of Western to engage in and devote time and attention
to other businesses or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Western hereby agrees that all books and records which it
maintains for the Fund are property of the Fund and further agrees to surrender
promptly to the Fund or its agents any of such records upon the Fund's request.
Western further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act, any such records required to be maintained by Rule 31a-1
under the 1940 Act.
6. Expenses. During the term of this Agreement, Western will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for the Fund.
7. Compensation. For the services which Western will render to
Manager and the Fund under this Agreement, Manager will pay Western a fee,
computed daily and paid monthly, at an annual rate equal to 53-1/3% of the fee
received by the Manager from the Fund, net of any waivers or reimbursements by
the Manager of its
- 4 -
<PAGE>
fee. Fees due to Western hereunder shall be paid promptly to Western by the
Manager following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
8. Limitation of Liability. Western will not be liable for any error of
judgment or mistake of law or for any loss suffered by Manager or by the Fund in
connection with the performance of this 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 this Agreement.
9. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and the terms "assignment," "interested
person," and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
10. Duration and Termination. This Agreement will become effective May
1, 1997, provided that it shall have been approved by the Corporation's Board of
Directors and by the shareholders of the Fund in accordance with the
requirements of the 1940 Act and, unless sooner terminated as provided for
herein, shall continue in effect until May 1, 1999. Thereafter, if not
terminated, this Agreement shall continue in effect for successive annual
periods, provided that such continuance is specifically approved at least
annually (i) by the Corporation's Board of Directors or (ii) by a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not interested persons (as
defined in the 1940 Act) of the Corporation or of any party to this Agreement,
by vote cast in person at a meeting
- 5 -
<PAGE>
called for the purpose of voting on such approval. This Agreement is terminable
without penalty, by vote of the Corporation's Board of Directors, by vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, by the Manager or by Western, on not less than 60 days' notice to the
Fund and/or the other party(ies) and will be terminated immediately upon any
termination of the Management Agreement with respect to the Fund or upon the
mutual written consent of Western, the Manager, and the Fund. Termination of
this Agreement with respect to the Fund shall in no way affect continued
performance with regard to any other portfolio of the Corporation. This
Agreement will automatically and immediately terminate in the event of its
assignment.
11. Further Actions. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
12. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
- 6 -
<PAGE>
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By:/s/ Kathi D. Bair By: /s/ William H. Miller
[SEAL] WESTERN ASSET MANAGEMENT COMPANY
Attest:
By:/s/ Donna Barnes By: /s/ Ilene S. Harker
- 7 -
Exhibit 5(c)i
FORM OF
INVESTMENT SUBADVISORY AGREEMENT
LEGG MASON GLOBAL TRUST, INC.
AGREEMENT made this 1st day of May, 1997 by and between Western Asset
Management Company ("Adviser"), a California corporation, and Western Asset
Global Management, Ltd. ("Western Asset Global"), a corporation organized under
the laws of the United Kingdom, each of which is registered as an investment
adviser under the Investment Advisers Act of 1940.
WHEREAS, the Adviser is investment adviser to Legg Mason Global
Government Trust ("Fund"), a portfolio represented by a separate series of
shares of Legg Mason Global Trust, Inc. (the "Corporation"), an open-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), and
WHEREAS, the Adviser wishes to retain Western Asset Global to provide
it with certain investment subadvisory services in connection with the Adviser's
provision of investment advisory services to the Fund; and
WHEREAS, Western Asset Global is willing to furnish such services on
the terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. Appointment. The Adviser hereby appoints Western Asset Global
Management, Lts. as investment subadviser for the Fund for the period and on the
terms set forth in this Agreement. Western Asset Global accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. The Adviser has furnished Western Asset
Global with copies properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on December 31, 1992 and all amendments thereto (such Articles
of Incorporation, as presently in effect and as they shall from time to
time be amended, are herein called the "Articles");
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Legg Mason Fund Adviser, Inc.
("Manager") as the manager, the Adviser as investment adviser and
Western Asset Global Management, Ltd. as investment subadviser,
respectively, and approving the Management Agreement between the
Manager and the Fund dated May 1, 1995 (the "Management Agreement"),
the Amended Investment
<PAGE>
Advisory Agreement between the Manager and the Adviser, dated May 1,
1997 ("Advisory Agreement"), and this Agreement;
(d) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and the 1940 Act (File
No. 33- 56672) as filed with the Securities and Exchange Commission
most recently, including all exhibits thereto, relating to shares of
common stock of the Fund, par value $.001 per share (herein called
"Shares") and all amendments thereto;
(e) The Fund's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are
herein called the "Prospectus"); and
(f) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
The Adviser will furnish Western Asset Global from time to time with copies of
all amendments of or supplements to the foregoing.
3. Investment Subadvisory Services. (a) Subject to the supervision of
the Corporation's Board of Directors, the Manager and the Adviser, Western Asset
Global shall as requested by the Adviser regularly provide the Fund with
investment research, advice, management and supervision and shall furnish a
continuous investment program for the Fund's portfolio of securities consistent
with the Fund's investment objective, policies, and limitations as stated in the
Fund's current Prospectus and Statement of Additional Information. Western Asset
Global shall as requested by the Adviser determine from time to time what
securities will be purchased, retained or sold by the Fund, and shall implement
those decisions, all subject to the provisions of the Corporation's Articles of
Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of
the Securities and Exchange Commission, and other applicable federal and state
law, as well as the investment objective, policies, and limitations of the Fund.
Western Asset Global will as requested by the Adviser place orders pursuant to
investment determinations for the Fund either directly with the issuer or with
any broker or dealer. In placing orders with brokers and dealers, Western Asset
Global will attempt to obtain the best net price and the most favorable
execution of its orders; however, Western Asset Global may, in its discretion,
purchase and sell portfolio securities from and to brokers and dealers who
provide the Fund with research, analysis, advice and similar services, and
Western Asset Global may pay to these brokers, in return for research and
analysis, a higher commission or spread than may be charged by other brokers. In
no instance will portfolio securities be purchased from or sold to Western Asset
Global or any affiliated person thereof except in accordance with the rules,
regulations or orders promulgated by the Securities and Exchange Commission
pursuant to the 1940 Act. Western Asset Global shall also perform such other
functions of
- 2 -
<PAGE>
management and supervision as may be requested by the Adviser or Manager and
agreed to by Western Asset Global.
(b) Western Asset Global will as requested by the Adviser or Manager
oversee the maintenance of all books and records with respect to the securities
transactions of the Fund in accordance with all applicable federal and state
laws and regulations, and will furnish the Board of Directors of the Corporation
with such periodic and special reports as the Board or the Adviser or Manager
reasonably may request.
(c) The Corporation hereby authorizes any entity or person associated
with Western Asset Global which is a member of a national securities exchange to
effect any transaction on the exchange for the account of the Corporation which
is permitted by Section 11(a) of the Securities Exchange Act of 1934, and the
Corporation hereby consents to the retention by such person associated with
Western Asset Global of compensation for such transactions, whether in
accordance with Rule 11a2-2(T)(a)(2)(iv) or otherwise.
4. Services Not Exclusive. Western Asset Global's services hereunder
are not deemed to be exclusive, and Western Asset Global shall be free to render
similar services to others. It is understood that persons employed by Western
Asset Global to assist in the performance of its duties hereunder might not
devote their full time to such service. Nothing herein contained shall be deemed
to limit or restrict the right of Western Asset Global or any affiliate of
Western Asset Global to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Western Asset Global hereby agrees that all books and
records which it maintains for the Fund are property of the Fund and further
agrees to surrender promptly to the Fund or its agents any of such records upon
the Fund's request. Western Asset Global further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act, any such records required
to be maintained by Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, Western Asset Global
will pay all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Fund.
7. Compensation. For the services which Western Asset Global will
render to the Adviser and the Fund under this Agreement, the Adviser will pay
Western Asset Global a fee, computed daily and paid monthly, at an annual rate
equal to 0.20% of the Fund's average daily net assets. Fees due to Western Asset
Global hereunder shall be paid promptly to Western Asset Global by Western Asset
following its receipt of fees from the Fund. If this Agreement is terminated as
of any date not the last day of a calendar month, a final fee shall be paid
promptly after the date of termination and shall be based on the percentage of
days of the month during which the contract was still in effect.
- 3 -
<PAGE>
8. Limitation of Liability. Western Asset Global will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Adviser
or by the Fund in connection with the performance of this 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 this Agreement.
9. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and the terms "assignment," "interested
person," and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
10. Duration and Termination. This Agreement will become effective May
1, 1997, provided that it shall have been approved by the Corporation's Board of
Directors and by the shareholders of the Fund in accordance with the
requirements of the 1940 Act and, unless sooner terminated as provided for
herein, shall continue in effect until May 1, 1999. Thereafter, if not
terminated, this Agreement shall continue in effect for successive annual
periods, provided that such continuance is specifically approved at least
annually (i) by the Corporation's Board of Directors or (ii) by a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not interested persons (as
defined in the 1940 Act) of the Corporation or of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval. This Agreement is terminable without penalty, by vote of the
Corporation's Board of Directors, by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, by the Adviser or by
Western Asset Global, on not less than 60 days' notice to the Fund and/or the
other party(ies) and will be terminated immediately upon any termination of the
Management Agreement with respect to the Fund, the [Amended] Investment Advisory
Agreement between the Manager and the Adviser, or upon the mutual written
consent of Western Asset Global, the Adviser, and the Fund. Termination of this
Agreement with respect to the Fund shall in no way affect continued performance
with regard to any other portfolio of the Corporation. This Agreement will
automatically and immediately terminate in the event of its assignment.
11. Further Actions. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
12. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge
- 4 -
<PAGE>
or termination is sought, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors.
14. Governing Law. This Agreement shall be construed in accordance
with the 1940 Act and the laws of the State of California. To the extent that
the applicable laws of the State of California conflict with the applicable
provisions of the 1940 Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
[SEAL] WESTERN ASSET MANAGEMENT COMPANY
Attest:
By: By:
___________________________ __________________________
[SEAL] WESTERN ASSET GLOBAL MANAGEMENT, LTD.
Attest:
By: By:
___________________________ __________________________
- 5 -
Exhibit 6a
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 5th day of April, 1993, by and
between Legg Mason Global Trust, Inc., a Maryland corporation ("Corporation"),
and Legg Mason Wood Walker, Incorporated, a Maryland corporation (the
"Distributor").
WHEREAS, the Corporation has filed a registration statement with the
Securities and Exchange Commission for the purpose of registering as a series
type open-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act") for the purpose of registering the shares of common
stock of the Corporation for sale to the public under the Securities Act of 1933
(the "1933 Act") and will register the shares in accordance with the provisions
of various state securities laws; and
WHEREAS, the Corporation intends to offer for public sale distinct
series of shares of common stock, each corresponding to a distinct portfolio
("Series"); and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the shares of
common stock of each Series as now exists and as hereafter may be established
("Shares") and to furnish certain other services to the Corporation as specified
in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with paragraph (b)(2) of Rule 12b-1 under, the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and
to furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of each Series. The
Corporation authorizes the Distributor, as exclusive agent for the Corporation,
upon the commencement of
<PAGE>
operations of any Series and subject to applicable federal and state law and the
Articles of Incorporation and By-Laws of the Corporation: (a) to promote the
Series; (b) to solicit orders for the purchase of the Shares of the Series
subject to such terms and conditions as the Corporation may specify; and (c) to
accept orders for the purchase of the Shares of the Series on behalf of the
Corporation. The Distributor shall comply with all applicable federal and state
laws and offer the Shares of each Series on an agency or "best efforts" basis
under which the Corporation shall issue only such Shares as are actually sold.
The Distributor shall have the right to use any list of shareholders of the
Corporation or any Series or any other list of investors which it obtains in
connection with its provision of services under this Agreement; provided,
however, that the Distributor shall not sell or knowingly provide such list or
lists to any unaffiliated person without the consent of the Corporation's Board
of Directors.
2. The public offering price of the Shares of each Series shall be the
net asset value per share (as determined by the Corporation) of the outstanding
Shares of the Series plus any applicable sales charge as described in the
Registration Statement of the Corporation. The Corporation shall furnish the
Distributor with a statement of each computation of public offering price and of
the details entering into such computation.
3. As compensation for providing services under this contract, the
Distributor shall retain the sales charge, if any, on purchases of Shares as set
forth in the Registration Statement. The Distributor is authorized to collect
the gross proceeds derived from the sale of the Shares, remit the net asset
value thereof to the Corporation upon receipt of the proceeds and retain the
sales charge, if any. The Distributor may reallow any or all of such sales
charges to such dealers as it may from time to time determine. The Distributor
shall receive from each Series a distribution fee at the rate and under the
terms and conditions of the Plan of Distribution ("Plan") adopted by the
Corporation with respect to such Series, as such Plan is in effect from time to
time, and subject to any further limitations on such fee as the Corporation's
Board of Directors may impose.
4. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently
- 2 -
<PAGE>
filed by the Corporation with the Securities and Exchange Commission and
effective under the 1940 Act and 1933 Act, as such Registration Statement is
amended by any amendments thereto at the time in effect, and the terms
"Prospectus" and "Statement of Additional Information" shall mean, respectively,
the form of prospectus and statement of additional information with respect to
each Series filed by the Corporation as part of the Registration Statement.
5. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
shall give only such information and make only such statements or
representations as are contained in the Prospectus, Statement of Additional
Information, or in information furnished in writing to the Distributor by the
Corporation, and the Corporation shall not be responsible in any way for any
other information, statements or representations given or made by the
Distributor or its representatives or agents. Except as specifically provided in
this Agreement, the Corporation shall bear none of the expenses of the
Distributor in connection with its offer and sale of the Shares.
6. The Corporation agrees at its own expense to register the Shares
with the Securities and Exchange Commission, state and other regulatory bodies,
and to prepare and file from time to time such Prospectuses, Statements of
Additional Information, amendments, reports and other documents as may be
necessary to maintain the Registration Statement. Each Series shall bear all
expenses related to preparing and typesetting such Prospectuses, Statements of
Additional Information, and other materials required by law and such other
expenses, including printing and mailing expenses, related to such Series'
communications with persons who are shareholders of that Series.
7. The Corporation 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
- 3 -
<PAGE>
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 this 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 this
Agreement, and further provided that the Corporation shall not indemnify the
Distributor for conduct set forth in paragraph 8.
8. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation 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
Corporation, 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
information furnished in writing by the Distributor to the Corporation for use
in the Registration Statement or arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading. As used in this paragraph, the term "employee" shall not include
a corporate entity under contract to provide services to the Corporation or any
Series, or any employee of such a corporate entity, unless such person is
otherwise an employee of the Corporation.
- 4 -
<PAGE>
9. The Corporation reserves the right at any time to withdraw all
offerings of the Shares of any or all Series by written notice to the
Distributor at its principal office.
10. The Corporation shall not issue certificates representing Shares
unless requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued in such names and denominations as the Distributor shall from time
to time direct, provided that no certificates shall be issued for fractional
Shares.
11. The Distributor may at its sole discretion repurchase Shares
offered for sale by the shareholders. Repurchase of Shares by the Distributor
shall be at the net asset value next determined after a repurchase order has
been received. The Distributor will receive no commission or other remuneration
for repurchasing Shares. At the end of each business day, the Distributor shall
notify by telex or in writing, the Corporation and State Street Bank and Trust
Company, the Corporation's transfer agent, of the orders for repurchase of
Shares received by the Distributor since the last such report, the amount to be
paid for such Shares, and the identity of the shareholders offering Shares for
repurchase. Upon such notice, the Corporation shall pay the Distributor such
amounts as are required by the Distributor for the repurchase of such Shares in
cash or in the form of a credit against moneys due the Corporation from the
Distributor as proceeds from the sale of Shares. The Corporation reserves the
right to suspend such repurchase right upon written notice to the Distributor.
The Distributor further agrees to act as agent for the Corporation to receive
and transmit promptly to the Corporation's transfer agent shareholder requests
for redemption of Shares.
12. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the sale and redemption of the Shares.
13. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
- 5 -
<PAGE>
14. The Distributor shall prepare reports for the Corporation's Board
of Directors on a quarterly basis showing such information concerning
expenditures related to this Agreement as from time to time shall be reasonably
requested by the Board of Directors.
15. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
16. This Agreement will become effective with respect to each Series on
the date first written above, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of that Series in
accordance with the requirements of the 1940 Act and, unless sooner terminated
as provided herein, will continue in effect for two years from the above written
date. Thereafter, if not terminated, this Agreement shall continue in effect
with respect to each Series for successive annual periods ending on the same
date of each year, provided that such continuance is specifically approved at
least annually (i) by the Corporation's Board of Directors or (ii) by a vote of
a majority of the outstanding voting securities of the Series (as defined in the
1940 Act), provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not interested persons (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval.
17. This Agreement is terminable with respect to any Series or in its
entirety without penalty by the Corporation's Board of Directors, by vote of a
majority of the outstanding voting securities of each affected Series (as
defined in the 1940 Act), or by the Distributor, on not less than 60 days'
notice to the other party and will be terminated upon the mutual written consent
of the Distributor and the Corporation. This Agreement will also automatically
and immediately terminate in the event of its assignment.
- 6 -
<PAGE>
18. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Corporation hereby agrees
that it will eliminate from its corporate name any reference to the name of
"Legg Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part only so long as this Agreement is effective or until
such notice is given.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON GLOBAL TRUST, INC.
By: /s/ Blanche P. Roche By: /s/ Edward A. Taber, III
_________________________ __________________________
Attest: LEGG MASON WOOD WALKER,
INCORPORATED
By: /s/ Blanche P. Roche By: /s/Marie K. Karpinski
_________________________ __________________________
- 7 -
Exhibit 6b
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 11th day of February, 1995, by
and between Legg Mason Global Trust, Inc., a Maryland corporation
("Corporation") on behalf of the Legg Mason International Equity Trust ("Fund"),
and Legg Mason Wood Walker, Incorporated, a Maryland corporation (the
"Distributor").
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), and has registered shares of common stock of
the Fund for sale to the public under the Securities Act of 1933 (the "1933
Act") and various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the shares of
common stock of the Fund ("Shares") and to furnish certain other services to the
Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under, the
1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and
to furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Fund. The
Distributor, as exclusive agent for the Corporation, upon the commencement of
operations of the Fund and subject to applicable federal and state law and the
Articles of Incorporation and By-Laws of the Corporation, shall: (i) promote the
Fund; (ii) solicit orders for the purchase of the Shares subject to such terms
and conditions as the Corporation may specify; and (iii) accept orders for the
purchase of the Shares on behalf of the Corporation (collectively, "Distribution
<PAGE>
Services"). The Distributor shall comply with all applicable federal and state
laws and offer the Shares of the Fund on an agency or "best efforts" basis under
which the Corporation shall issue only such Shares of the Fund as are actually
sold. The Distributor shall have the right to use any list of shareholders of
the Corporation or the Fund or any other list of investors which it obtains in
connection with its provision of services under this Agreement; provided,
however, that the Distributor shall not sell or knowingly provide such list or
lists to any unaffiliated person without the consent of the Corporation's Board
of Directors.
(b) The Distributor shall provide ongoing shareholder liaison services,
including responding to shareholder inquiries, providing shareholders with
information on their investments, and any other services now or hereafter deemed
to be appropriate subjects for the payments of "service fees" under Article III,
Section 26 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (collectively, "Shareholder Services").
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services, the form thereof to be as mutually agreed upon and
approved by the Corporation and the Distributor. In making arrangements with
such dealers, the Distributor shall act only as principal and not as agent for
the Corporation. No dealer is authorized to act as agent for the Corporation in
connection with the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of the Fund shall be the net
asset value per share (as determined by the Corporation) of the outstanding
Shares of the Fund plus any applicable sales charge as described in the
Registration Statement of the Corporation. The Corporation shall furnish the
Distributor with a statement of each computation of public offering price and of
the details entering into such computation.
4. As compensation for providing Distribution Services under this
agreement, the Distributor shall retain the sales charge, if any, on purchases
of Shares as set forth in the Registration Statement. The Distributor is
authorized to collect
- 2 -
<PAGE>
the gross proceeds derived from the sale of the Shares, remit the net asset
value thereof to the Corporation upon receipt of the proceeds and retain the
sales charge, if any. The Distributor shall receive from the Fund a distribution
fee and a service fee at the rates and under the terms and conditions of the
Plan of Distribution ("Plan") adopted by the Corporation with respect to the
Fund, as such Plan is in effect from time to time, and subject to any further
limitations on such fee as the Corporation's Board of Directors may impose. The
Distributor may reallow any or all of the sales charge, distribution fee and
service fee that it has received under this Agreement to such dealers as it may
from time to time determine; provided, however, that the Distributor may not
reallow to any dealer for Shareholder Services an amount in excess of .25% of
the average annual net asset value of the Shares with respect to which said
dealer provides Shareholder Services.
5. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Corporation with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to the Fund filed by the Corporation as part
of the Registration Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any Dealer shall give only such information and make only such statements or
representations as are contained in the Prospectus, Statement of Additional
Information, or in information furnished in writing to the Distributor by the
Corporation, and the Corporation shall not be responsible in any way for any
other information, statements or representations given or made by the
Distributor, any dealer, or their representatives or agents. Except as
specifically
- 3 -
<PAGE>
provided in this Agreement, the Corporation shall bear none of the expenses of
the Distributor in connection with its offer and sale of the Shares.
7. The Corporation agrees at its own expense to register the Shares
with the Securities and Exchange Commission, state and other regulatory bodies,
and to prepare and file from time to time such Prospectuses, Statements of
Additional Information, amendments, reports and other documents as may be
necessary to maintain the Registration Statement. The Fund shall bear all
expenses related to preparing and typesetting such Prospectuses, Statements of
Additional Information, and other materials required by law and such other
expenses, including printing and mailing expenses, related to such Fund's
communications with persons who are shareholders of the Fund.
8. The Corporation 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 this 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 this Agreement, and
further provided that the Corporation shall not indemnify the Distributor for
conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation within the meaning of Section
- 4 -
<PAGE>
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 Corporation, its officers or directors, or any
such controlling person may incur, under the 1933 Act or under common law or
otherwise, on account of any wrongful act of the Distributor or any of its
employees or arising out of or based upon any alleged untrue statement of a
material fact contained in information furnished in writing by the Distributor
to the Corporation for use in the Registration Statement or arising out of or
based upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or necessary to
make such information not misleading. As used in this paragraph, the term
"employee" shall not include a corporate entity under contract to provide
services to the Corporation or any Series, or any employee of such a corporate
entity, unless such person is otherwise an employee of the Corporation.
10. The Corporation reserves the right at any time to withdraw all
offerings of the Shares of the Fund by written notice to the Distributor at its
principal office.
11. The Corporation shall not issue certificates representing Shares
unless requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued in such names and denominations as the Distributor shall from time
to time direct, provided that no certificates shall be issued for fractional
Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by telex or in writing, the
Corporation and State Street Bank and Trust Company, the Corporation's transfer
agent, of the orders for repurchase of Shares received by the Distributor since
the last such report, the amount to be paid for such Shares, and the
- 5 -
<PAGE>
identity of the shareholders offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by the
Distributor for the repurchase of such Shares in cash or in the form of a credit
against moneys due the Corporation from the Distributor as proceeds from the
sale of Shares. The Corporation reserves the right to suspend such repurchase
right upon written notice to the Distributor. The Distributor further agrees to
act as agent for the Corporation to receive and transmit promptly to the
Corporation's transfer agent shareholder and dealer requests for redemption of
Shares.
13. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the sale and redemption of the Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's Board
of Directors on a quarterly basis showing such information concerning
expenditures related to this Agreement as from time to time shall be reasonably
requested by the Board of Directors.
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
17. This Agreement will become effective with respect to the Fund on
the date first written above and, unless sooner terminated as provided herein,
will continue in effect for one year from the above written date. Thereafter, if
not terminated, this Agreement shall continue in effect with respect to the Fund
for successive annual periods ending on the same date of each year, provided
that such continuance is specifically approved at least annually (i) by the
Corporation's Board of Directors or (ii) by a vote of a majority of the
outstanding voting securities
- 6 -
<PAGE>
of the Fund (as defined in the 1940 Act), provided that in either event the
continuance is also approved by a majority of the Corporation's Directors who
are not interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval.
18. This Agreement is terminable with respect to the Fund or in its
entirety without penalty by the Corporation's Board of Directors, by vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act), or by the Distributor, on not less than 60 days' notice to the other
party and will be terminated upon the mutual written consent of the Distributor
and the Corporation. This Agreement will also automatically and immediately
terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived, discharge or
terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
20. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Corporation hereby agrees
that it will eliminate from its corporate name any reference to the name of
"Legg Mason." The Corporation shall have the non-exclusive use of the name
"Legg Mason" in whole or in part only so long as this Agreement is effective or
until such notice is given.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON GLOBAL TRUST, INC.
By: /s/ Kathi D. Glenn By: /s/ Marie K. Karpinski
______________________ ________________________
Attest: LEGG MASON WOOD WALKER,
INCORPORATED
By: /s/ Kathi D. Glenn By: /s/ John F. Curley
______________________ ________________________
- 7 -
Exhibit 8
CUSTODIAN CONTRACT
Between
LEGG MASON GLOBAL TRUST, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held By
It.......................................................................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States...................................................2
2.1 Holding Securities..............................................................................2
2.2 Delivery of Securities..........................................................................2
2.3 Registration of Securities......................................................................4
2.4 Bank Accounts...................................................................................4
2.5 Availability of Federal Funds...................................................................5
2.6 Collection of Income............................................................................5
2.7 Payment of Fund Monies..........................................................................5
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased.................................................................6
2.9 Appointment of Agents...........................................................................7
2.10 Deposit of Fund Assets in Securities System.....................................................7
2.10A Fund Assets Held in the Custodian's Direct
Paper System....................................................................................8
2.11 Segregated Account..............................................................................9
2.12 Ownership Certificates for Tax Purposes.........................................................9
2.13 Proxies .......................................................................................9
2.14 Communications Relating to Portfolio Securitiesy...............................................10
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States..............................................................10
3.1 Appointment of Foreign Sub-Custodians..........................................................10
3.2 Assets to be Held..............................................................................10
3.3 Foreign Securities Depositories................................................................10
3.4 Segregation of Securities......................................................................11
3.5 Agreements with Foreign Banking Institutions...................................................11
3.6 Access of Independent Accountants of the Fund..................................................11
3.7 Reports by Custodian...........................................................................11
3.8 Transactions in Foreign Custody Account........................................................11
3.9 Liability of Foreign Sub-Custodians............................................................12
3.10 Liability of Custodian.........................................................................12
3.11 Reimbursement for Advances.....................................................................12
3.12 Monitoring Responsibilities....................................................................13
3.13 Branches of U.S. Banks.........................................................................13
3.14 Tax Law........................................................................................13
4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund...................................................................................14
5. Proper Instructions.....................................................................................14
6. Actions Permitted Without Express Authority.............................................................14
7. Evidence of Authority...................................................................................15
8. Duties of Custodian With Respect to the Books
of Account and Calculation of Net Asset Value
and Net Income..........................................................................................15
<PAGE>
9. Records.................................................................................................15
10. Opinion of Fund's Independent Accountants...............................................................16
11. Reports to Fund by Independent Public Accountants.......................................................16
12. Compensation of Custodian...............................................................................16
13. Responsibility of Custodian.............................................................................16
14. Effective Period, Termination and Amendment.............................................................17
15. Successor Custodian.....................................................................................18
16. Interpretive and Additional Provisions..................................................................19
17. Additional Funds........................................................................................19
18. Massachusetts Law to Apply..............................................................................19
19. Prior Contracts.........................................................................................19
20. Miscellaneous...........................................................................................19
21. Shareholder Communications..............................................................................20
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
This Contract between Legg Mason Global Trust, Inc. , a corporation
organized and existing under the laws of Maryland, having its principal place of
business at 111 South Calvert Street, Baltimore, Maryland 21202 hereinafter
called the "Fund", and State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in one series, the
Legg Mason Global Government Trust (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 17, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities")
<PAGE>
and securities it desires to be held outside the United States ("foreign
securities") pursuant to the provisions of the Articles of Incorporation.
The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian all
securities and cash of the Portfolios, and all payments of income, payments of
principal or capital distributions received by it with respect to all
securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock of
the Fund representing interests in the Portfolios, ("Shares") as may be issued
or sold from time to time. The Custodian shall not be responsible for any
property of a Portfolio held or received by the Portfolio and not delivered to
the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Directors of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
-2-
<PAGE>
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department of the
Treasury, collectively referred to herein as "Securities System" and
(b) commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund on behalf of the
applicable Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
-3-
<PAGE>
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.9 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
-4-
<PAGE>
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for
-5-
<PAGE>
definitive securities; provided that, in any such case, the
new securities and cash, if any, are to be delivered to the
Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Fund on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a
-6-
<PAGE>
broker-dealer registered under the Securities Exchange Act of
1934 (the "Exchange Act") and a member of The National
Association of Securities Dealers, Inc. ("NASD"), relating
to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described
-7-
<PAGE>
from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to
the Portfolio ("Prospectus"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund on behalf
of the applicable Portfolio, a certified copy of a resolution
of the Board of Directors or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to
-8-
<PAGE>
be used in common with other registered investment companies having
the same investment adviser as the Portfolio, or in the name or
nominee name of any agent appointed pursuant to Section 2.9 or in
the name or nominee name of any sub-custodian appointed pursuant
to Article 1. All securities accepted by the Custodian on behalf of
the Portfolio under the terms of this Contract shall be in "street
name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian
shall utilize its best efforts only to timely collect income due the
Fund on such securities and to notify the Fund on a best efforts
basis only of relevant corporate actions including, without limitation,
pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio
of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Portfolio, other than cash maintained by
the Portfolio in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Cash held
hereunder shall be deemed to be a special deposit. Funds held by the
Custodian for a Portfolio may be
-9-
<PAGE>
deposited by it to its credit as Custodian in the Banking Department
of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however,
that every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each such
bank or trust company and the funds to be deposited with each such
bank or trust company shall on behalf of each applicable Portfolio
be approved by vote of a majority of the Board of Directors of the
Fund. Such funds shall be deposited by the Custodian in its capacity
as Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
such Portfolio which are deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which
each Portfolio shall be entitled either by law or
-10-
<PAGE>
pursuant to custom in the securities business, and shall collect on a
timely basis all income and other payments with respect to bearer
domestic securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and shall
credit such income, as collected, to such Portfolio's custodian
account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other
income items requiring presentation as and when they become due and
shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely delivery to
the Custodian of the income to which the Portfolio is properly
entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the
-11-
<PAGE>
Portfolio but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian
and has been designated by the Custodian as its agent for
this purpose) registered in the name of the Portfolio or in
the name of a nominee of the Custodian referred to in Section
2.3 hereof or in proper form for transfer; (b) in the case
of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth
in Section 2.10A; (d) in the case of repurchase agreements
entered into between the Fund on behalf of the Portfolio and
the Custodian, or another bank, or a broker-dealer which is
a member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting the
Custodian's account at the
-12-
<PAGE>
Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Portfolio
of securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase
such securities from the Portfolio or (e) for transfer to a
time deposit account of the Fund in any bank, whether domestic
or foreign; such transfer may be effected prior to receipt
of a confirmation from a broker and/or the applicable bank
pursuant to Proper Instructions from the Fund as defined in
Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be
-13-
<PAGE>
in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund on behalf of such
-14-
<PAGE>
Portfolio to so pay in advance, the Custodian shall be absolutely
liable to the Fund for such securities to the same extent as if the
securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided
-15-
<PAGE>
that such securities are represented in an account
("Account") of the Custodian in the Securities System which
shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities of
the Portfolio which are maintained in a Securities System
shall identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon (i)
receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the
Portfolio.
-16-
<PAGE>
Copies of all advices from the Securities System of transfers
of securities for the account of the Portfolio shall identify
the Portfolio, be maintained for the Portfolio by the
Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio in the form of a written advice or notice and
shall furnish to the Fund on behalf of the Portfolio copies of
daily transaction sheets reflecting each day's transactions in
the Securities System for the account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
5) The Custodian shall have received from the Fund on behalf
of the Portfolio the initial or annual certificate, as the
case may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be
-17-
<PAGE>
liable to the Fund for the benefit of the Portfolio for any
loss or damage to the Portfolio resulting from use of the
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any
of its or their employees or from failure of the Custodian
or any such agent to enforce effectively such rights as it may
have against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Portfolio has not been made whole for any such loss
or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund on behalf of the Portfolio;
-18-
<PAGE>
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
an account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to
the Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the
-19-
<PAGE>
Portfolio, in the form of a written advice or notice, of
Direct Paper on the next business day following such transfer
and shall furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each day's
transaction in the Securities System for the account of the
Portfolio;
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal accounting
control as the Fund may reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity
-20-
<PAGE>
Futures Trading Commission or any registered contract market), or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Portfolio, (ii)
for purposes of segregating cash or government securities in connection
with options purchased, sold or written by the Portfolio or commodity
futures contracts or options thereon purchased or sold by the
Portfolio, (iii) for the purposes of compliance by the Portfolio with
the procedures required by Investment Company Act Release No. 10666,
or any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with
-21-
<PAGE>
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be voted,
and shall promptly deliver to the Portfolio such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.14 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio
-22-
<PAGE>
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Portfolio shall notify the
Custodian at least three business days prior to the date on which the
Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board of
Directors, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities",
-23-
<PAGE>
as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts
as the Custodian or the Fund may determine to be reasonably necessary
to effect the Portfolio's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Portfolios
shall be maintained in foreign securities depositories only through
arrangements implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.5 and 3.9 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books as
belonging to each applicable Portfolio of the Fund, the foreign
securities of such Portfolios held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian employs a foreign institution
shall require that such institution establish custody account(s) for
the Custodian on behalf of the Fund for each applicable Portfolio of
the Fund and physically segregate in each such account securities and
other assets of the Portfolios, and, in the event that such institution
deposits the securities of one or more of the Portfolios in a foreign
securities depository, that it shall identify on its books as belonging
to the Custodian, as
-24-
<PAGE>
agent for each applicable Portfolio, the securities so deposited (all
collectively referred to as the "Accounts").
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the assets of
each Portfolio will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking
institution or its creditors or agent, except a claim of payment for
their safe custody or administration; (b) beneficial ownership for the
assets of each Portfolio will be freely transferable without the
payment of money or value other than for custody or administration; (c)
adequate records will be maintained identifying the assets as belonging
to each applicable Portfolio; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for
the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with
the Custodian; (e) the foreign banking institution will retain all
books and records relating to its actions under its agreement with the
Custodian for the periods required by Rule 31a-2; and (f) assets of the
Portfolios held by the foreign sub-custodian will be subject only to
the instructions of the Custodian or its agents.
-25-
<PAGE>
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Portfolio(s) securities and other
assets and advices or notifications of any transfers of securities to
or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of each applicable Portfolio
indicating, as to securities acquired for a Portfolio, the identity of
the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
-26-
<PAGE>
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of
each applicable Portfolio and delivery of securities maintained for
the account of each applicable Portfolio may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market
in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor
(or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer. (c) Securities maintained in the custody of a
foreign sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this
Contract, and the Fund agrees to hold any such nominee harmless from
any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and each Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in
-27-
<PAGE>
connection with the institution's performance of such obligations.
At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a
foreign banking institution as a consequence of any such loss, damage,
cost, expense, liability or claim if and to the extent that the Fund
has not been made whole for any such loss, damage, cost, expense,
liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.13 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk (including, but not
limited to, exchange control
-28-
<PAGE>
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or other
losses under circumstances where the Custodian and State Street London
Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a
Portfolio including the purchase or sale of foreign exchange or of
contracts for foreign exchange, or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's
own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to repay
the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolios assets to the extent
necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
-29-
<PAGE>
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of
a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that
its shareholders' equity will decline below $200 million (U.S. dollars
or the equivalent thereof) or that its shareholders' equity has
declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks.
(a) Except as otherwise set forth in this Contract, the provisions
hereof shall not apply where the custody of the Portfolios assets are
maintained in a foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the Investment Company Act
of 1940 meeting the qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a sub-custodian shall
be governed by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom
shall be maintained in an interest bearing
-30-
<PAGE>
account established for the Fund with the Custodian's London branch,
which account shall be subject to the direction of the Custodian,
State Street London Ltd. or both.
3.14 Tax Law.
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America
or any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the
tax law of jurisdictions other than those mentioned in the above
sentence, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the tax
law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to
-31-
<PAGE>
time by the Fund. The Custodian will provide timely notification to the Fund
on behalf of each such Portfolio and the Transfer Agent of any receipt by it of
payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt
of instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialled by one or more person or persons as the Board of Directors
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
-32-
<PAGE>
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Directors of the
Fund accompanied by a detailed description of procedures approved by the Board
of Directors, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Directors and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
-33-
<PAGE>
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Portfolio except as otherwise directed by the Board of
Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself
-34-
<PAGE>
keep such books of account and/or compute such net asset value per share. If
so directed, the Custodian shall also calculate daily the net income of
the Portfolio as described in the Fund's currently effective prospectus related
to such Portfolio and shall advise the Fund and the Transfer Agent daily of the
total amounts of such net income and, if instructed in writing by an officer
of the Fund to do so, shall advise the Transfer Agent periodically of the
division of such net income among its various components. The calculations of
the net asset value per share and the daily income of each Portfolio shall be
made at the time or times described from time to time in the Fund's currently
effective prospectus related to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate numbers in such
tabulations.
-35-
<PAGE>
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
-36-
<PAGE>
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.10)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.13 hereof, the Custodian shall not be liable for
any loss, damage,
-37-
<PAGE>
cost, expense, liability or claim resulting from, or caused by, the direction
of or authorization by the Fund to maintain custody of any securities or cash
of the Fund in a foreign country including, but not limited to, losses resulting
from nationalization, expropriation, currency restrictions, or acts of war or
terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement)
for the benefit of a Portfolio including the purchase or sale of foreign
exchange or of contracts for foreign exchange or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to
-38-
<PAGE>
dispose of such Portfolio's assets to the extent necessary to obtain
reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Directors of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.10A
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors has approved the initial use
of the Direct Paper System by such Portfolio; provided
-39-
<PAGE>
further, however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation, and further provided, that the Fund on behalf
of one or more of the Portfolios may at any time by action of its Board of
Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Directors of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
-40-
<PAGE>
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of
-41-
<PAGE>
Directors to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Articles of Incorporation
of the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to Legg Mason Global Government Trust with respect to which it desires
to have the Custodian render services as custodian under the terms hereof, it
shall so notify the Custodian in writing, and if the Custodian agrees in writing
to provide such services, such series of Shares shall become a Portfolio
hereunder.
-42-
<PAGE>
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Miscellaneous
The Custodian agrees to treat all records and other information
relative to the Fund and its prior, present or potential Shareholders
confidentially and the Custodian on behalf of itself and its employees agrees to
keep confidential all such information, except after prior notification to an
approval in writing by the Fund, which approval shall not be unreasonably
withheld. The preceding notwithstanding, in the event legal process is served
upon the Custodian requiring certain disclosure, the Custodian may divulge such
information. In such event, the Custodian shall, if legally permissible, advise
the Fund of its receipt of such legal process.
Notwithstanding any other provision in this Agreement, the parties
agree that the assets and liabilities of each Portfolio of the Fund are separate
and distinct from the assets and liabilities of each other Portfolio and that no
Portfolio shall be liable or shall be charged for any debt, obligation or
liability of any other Portfolio, whether arising under the Agreement or
otherwise.
-43-
<PAGE>
21. Shareholder Communications
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the Custodian
"no", the Custodian will not provide this information to requesting companies.
If the Fund tells the Custodian "yes" or do not check either "yes" or "no"
below, the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any funds
or accounts established by the Fund. For the Fund's protection, the Rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consent or object by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
-44-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 15th day of April , 1993 .
ATTEST LEGG MASON GLOBAL TRUST, INC.
/s/ Kathi D. Glenn By /s/ Marie K. Karpinski
_________________________ _____________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Saul Natansohn By /s/ Ronald E. Logue
_________________________ _____________________________
Assistant Secretary Executive Vice President
-45-
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of Legg Mason Global
Trust, Inc. for use as sub-custodians for the Fund's securities and other
assets:
Citibank, N.A.-Argentina (Caja de Valores) (Argentina)
ANZ Banking Group, Ltd. (Austraclear and RITS) (Australia)
GiroCredit Bank Aktiengesellschaft der Sparkassen (OEKB) (Austria)
Banque Bruxelles Lambert (C.I.K.) (Belgium)
Citibank N.A.-Brazil (BOVESPA) (Brazil)
Canada Trustco Mortgage Company (CDS) (Canada)
Citibank, N.A.-Chile (Chile)
Den Danske Bank (VP-Centralen) (Denmark)
Kansallis Osake Pankki (Central Share Register of Finland) (Finland)
Credit Commercial de France (SICOVAM) (France)
Berliner Handels und Frankfurter Bank (Kassenverein) (Germany)
National Bank of Greece (The Central Depository) (Greece)
Standard Chartered Bank Hong Kong (CCASS) (Hong Kong)
Standard Chartered Bank Jakarta (Indonesia)
Bank of Ireland (Ireland)
Credito Italiano (Monte Titoli SpA) (Italy)
Sumitomo Trust & Banking Company Limited (Japan)
Bank of Seoul (Korea)
Standard Chartered Bank Kuala Lumpur (Malaysia)
Citibank, N.A.-Mexico (INDEVAL) (Mexico)
Bank Mees & Hope, N.V. (NECIGEF) (The Netherlands)
Westpac Banking Corp. (New Zealand)
Christiania Bank Og Kreditkasse (VPS) (Norway)
Standard Chartered Bank (The Philippines)
Banco Comercial Portugues (Central de Valores Mobiliarios) (Portugal)
DBS Bank (CDP) (Singapore)
Banco Central Hispanoamericano (SCLV) (Spain)
Hong Kong and Shanghai Banking Corporation Limited (Central Depository System
(PVT) Ltd)(Sri Lanka)
Skandinaviska Enskilda Banken (VPC) (Sweden)
Union Bank of Switzerland (SEGA) (Switzerland)
Central Trust of China (TSCD) (Taiwan)
Standard Chartered Bank, Bangkok (Share Depository Center) (Thailand)
Citibank, N.A.-Turkey (Turkey)
State Street London Limited (The Central Gilts Office) (United Kingdom)
Citibank N.A.-Venezuela (Venezuela)
Cedel
Euroclear
BOVESPA
Certified:
/s/ Marie K. Karpinski
________________________________
Fund's Authorized Officer
Dated: May 14, 1993
_________________________
Exhibit 8a
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company
(the "Custodian") and Legg Mason Global Trust, Inc. (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated April 15, 1993 (the "Custodian Contract") governing the terms and
conditions under which the Custodian maintains custody of the securities and
other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed as a sealed instrument in its name and behalf by its duly authorized
representative this 28th day of May, 1996.
LEGG MASON GLOBAL TRUST, INC.
By: /s/ Marie K. Karpinski
_______________________________
Title: Vice President & Treasurer
____________________________
STATE STREET BANK AND TRUST COMPANY
By: /s/ ML Summers
_______________________________
Title: Vice President
____________________________
Exhibit 9
TRANSFER AGENCY AND SERVICE AGREEMENT
between
LEGG MASON GLOBAL TRUST, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article 1 Terms of Appointment; Duties of the Bank........................................ 1
Article 2 Fees and Expenses............................................................... 4
Article 3 Representations and Warranties of the Bank...................................... 5
Article 4 Representations and Warranties of the Fund...................................... 5
Article 5 Data Access and Proprietary Information......................................... 6
Article 6 Indemnification................................................................. 7
Article 7 Standard of Care................................................................ 9
Article 8 Covenants of the Fund and the Bank.............................................. 9
Article 9 Termination of Agreement........................................................ 10
Article 10 Additional Funds................................................................ 10
Article 11 Assignment...................................................................... 11
Article 12 Amendment....................................................................... 11
Article 13 Massachusetts Law to Apply...................................................... 11
Article 14 Force Majeure................................................................... 11
Article 15 Consequential Damages........................................................... 12
Article 16 Merger of Agreement............................................................. 12
Article 17 Miscellaneous................................................................... 12
Article 18 Counterparts.................................................................... 12
</TABLE>
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 15th day of April, 1993, by and between LEGG
MASON GLOBAL TRUST, INC. , a Maryland corporation, having its principal office
and place of business at 111 South Calvert Street, Baltimore, Maryland 21202
(the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company having its principal office and place of business at 225 Franklin
Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in one series,
the Legg Mason Global Government Trust (each such series, together with all
other series subsequently established by the Fund and made subject to this
Agreement in accordance with Article 10, being herein referred to, as a
"Portfolio", and collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the
Bank as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities and the
Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
<PAGE>
Article l Terms of Appointment; Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of capital stock of the Fund representing interests
in each of the respective Portfolios ("Shares"), dividend disbursing agent,
custodian of certain retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of each
of the respective Portfolios of the Fund ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable Portfolio, including
without limitation any periodic investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund on behalf of each of the Portfolios, as
applicable and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and
appropriate documentation thereof to the Custodian
of the Fund authorized pursuant to the Articles of
Incorporation of the Fund (the "Custodian");
-2-
<PAGE>
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) In respect to the transactions in items (i), (ii)
and (iii) above, the Bank shall execute
transactions directly with broker-dealers
authorized by the Fund who shall thereby be deemed
to be acting on behalf of the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed
by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio;
(viii) Issue replacement certificates for those
certificates alleged to have been lost, stolen or
destroyed upon receipt by the Bank of
indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at
-3-
<PAGE>
its option, may issue replacement certificates in
place of mutilated stock certificates upon
presentation thereof and without such indemnity;
(ix) Maintain records of account for and advise the Fund
and its Shareholders as to the foregoing; and
(x) Record the issuance of Shares of the Fund and
maintain pursuant to SEC Rule 17Ad-10(e) a record
of the total number of Shares of the Fund which are
authorized, based upon data provided to it by the
Fund, and issued and outstanding. The Bank shall
also provide the Fund on a regular basis with the
total number of Shares which are authorized and
issued and outstanding and shall have no
obligation, when recording the issuance of Shares,
to monitor the issuance of such Shares or to take
cognizance of any laws relating to the issue or
sale of such Shares, which functions shall be the
sole responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention
of the services set forth in the above paragraph (a), the Bank shall: (i)
perform the customary services of a transfer agent, dividend disbursing agent,
custodian of certain retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal
-4-
<PAGE>
program), including but not limited to: maintaining all Shareholder accounts,
preparing Shareholder meeting lists, mailing proxies, mailing Shareholder
reports and prospectuses to current Shareholders, withholding taxes on U.S.
resident and non-resident alien accounts, preparing and filing U.S. Treasury
Department Forms 1099 and other appropriate forms required with respect to
dividends and distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders, and providing Shareholder account information and (ii) provide
a system which will enable the Fund to monitor the total number of Shares sold
in each State.
(c) In addition, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from blue sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
(d) Procedures as to who shall provide certain of these
services in Article 1 may be established from time to time by agreement between
the Fund on behalf of each Portfolio and the
-5-
<PAGE>
Bank per the attached service responsibility schedule. The Bank may at times
perform only a portion of these services and the Fund or its agent may perform
these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of
the Fund (i.e., escheatment services) which may be agreed upon in writing
between the Fund and the Bank.
Article 2 Fees and Expenses
2.01 For the performance by the Bank pursuant to this
Agreement, the Fund agrees on behalf of each of the Portfolios to pay the Bank
an annual maintenance fee for each Shareholder account as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above,
the Fund agrees on behalf of each of the Portfolios to reimburse the Bank for
out-of-pocket expenses, including but not limited to confirmation production,
postage, forms, telephone, microfilm, microfiche, tabulating proxies, records
storage or advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by the Bank
at the request or with the consent of the Fund, will be reimbursed by the Fund
on behalf of the applicable Portfolio.
-6-
<PAGE>
2.03 The Fund agrees on behalf of each of the Portfolios to
pay all fees and reimbursable expenses within five days following the receipt of
the respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall be advanced to the
Bank by the Fund at least seven (7) days prior to the mailing date of such
materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and
in good standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its
Charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in
good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its
Articles of Incorporation and By-Laws to enter into and perform this Agreement.
-7-
<PAGE>
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an open-end and diversified management investment
company registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of
1933, as amended on behalf of each of the Portfolios is currently effective and
will remain effective, and appropriate state securities law filings have been
made and will continue to be made, with respect to all Shares of the Fund being
offered for sale.
Article 5 Data Access and Proprietary Information
5.01 The Fund acknowledges that the data bases, computer
programs, screen formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Bank as part of the Fund's
ability to access certain Fund-related data ("Customer Data") maintained by the
Bank on data bases under the control and ownership of the Bank or other third
party ("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of substantial
value to the Bank or other third party. In no event shall Proprietary
Information be deemed Customer Data. The Fund agrees to treat all Proprietary
Information as proprietary to the Bank and further agrees that it shall not
divulge any Proprietary Information to any person or organization except as may
be provided hereunder. Without
-8-
<PAGE>
limiting the foregoing, the Fund agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations as
may be designated in writing by the Bank and solely
in accordance with the Bank's applicable user
documentation;
(b) to refrain from copying or duplicating in any way
the Proprietary Information;
(c) to refrain from obtaining unauthorized access to
any portion of the Proprietary Information, and if
such access is inadvertently obtained, to inform
in a timely manner of such fact and dispose of
such information in accordance with the Bank's
instructions;
(d) to refrain from causing or allowing third-party
data acquired hereunder from being retransmitted to
any other computer facility or other location,
except with the prior written consent of the Bank;
(e) that the Fund shall have access only to those
authorized transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by
the Bank to protect at the Bank's expense the
rights of the Bank in Proprietary Information at
common law, under federal copyright law and under
other federal or state law.
-9-
<PAGE>
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Article 5. The obligations of this Article
shall survive any earlier termination of this Agreement.
5.02 If the Fund notifies the Bank that any of the Data
Access Services do not operate in material compliance with the most recently
issued user documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may obtain
certain data included in the Data Access Services are solely responsible for the
contents of such data and the Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Fund include the
ability to originate electronic instructions to the Bank in order to (i) effect
the transfer or movement of cash or Shares or (ii) transmit Shareholder
information or other information (such transactions constituting a "COEFI"),
then in such event the Bank shall be entitled to rely on the validity and
authenticity of such instruction without undertaking any further inquiry as long
as such instruction is undertaken in conformity
-10-
<PAGE>
with security procedures established by the Bank from time to time.
Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Fund
shall on behalf of the applicable Portfolio indemnify and hold the Bank harmless
from and against, any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation or warranty of
the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services which (i) are
received by the Bank or its agents or subcontractors, and (ii) have been
prepared, maintained or performed by the Fund or any other person or firm on
behalf of the Fund including but not limited to any previous transfer agent or
registrar.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund on behalf
of the applicable Portfolio.
-11-
<PAGE>
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
6.02 At any time the Bank may apply to any officer of the
Fund for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the Bank under
this Agreement, and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Fund on behalf of the applicable
Portfolio for any action taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel. The Bank, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund, reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided the Bank or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. The Bank, its agents and subcontractors shall also be
protected and
-12-
<PAGE>
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signatures of the officers of the Fund,
and the proper countersignature of any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained
in this Article 6 shall apply, upon the assertion of a claim for which the Fund
may be required to indemnify the Bank, the Bank shall promptly notify the Fund
of such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written consent.
Article 7 Standard of Care
7.01 The Bank shall at all times act in good faith and
agrees to use its best efforts within reasonable limits to insure the accuracy
of all services performed under this Agreement, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless said errors are
caused by its negligence, bad faith, or willful misconduct of that of its
employees.
Article 8 Covenants of the Fund and the Bank
8.01 The Fund shall on behalf of each of the Portfolios
promptly furnish to the Bank the following:
-13-
<PAGE>
(a) A certified copy of the resolution of the Directors of
the Fund authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of
the Fund and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices and to make such changes in said procedures and
facilities as the Fund may from time to time reasonably request.
8.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other
-14-
<PAGE>
person, except as may be required by law.
8.05 In case of any requests or demands for the inspection
of the Shareholder records of the Fund, the Bank will endeavor to notify the
Fund and to secure instructions from an authorized officer of the Fund as to
such inspection. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon
one hundred twenty (120) days written notice to the other.
9.02 Should the Fund exercise its right to terminate in the
absence of a material breach of this Agreement by the Bank, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund on behalf of the applicable Portfolio(s). Additionally, the Bank
reserves the right to charge for any other reasonable expenses associated with
such termination, including but not limited to training Fund employees, training
materials and procedural documentation required by the Fund. In the event that
the Fund designates a successor to any of the Bank's obligations hereunder, the
Bank shall, at the expense and direction of the Fund, transfer to such successor
a certified list of Shareholders of the Fund, a complete record of the account
of each Shareholder, and all other
-15-
<PAGE>
necessary or relevant books, records and other data established or maintained by
the Bank hereunder.
Article 10 Additional Funds
10.01 In the event that the Fund establishes one or more
series of Shares in addition to with respect to which it desires to have the
Bank render services as transfer agent under the terms hereof, it shall so
notify the Bank in writing, and if the Bank agrees in writing to provide such
services, such series of Shares shall become a Portfolio hereunder.
Article 11 Assignment
11.01 Except as provided in Section 11.03 below, neither
this Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
11.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
11.03 The Bank may, without further consent on the part of
the Fund, subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(1)"), (ii) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS affiliate;
provided, however, that the Bank shall be as fully responsible to the Fund for
the acts and omissions of any subcontractor as it is for its own acts and
omissions.
-16-
<PAGE>
Article 12 Amendment
12.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Directors of the Fund.
Article 13 Massachusetts Law to Apply
13.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 14 Force Majeure
14.01 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes. In addition, the Bank shall further use reasonable
care to minimize the likelihood of such damage, loss of data, delays and/or
errors and should such damages, loss of data, delays and/or errors occur, the
Bank shall use its best efforts to mitigate the effects of such occurrence.
Article 15 Consequential Damages
15.01 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any consequential damages arising out of any act or failure to act
hereunder.
-17-
<PAGE>
Article 16 Merger of Agreement
16.01 This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect to
the subject matter hereof whether oral or written.
Article 17 Miscellaneous
The Bank agrees to treat all records and other
information relative to the Fund and its prior, present or potential
Shareholders confidentially and the Bank on behalf of itself and its
employees agrees to keep confidential all such information, except after prior
notification to an approval in writing by the Fund, which approval shall not be
unreasonably withheld and may not be withheld where the Bank may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested
to divulge such information by duly constituted authorities, or when so
requested by the Fund.
Notwithstanding any other provision in this Agreement, the parties
agree that the assets and liabilities of each Portfolio of the Fund are separate
and distinct from the assets and liabilities of each other Portfolio and that no
Portfolio shall be liable or shall be charged for any debt, obligation or
liability of any other Portfolio, whether arising under the Agreement or
otherwise.
Article 18 Counterparts
18.01 This Agreement may be executed by the parties hereto
on any number of counterparts, and all of said counterparts taken together shall
be deemed to constitute one and the same instrument.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf by and through their
duly authorized officers, as of the day and year first above written.
LEGG MASON GLOBAL TRUST, INC.
BY: /s/ Marie K. Karpinski
ATTEST: _______________________________
/s/ Kathi D. Glenn
_______________________________
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Ronald E. Logue
_______________________________
Executive Vice President
ATTEST:
/s/ Saul Natansohn
_______________________________
Assistant Secretary
-19-
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
----------------- --------------
Bank Fund
---- ----
1. Receives orders for the purchase
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien accounts.
16. Prepare and file U.S. Treasury
Department forms.
17. Prepare and mail account and
confirmation statements for
Shareholders.
-1-
<PAGE>
Service Performed Responsibility
----------------- --------------
Bank Fund
---- ----
18. Provide Shareholder account
information.
19. Blue sky reporting.
* Such services are more fully described in Article 1.02 (a), (b) and (c) of the
Agreement.
BY:
__________________________________
ATTEST:
______________________________
STATE STREET BANK AND TRUST COMPANY
BY:
___________________________________
Vice President
ATTEST:
_____________________________
Assistant Secretary
-2-
Exhibit 10(a)
KIRKPATRICK & LOCKHART
South Lobby - 9th Floor 1800 M
Street, N.W.
Washington, D. C. 20036-5891
March 31, 1993
Legg Mason Global Trust, Inc.
111 South Calvert Street
Baltimore, Maryland 21202
Dear Sir or Madam:
Legg Mason Global Trust, Inc. (the "Company") is a corporation
organized under the laws of the State of Maryland by Articles of Incorporation
dated January 31, 1992. You have requested our opinion regarding certain matters
in connection with the Company's issuance of shares of common stock ("Shares")
in its sole series Legg Mason Global Government Trust.
We have, as counsel, participated in various corporate and other
matters relating to the Company. We have examined copies of the Articles of
Incorporation and By-Laws, the minutes of meetings of the directors and other
documents relating to the organization and operation of the Company, and we are
generally familiar with its business affairs. Based upon the foregoing, it is
our opinion that the unissued Shares designated as the Legg Mason Global
Government Trust, which are currently being registered, may be legally and
validly issued from time to time in accordance with the Company's Articles of
Incorporation and By-Laws and subject to compliance with the Securities Act of
1933, the Investment Company Act of 1940, and applicable state laws regulating
the offer and sale of securities; and when so issued, will be legally issued,
fully paid and nonassessable by the Company.
We hereby consent to the filing of this opinion in connection with Pre-
Effective Amendment No. 2 to the Company's Registration Statement on Form N-1A
(File No. 33-56672) to be filed with the Securities and Exchange Commission.
We also consent to the reference to our firm under the caption "Legg Mason
Global Trust's Legal Counsel" in the Statement of
<PAGE>
Legg Mason Global Trust, Inc.
March 31, 1993
Page 2
Additional Information filed as part of the Registration Statement.
Sincerely,
KIRKPATRICK & LOCKHART
/s/ Arthur C. Delibert
_______________________
Arthur C. Delibert
Exhibit 10b
Kirkpatrick & Lockhart letterhead
November 28, 1994
Legg Mason Global Trust, Inc.
111 South Calvert Street
Baltimore, Maryland 21202
Dear Sir or Madam:
Legg Mason Global Trust, Inc. (the "Company") is a corporation
organized under the laws of the State of Maryland by Articles of Incorporation
dated December 31, 1992, as supplemented November 10, 1994. You have requested
our opinion regarding certain matters in connection with the Company's issuance
of shares of common stock ("Shares") in its series designated as Legg Mason
International Equity Trust.
We have, as counsel, participated in various corporate and other
matters relating to the Company. We have examined copies of the Articles of
Incorporation and By-Laws, the minutes of meetings of the directors and other
documents relating to the organization and operation of the Company, and we are
generally familiar with its business affairs. Based upon the foregoing, it is
our opinion that the unissued Shares designated as Legg Mason International
Equity Trust, which are currently being registered, may be legally and validly
issued from time to time in accordance with the Company's Articles of
Incorporation and By-Laws; and when so issued, will be legally issued, fully
paid and nonassessable by the Company.
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 3 to the Company's Registration Statement on Form
N-1A (File no. 33-56672) to be filed with the Securities and Exchange
Commission. We also consent to the reference to our firm under the caption "Legg
Mason Global Trust's Legal Counsel" in the Statement of Additional Information
filed as part of the Registration Statement.
Sincerely,
KIRKPATRICK & LOCKHART
/s/Arthur C. Delibert
_______________________
Arthur C. Delibert
Exhibit 11a-c
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Legg Mason Global Trust, Inc.:
We consent to the incorporation by reference in Post-Effective
Amendment No. 12 to the Registration Statement of Legg Mason Global Trust, Inc.
(the "Corporation") on Form N-1A (File No. 33-56672) of our report dated
February 5, 1997 on our audits of the financial statements and financial
highlights of the Legg Mason Global Government Trust, Legg Mason International
Equity Trust and Legg Mason Emerging Markets Trust for the period ended December
31, 1996, which report is included in the Corporation's Annual Report to
Shareholders for the period ended December 31, 1996, which are incorporated by
reference in the Registration Statement. We also consent to the reference to our
Firm under the caption "Financial Highlights" in the Prospectus and "The
Corporation's Independent Accountants" in the Statement of Additional
Information.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 30, 1997
Exhibit 13
Legg Mason Wood Walker, Incorporated
111 South Calvert Street, P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000
March 31, 1993
Legg Mason Global Trust, Inc.
111 South Calvert Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Please be advised that the 10,000 shares of Legg Mason Global Trust,
Inc. which we have today purchased from you in the aggregate amount of $100,000
were purchased as an investment with no present intention of redeeming or
selling such shares and we do not have any intention of redeeming or selling
such shares.
Very truly yours,
LEGG MASON FUND ADVISER, INC.
By: /s/William H. Miller
_____________________________
William H. Miller, III
President
Exhibit 15a
DISTRIBUTION PLAN OF
LEGG MASON GLOBAL TRUST, INC.
WHEREAS, Legg Mason Global Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended ("1940 Act"), and intends to offer for public sale
distinct series of shares of common stock ("Series"), each corresponding to a
distinct portfolio;
WHEREAS, the Corporation has registered the offering of its shares of
common stock under a Registration Statement filed with the Securities and
Exchange Commission and this Registration Statement is in effect as of the date
hereof;
WHEREAS, the Corporation's Board of Directors has established one
series of shares of common stock of the Corporation: Legg Mason Global
Government Trust;
WHEREAS, the Corporation desires to adopt a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act and the Board of Directors has determined that
there is a reasonable likliehood that adoption of the Distribution Plan will
benefit the Corporation and its shareholders; and
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as underwriter of the shares of the Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the following
terms and conditions:
1. Legg Mason Global Government Trust shall pay to Legg Mason a
distribution fee for expenses related to distribution of its shares at a rate of
.75% per annum of the Series' average daily net assets, such fee to be
calculated daily and paid monthly.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
Legg Mason's services as underwriter of the shares of the Corporation in
accordance with an Underwriting Agreement between Legg Mason and the Corporation
and may be spent by Legg Mason on any activities or expenses related to the sale
and distribution of any Series' shares or the provision of ongoing services to
shareholders, including, but not limited to, commissions and other compensation
to persons who engage in or support distribution of shares, printing of
<PAGE>
prospectuses and reports for other than existing shareholders, advertising,
preparation and distribution of sales literature, and overhead, travel and
telephone expenses.
3. This Plan shall not take effect with repsect to a particular Series
until it has been approved by a vote of at least a majority of the outstanding
voting securities, as defined in the 1940 Act, of that Series.
4. This Plan shall continue in effect for successive periods of one
year from its execution for so long as such continuance is specifically approved
at least annually together with any related agreements, by votes of a majority
of both (a) the Board of Directors of the Corporation and (b) those Directors
who are not "interested persons" of the Corporation, as defined in the 1940 Act,
and who have no direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Directors"), cast in
person at a meeting or meetings called for the purpose of voting on this Plan
and such related agreements; and only if the Directors who approve the Plan
taking effect have reached the conclusion required by Rule 12b-1(e) under the
1940 Act.
5. Any person authorized to direct the disposition of monies paid or
payable by any Series pursuant to this Plan or any related agreement shall
provide to the Corporation's Board of Directors and the Board shall review, at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made.
6. This Plan may be terminated with respect to any Series at any time
by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of
the outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1 hereof unless such amendment is
approved in the manner provided for initial shareholder approval in paragraph 3
hereof, and no material amendment to the Plan shall be made unless such
amendment is approved in the manner provided for continuing trustee approval in
paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Trust, as defined in the 1940
Act, shall be committed to the discretion of directors who are themselves not
interested persons.
9. The Corporation shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 5 hereof
- 2 -
<PAGE>
for a period of not less than six years from the date of execution of this
Plan, or of the agreements or of such reports, as the case may be, the
first two years in an easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan
as of the day and year set forth below:
Date: April 7, 1993 LEGG MASON GLOBAL TRUST, INC.
_____________
Attest: By: /s/ Edward A. Taber, III
________________________
By: /s/ Blanche P. Roche
________________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ Marie K. Karpinski
________________________
- 3 -
Exhibit 15b
DISTRIBUTION PLAN OF
LEGG MASON GLOBAL TRUST, INC.
WHEREAS, Legg Mason Global Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended ("1940 Act"), and has offered, and intends to offer for
public sale shares of common stock of a series to be known as the Legg Mason
International Equity Trust ("Fund");
WHEREAS, the Corporation has registered the offering of its shares of
common stock under a Registration Statement filed with the Securities and
Exchange Commission and that Registration Statement is in effect as of the date
hereof or expected to be made effective in the near future;
WHEREAS, the Corporation's Board of Directors has established a second
Series of shares of common stock of the Corporation: Legg Mason Global Equity
Trust;
WHEREAS, the Corporation desires to adopt a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act and the Board of Directors has determined that
there is a reasonable likliehood that adoption of the Distribution Plan will
benefit the Corporation and its shareholders; and
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the following
terms and conditions:
1. A. Legg Mason Global Equity Trust shall pay to Legg Mason, as
compensation for Legg Mason's services as principal underwriter of the Fund
shares, a distribution fee at the rate of 0.75% on an annualized basis of the
average daily net assets of the Fund's shares, such fee to be calculated and
accrued daily and paid monthly or at such other intervals as the Board shall
determine.
B. The Corporation shall pay to Legg Mason, as compensation
for ongoing services provided to the Fund's shareholders, a service fee at the
rate of 0.25% on an annualized basis of the average daily net assets of the
Fund's shares, such fee to be
<PAGE>
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
C. The Corporation may pay a distribution or service fee to
Legg Mason at a lesser rate than the fees specified in paragraphs 1.A. and 1.B.,
respectively, of this Plan, in either case as agreed upon by the Board and Legg
Mason and as approved in the manner specified in paragraph 3 of this Plan. The
distribution and service fees payable hereunder are payable without regard to
the aggregate amount that may be paid over the years, provided that, so long as
the limitations set forth in Article III, Section 26(d) of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD") remain
in effect and apply to distributors or dealers in the Corporation's shares, the
amounts paid hereunder shall not exceed those limitations, including permissible
interest.
2. As principal underwriter of the Corporation's shares, Legg Mason may
spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the shares of the Fund and/or the
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Legg Mason; compensation to Legg Mason and
other broker-dealers that engage in or support the distribution of shares or who
service shareholder accounts; expenses of Legg Mason and such other
broker-dealers, including overhead and telephone and other communication
expenses; the printing of prospectuses, statements of additional information,
and reports for other than existing shareholders; and preparation and
distribution of sales literature and advertising materials.
3. This Plan shall take effect on February 17, 1995 and shall continue
in effect for successive periods of one year from its execution for so long as
such continuance is specifically approved at least annually together with any
related agreements, by votes of a majority of both (a) the Board of Directors of
the Corporation and (b) those Directors who are not "interested persons" of the
Corporation, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements; and only if the
Directors who approve the Plan taking effect have reached the conclusion
required by Rule 12b- 1(e) under the 1940 Act.
4. Any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to this Plan or any related agreement shall provide
to the Corporation's Board of Directors and the Board shall review, at least
quarterly, a written report of the
- 2 -
<PAGE>
amounts so expended and the purposes for which such expenditures were made. Legg
Mason shall submit only information regarding amounts expended for "distribution
activities," as defined in this paragraph 4, to the Board in support of the
distribution fee payable hereunder and shall submit only information regarding
amounts expended for "service activities," as defined in this paragraph 4, to
the Board in support of the service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall
mean any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated February 11, 1995, by and
between the Corporation and Legg Mason, that are not deemed "service
activities." "Service activities" shall mean activities covered by the
definition of "service fee" contained in amendments to Article III, Section
26(d) of the NASD's Rules of Fair Practice that became effective July 7, 1993,
including the provision by Legg Mason of personal, continuing services to
investors in the Corporation's shares. Overhead and other expenses of Legg Mason
related to its "distribution activities" or "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such distribution or service activities,
respectively.
5. This Plan may be terminated with respect to the Fund at any time by
vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the
outstanding voting securities of the Fund.
6. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1.A. hereof or the amount of service
fees provided for in paragraph 1.B. hereof unless such amendment is approved by
a vote of at least a majority of the outstanding securities, as defined in the
1940 Act, of the Corporation, and no material amendment to the Plan shall be
made unless such amendment is approved in the manner provided for continuing
approval in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation, as defined in the
1940 Act, shall be committed to the discretion of directors who are themselves
not interested persons.
9. The Corporation shall preserve copies of this Plan and any related
agreements for a period of not less than six years from the date of expiration
of the Plan or agreement, as the case may be, the first two years in an easily
accessible place; and shall preserve copies of each report made pursuant to
paragraph 4 hereof for a period
- 3 -
<PAGE>
of not less than six years from the date of such report, the first two years in
an easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan
as of the day and year set forth below:
Date: February 11, 1995 LEGG MASON GLOBAL TRUST, INC.
_________________
Attest: By: /s/ Marie K. Karpinski
________________________
By: /s/ Kathi D. Glenn
_____________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ John F. Curley
_____________________
- 4 -
Exhibit 16a-c
LEGG MASON GLOBAL GOVERNMENT TRUST
December 31, 1995 - December 31, 1996 (one year)
Cumulative Total Return:
ERV= (10.41 x 1.321956475) - (10.32 x 1.232199094) x 1000 + 1000 = 1082.20
----------------------------------------------
(10.32 x 1.232199094)
P = 1000
C = 1082.20 - 1 = 0.0821994 = 8.22%
------- ----
1000
Average Annual Return: Same
April 15, 1993 - December 31, 1996 (life of fund)
Cumulative Total Return:
ERV = (10.41 x 1.321956475) - (10.00 x 1.0) x 1000 + 1000 = 1376.16
------------------------------------
(10.00 x 1.0)
P = 1000
P = 1376.16 - 1 = 0.37615669 = 37.62%
------- -----
1000
Average Annual Return:
1
---
4.21096
(0.376156 + 1) - 1 = 0.0897 = 8.97%
----
<PAGE>
LEGG MASON INTERNATIONAL EQUITY TRUST
December 31, 1995 - December 31, 1996 (one year)
Cumulative Total Return:
ERV= (12.09 x 1.041687) - (10.70 x 1.010386) x 1000 + 1000 = 1164.91
----------------------------------------
(10.70 x 1.010386)
P = 1000
C = 1164.91 - 1 = 0.164910 = 16.49%
------- -----
1000
Average Annual Return: Same
February 17, 1995 - December 31, 1996 (life of fund)
Cumulative Total Return:
ERV = (12.09 x 1.041687) - (10.00 x 1.0) x 1000 + 1000 = 1259.40
---------------------------------
(10.00 x 1.0)
P = 1000
P = 1259.40 - 1 = 0.25940 = 25.94%
------- -----
1000
Average Annual Return:
1
---
1.871233
(0.25940 + 1) - 1 = 0.1310 = 13.10%
-----
<PAGE>
LEGG MASON EMERGING MARKETS TRUST
May 28, 1996 - December 31, 1996 (life of fund)
Cumulative Total Return:
ERV = (10.51 x .9828430) - (10.00 x 1.0) x 1000 + 1000 = 1032.97
---------------------------------
(10.00 x 1.0)
P = 1000
P = 1032.97 - 1 = 0.03297 = 3.30%
------- ----
1000
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895662
<NAME> LEGG MASON GLOBAL TRUST, INC.
<SERIES>
<NUMBER> 1
<NAME> GLOBAL GOVERNMENT TRUST
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 151,031
<INVESTMENTS-AT-VALUE> 156,633
<RECEIVABLES> 6,982
<ASSETS-OTHER> 41
<OTHER-ITEMS-ASSETS> 830
<TOTAL-ASSETS> 164,486
<PAYABLE-FOR-SECURITIES> 2,044
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 893
<TOTAL-LIABILITIES> 2,937
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 156,839
<SHARES-COMMON-STOCK> 15,512
<SHARES-COMMON-PRIOR> 14,907
<ACCUMULATED-NII-CURRENT> (469)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (51)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,230
<NET-ASSETS> 161,549
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,752
<OTHER-INCOME> 0
<EXPENSES-NET> 2,853
<NET-INVESTMENT-INCOME> 8,899
<REALIZED-GAINS-CURRENT> 724
<APPREC-INCREASE-CURRENT> 2,457
<NET-CHANGE-FROM-OPS> 12,080
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,293)
<DISTRIBUTIONS-OF-GAINS> (1,528)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,220
<NUMBER-OF-SHARES-REDEEMED> (3,551)
<SHARES-REINVESTED> 936
<NET-CHANGE-IN-ASSETS> 7,595
<ACCUMULATED-NII-PRIOR> 1,167
<ACCUMULATED-GAINS-PRIOR> (545)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,150
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,853
<AVERAGE-NET-ASSETS> 153,369
<PER-SHARE-NAV-BEGIN> 10.33
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> .21
<PER-SHARE-DIVIDEND> (.62)
<PER-SHARE-DISTRIBUTIONS> (.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.41
<EXPENSE-RATIO> 1.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895662
<NAME> LEGG MASON GLOBAL TRUST, INC.
<SERIES>
<NUMBER> 2
<NAME> INTERNATIONAL EQUITY TRUST
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 157,264
<INVESTMENTS-AT-VALUE> 170,072
<RECEIVABLES> 2,665
<ASSETS-OTHER> 60
<OTHER-ITEMS-ASSETS> 356
<TOTAL-ASSETS> 173,153
<PAYABLE-FOR-SECURITIES> 4,520
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 707
<TOTAL-LIABILITIES> 5,227
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 153,513
<SHARES-COMMON-STOCK> 13,888
<SHARES-COMMON-PRIOR> 6,163
<ACCUMULATED-NII-CURRENT> (136)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,758
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,791
<NET-ASSETS> 167,926
<DIVIDEND-INCOME> 2,719
<INTEREST-INCOME> 344
<OTHER-INCOME> 0
<EXPENSES-NET> 2,802
<NET-INVESTMENT-INCOME> 261
<REALIZED-GAINS-CURRENT> 6,713
<APPREC-INCREASE-CURRENT> 10,954
<NET-CHANGE-FROM-OPS> 17,928
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,861
<NUMBER-OF-SHARES-REDEEMED> (1,540)
<SHARES-REINVESTED> 404
<NET-CHANGE-IN-ASSETS> 101,979
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (523)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 934
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,894
<AVERAGE-NET-ASSETS> 124,527
<PER-SHARE-NAV-BEGIN> 10.70
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> 1.74
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> .32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.09
<EXPENSE-RATIO> 2.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895662
<NAME> LEGG MASON GLOBAL TRUST, INC.
<SERIES>
<NUMBER> 3
<NAME> EMERGING MARKETS TRUST
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAY-28-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 20,176
<INVESTMENTS-AT-VALUE> 21,358
<RECEIVABLES> 427
<ASSETS-OTHER> 66
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,851
<PAYABLE-FOR-SECURITIES> 506
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 139
<TOTAL-LIABILITIES> 645
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,153
<SHARES-COMMON-STOCK> 2,018
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (118)
<ACCUMULATED-NET-GAINS> (11)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,182
<NET-ASSETS> 21,206
<DIVIDEND-INCOME> 111
<INTEREST-INCOME> 43
<OTHER-INCOME> 0
<EXPENSES-NET> 211
<NET-INVESTMENT-INCOME> (57)
<REALIZED-GAINS-CURRENT> (13)
<APPREC-INCREASE-CURRENT> 1,182
<NET-CHANGE-FROM-OPS> 1,112
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 59
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,092
<NUMBER-OF-SHARES-REDEEMED> (79)
<SHARES-REINVESTED> 5
<NET-CHANGE-IN-ASSETS> 21,205
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 84
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 313
<AVERAGE-NET-ASSETS> 14,168
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> .57
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.51
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
