As filed with the Securities and Exchange Commission on April 30, 1998.
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. 13 [X]
------
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15
------
LEGG MASON GLOBAL TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
100 Light 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, 1998 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1998 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1998 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
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 Sheets
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 Advisers;
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 Advisers;
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 Shareholder Accounts are
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 for Global Government
Trust;
The Funds' Distributor;
The Corporation's Independent Accountants;
The Corporation's 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 5
Performance Information 6
Investment Objectives and Policies 7
How You Can Invest in the Funds 21
How Your Shareholder Account is
Maintained 22
How You Can Redeem Your Primary Shares 22
How Net Asset Value is Determined 24
Dividends and Other Distributions 24
Taxes 25
Shareholder Services 26
The Funds' Management and Investment Advisers 27
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.
100 Light 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.
250 W. Pratt Street, Baltimore, MD 21201
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
------------------------------------------
THE ART OF INVESTING
PROSPECTUS
MAY 1, 1998
<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 a "Fund"). 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, 1998 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
May 1, 1998
Legg Mason Wood Walker, Inc.
100 Light 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 fluctuate 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," pages 10-21.
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, 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," pages
10-21.
There can be no assurance that any Fund will achieve its objective.
See "Investment Objectives and Policies," page 7. 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.
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
to its distributor, Legg Mason, as described on pages 27-29 of this
Prospectus.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
MANAGER:
Legg Mason Fund Adviser, Inc. ("LMFA")
INVESTMENT ADVISERS:
Western Asset Management Company and Western Asset Global Management,
Ltd. (for Global Government)
Batterymarch Financial Management, Inc. (for International Equity and
Emerging Markets)
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 21.
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 24. All dividends and other distributions are
automatically reinvested in Fund shares unless cash payments are
requested.
3
<PAGE>
EXPENSES
The purpose of the following tables 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
below are based on average net assets and annual Fund operating expenses
related to Primary Shares for the year ended December 31, 1997.
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 23.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
GLOBAL INTERNATIONAL EMERGING
GOVERNMENT EQUITY MARKETS
---------------------------------------
Management fees 0.75% 0.75% 0.64%(B)
12b-1 fees 0.75% 1.00% 1.00%
Other expenses 0.36% 0.42% 0.86%
---------------------------------------
Total operating
expenses 1.86% 2.17% 2.50%(B)
---------------------------------------
- ---------------
(A) After fee waivers. 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 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 indefinitely; and for Emerging Markets, 2.50% of average
daily net assets until May 1, 1999. In the fiscal year ended December 31,
1997, no fee waivers were necessary for Global Government or International
Equity.
(B) After fee waivers. In the absence of such waivers, the expected management
fee, 12b-1 fee, other expenses, and total operating expenses of Emerging
Markets would be 1.00%, 1.00%, .86% and 2.86% of average net assets.
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. With the exception of shares of Emerging Markets redeemed within
one year of purchase, the Funds charge no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------
Global Government $ 19 $58 $101 $218
International Equity $ 22 $68 $116 $250
Emerging Markets $ 46 $78 $133 $284
Emerging Markets
(Assuming no
redemption) $ 25 $78 $133 $284
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, 1999, 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 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 27.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been audited by
Coopers & Lybrand L.L.P., independent accountants. Global Government's,
International Equity's and Emerging Markets' financial statements for the
year ended December 31, 1997 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 DISTRIBUTIONS FROM:
------------------------------------------------------ ------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVEST- IN EXCESS
NET ASSET NET MENTS, OPTIONS, TOTAL IN EXCESS NET OF NET
VALUE, INVESTMENT FUTURES AND FROM NET OF NET REALIZED REALIZED
BEGINNING INCOME FOREIGN CURRENCY INVESTMENT INVESTMENT INVESTMENT GAIN ON GAIN ON
OF YEAR (LOSS) TRANSACTIONS OPERATIONS INCOME INCOME INVESTMENTS INVESTMENTS
----------------------------------------------------------------------------------------------------------------------------
<S><C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1997 $ 10.41 $ .54 $ (.71) $ (.17) $ (.48) $(.05) $(.11) $ --
1996 10.33 .59 .21 .80 (.62) -- (.10) --
1995 9.54 .63 1.32 1.95 (1.16) -- -- --
1994 10.27 .57(A) (.71) (.14) (.59) -- -- --
1993(D) 10.00 .36(A) .31 .67 (.36) -- (.04) --
INTERNATIONAL EQUITY
TRUST
Years Ended Dec. 31,
1997 $ 12.09 $ .02 $ .19 $ .21 $ (.08) $ -- $(.44) $ --
1996 10.70 .02(B) 1.74 1.76 (.05) -- (.32) --
1995(E) 10.00 .04(B) .77 .81 (.04) -- -- (.07)
EMERGING MARKETS TRUST
Years Ended Dec. 31,
1997 $ 10.51 $ (.02)(C) $ (.63) $ (.65) $ (.01) $ -- $ -- $ --
1996(F) 10.00 (.03)(C) .57 .54 (.03) -- -- --
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------------------------------------
NET
NET ASSET INVESTMENT AVERAGE NET ASSETS,
VALUE, EXPENSES INCOME (LOSS) PORTFOLIO COMMISSION END OF
TOTAL END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER RATE YEAR
DISTRIBUTIONS YEAR RETURN NET ASSETS NET ASSETS RATE PAID(G) (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
<S><C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1997 $ (.64) $ 9.60 (1.69)% 1.86% 5.39% 241% $ -- $136,732
1996 (.72) 10.41 8.22% 1.86% 5.80% 172% -- 161,549
1995 (1.16) 10.33 20.80% 1.81% 5.72% 169% -- 153,954
1994 (.59) 9.54 (1.40)% 1.34%(A) 5.71%(A) 127% -- 145,415
1993(D) (.40) 10.27 6.76%(H) .27%(A,I) 5.41%(A,I) 128%(I) -- 161,072
INTERNATIONAL EQUITY
TRUST
Years Ended Dec. 31,
1997 $ (.52) $ 11.78 1.76% 2.17% .17% 59% $.0082 $227,655
1996 (.37) 12.09 16.49% 2.25%(B) .21%(B) 83% .0083 167,926
1995(E) (.11) 10.70 8.11%(H) 2.25%(B,I) .52%(B,I) 58%(I) -- 65,947
EMERGING MARKETS TRUST
Years Ended Dec. 31,
1997 $ (.01) $ 9.85 (6.18)% 2.50%(C) (.76)%(C) 63% $.0054 $ 65,302
1996(F) (.03) 10.51 5.40%(H) 2.50%(C,I) (.68)%(C,I) 46%(I) .0061 21,206
</TABLE>
------------------
(A) NET OF FEES WAIVED BY LMFA 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. IF NO FEES HAD BEEN WAIVED BY LMFA, THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS
FOLLOWS: 1994, 1.82%; AND 1993, 1.93%.
(B) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 2.25%.
IF NO FEES HAD BEEN WAIVED BY LMFA, THE ANNUALIZED RATIO OF EXPENSES TO
AVERAGE DAILY NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS FOLLOWS:
1996, 2.32%; AND 1995, 2.91%.
(C) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 2.50%.
IF NO FEES HAD BEEN WAIVED BY LMFA, THE ANNUALIZED RATIO OF EXPENSES TO
AVERAGE DAILY NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS FOLLOWS:
1997, 2.86%; AND 1996, 3.71%.
(D) FOR THE PERIOD APRIL 15, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1993.
(E) FOR THE PERIOD FEBRUARY 17, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1995.
(F) FOR THE PERIOD MAY 28, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1996.
(G) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE AVERAGE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY THE FUNDS. THE REGULATIONS FOR AVERAGE COMMISSION
RATES ARE NOT APPLICABLE TO NON-EQUITY FUNDS.
(H) NOT ANNUALIZED
(I) ANNUALIZED
5
<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, International Equity invests in common
stocks located outside the United States.
Total returns of Primary Shares as of December 31, 1997 were as follows:
CUMULATIVE TOTAL GLOBAL INTERNATIONAL EMERGING
RETURN GOVERNMENT EQUITY MARKETS
- ----------------------------------------------------------
One Year -1.69% + 1.76% -6.18%(C)
Life of Class +35.29%(A) + 28.16%(B) -1.11%(D)
AVERAGE ANNUAL
TOTAL RETURN
- ----------------------------------------------------------
One Year -1.69% + 1.76% -6.18%(C)
Life of Class +6.62%(A) + 9.02%(B) -0.70%(D)
- ---------------
(A) INCEPTION OF GLOBAL GOVERNMENT -- APRIL 15, 1993.
(B) INCEPTION OF INTERNATIONAL EQUITY -- FEBRUARY 17, 1995.
(C) NET OF 2.0% REDEMPTION FEE ASSESSED WITHIN TWELVE MONTHS OF PURCHASE.
(D) INCEPTION OF EMERGING MARKETS -- MAY 28, 1996.
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 Financial Advisor or
Service Provider or Legg Mason's Funds Marketing Department at 800-822-5544.
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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 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
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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.
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 15 and "Risks of Futures,
Options and Forward Currency Exchange Contracts," page 16. The Fund may
purchase securities on a when-issued basis and enter into forward
commitments to purchase securities (see page 21); 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."
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 outside
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
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15 and "Risks of Futures, Options and Forward Currency Exchange
Contracts," page 16.
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 15, and "Risks of Futures, Options and
Forward Currency Exchange Contracts," page 16.
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 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 each 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).
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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.
Additional fundamental and non-fundamental investment restrictions are
set forth in the Statement of Additional Information.
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
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<PAGE>
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.
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.
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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 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
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<PAGE>
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 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
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<PAGE>
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 that Fund's 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 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.
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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 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.
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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; and (6) 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.
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
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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. 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 10. 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.
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.
The market for lower-rated securities may be thinner and less active
than that for higher-rated securities. 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, 1997, 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. A further description of Moody's and S&P's ratings is included
in the Appendix to the Statement of Additional Information.
MOODY'S Aaa/
RATINGS Aa/A Baa Ba B Caa Ca C NR
- ----------------------------------------------------------------------
Average 74.2% 4.5% 16.9% 2.9% -- 1.5% -- --%
AAA/ CC/
S&P RATINGS AA/A BBB BB B CCC C D NR
- ----------------------------------------------------------------------
Average 75.2% 3.8% 17.8% 1.7% -- 1.5% -- --%
Global Government held no unrated securities during the fiscal year.
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
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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 and Freddie Mac
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 ("CMOs")
which are collateralized by mortgage-related securities issued by Freddie
Mac, Fannie Mae, 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
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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 Freddie Mac, Fannie Mae 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 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.
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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.
Forward Commitments
The Fund may enter into commitments to purchase U.S. government
securities or other securities on a "forward commitment" basis, including
purchases on a "when-issued" basis or a "to be announced" basis. When such
transactions are negotiated, the price is fixed at the time the commitment
is made, but delivery and payment for the securities takes place at a
later date. Such securities are often the most efficiently priced and have
the best liquidity in the bond market. During the period between a
commitment and settlement, no payment is made by the purchaser for the
securities purchased and, thus, no interest accrues to the purchaser from
the transaction. In a to be announced transaction, the Fund has committed
to purchase securities for which all specific information is not yet known
at the time of the trade, particularly the exact face amount in forward
commitment mortgage-backed securities transactions.
The Fund may sell the securities subject to a forward commitment
purchase, which may result in a gain or loss. When the Fund purchases
securities on a forward commitment basis, it assumes the risks of
ownership, including the risk of price fluctuation, at the time of
purchase, not at the time of receipt. Purchases of forward commitment
securities also involve a risk of loss if the seller fails to deliver
after the value of the securities has risen. Depending on market
conditions, the Fund's forward commitment purchases could cause its net
asset value to be more volatile. The Fund will direct its custodian to
place cash or U.S. government obligations in a separate account equal to
the commitments of the Fund to purchase securities as a result of its
forward commitment obligation.
The Fund may also enter into a forward commitment to sell only those
securities it owns and will do so only with the intention of actually
delivering the securities. The use of forward commitments enables the Fund
to hedge against anticipated changes in interest rates and prices. In a
forward sale, the Fund does not participate in gains or losses on the
security occurring after the commitment date. The Fund will direct its
custodian to place the securities in a separate account. Forward
commitments to sell securities also involve a risk of loss if the seller
fails to take delivery after the value of the securities has declined.
Further risks involving forward commitments are discussed in the section
"Risks of Futures, Options and Forward Currency Exchange Contracts,"
above.
The Fund does not expect that its purchases of forward commitments
will at any time exceed, in the aggregate, 20% of its total assets.
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
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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 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.
FOR EACH FUND:
Portfolio Turnover
For the year ended December 31, 1997, Global Government's portfolio
turnover rate was 241%, International Equity's portfolio turnover rate was
59% and Emerging Markets' portfolio turnover rate was 63%. 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, which 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, with an affiliate that has an agreement with Legg
Mason, or with an unaffiliated entity having an agreement with Legg Mason
("Financial Advisor or Service Provider"). Your Financial Advisor or
Service Provider will be pleased to explain the shareholder services
available from the Funds and answer any questions you may have. Documents
available from your Financial Advisor or Service Provider should be
completed if you invest in shares of the Funds through an Individual
Retirement Account, Simplified Employee Pension Plan, Savings Incentive
Match Plan for Employees or tax-qualified retirement plan (collectively
referred to as "Retirement Plans").
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.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds and investments in a Retirement Plan, is $1,000, and the minimum
investment for each purchase of additional shares is $100, except as noted
below.
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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 FINANCIAL ADVISOR OR SERVICE PROVIDER
Shares may be purchased through a Financial Advisor or Service
Provider. A Financial Advisor or Service Provider 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 an account, you can order shares from your Financial Advisor
or Service Provider 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 Legg Mason account or from your checking account. Please contact your
Financial Advisor or Service Provider 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 their Financial
Advisor or Service Provider.
Primary Share purchases will be processed at the net asset value next
determined after your Financial Advisor or Service Provider has received
your order; payment must be made within three business days to Legg Mason.
Orders received by your Financial Advisor or Service Provider 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 Financial
Advisor or Service Provider 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 24.
Each Fund reserves the right to reject any order for its shares or to
suspend the offering of shares for a period of time. Some Service
Providers may place other conditions on the purchase of shares. Consult
their program literature for further information.
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 that does not have an
agreement with Legg Mason. The Funds do not 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 Financial Advisor or Service Provider an order for repurchase of
your shares. Please have the following information ready when you call:
the name of the Fund, the number of shares (or dollar amount) 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 Financial Advisor or Service Provider before the close of the
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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 Financial Advisor or Service Provider
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 Financial Advisor or Service Provider
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 (or
dollar amount) 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 Financial
Advisor or Service Provider.
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. 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.
The fee does apply to shares held in IRA accounts (including IRA-based
plans) 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.
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
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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 Financial Advisor or
Service Provider 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
each 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 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.
Some Service Providers may have other procedures for redemption,
either in addition to or instead of those described above. Consult your
Service Provider's literature for more information.
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 by
Global Government; and are declared and paid annually by 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 or Service Provider. 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 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 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;
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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, shareholders may reinvest dividends and other
distributions in the Primary Shares of another Legg Mason fund. Please
contact your Financial Advisor or Service Provider 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. If a shareholder has
elected to receive dividends and/or other distributions in cash and the
postal or other delivery service is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option
will automatically be converted to having all dividends and other
distributions reinvested in additional Primary Shares. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks. 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 record 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 it
distributes 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 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. Under the Taxpayer Relief Act of 1997 ("Tax
Act"), different maximum tax rates apply to a noncorporate taxpayer's net
capital gain depending on the holding period of the security and the
taxpayer's marginal rate of federal income tax. The relevant holding
period is determined by how long the Fund has held the portfolio security
on which the gain was earned, not by how long you have held your 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. The notice
will tell you what portion of the capital gain falls into each of the
different tax rate categories mentioned above.
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 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 of any Fund for shares of any other
Legg Mason fund generally will have similar tax consequences. See
"Shareholder Services -- Exchange Privilege." If Fund shares are purchased
within 30 days before or after redeeming at a loss other shares of the
same Fund (regardless of class),
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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 and/or total return 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.
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, the 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,
alternatively, use the foregoing information in calculating the foreign
tax credit against the shareholder's federal income tax. Each of these
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. If a Fund makes this election, then pursuant to the Tax Act,
individuals who have no more than $300 ($600 for married persons filing
jointly) of creditable foreign taxes included on Forms 1099 and all of
whose foreign source income is "qualified passive income" will be able to
claim a foreign tax credit without having to file the detailed Form 1116
that otherwise is required.
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.
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
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$5,000 or more. Shareholders should not purchase shares of a Fund while
they are participating in the Systematic Withdrawal Plan with respect to
that Fund. Please contact your Financial Advisor or Service Provider for
further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for Primary 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 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 Financial
Advisor or Service Provider. To effect an exchange by telephone, please
call your Financial Advisor or Service Provider with the information
described in "How You Can Redeem Your Primary Shares," page 22. 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 23.
Some Service Providers may not offer all of the Legg Mason Funds for
exchange.
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.
MANAGEMENT AGREEMENTS
Each Fund has a management agreement with LMFA which was approved by
the Fund's Board of Directors (each a "Management Agreement"). Under the
Management Agreements, LMFA is obligated to provide the Funds with
investment management and administrative services, and to oversee the
Funds' relationships with outside service providers, such as the
custodian, transfer agent, accountants, and lawyers.
For services under the Management Agreements, LMFA receives a fee from
each Fund, calculated daily and payable monthly, at the following annual
rates:
Global Government 0.75%
International Equity 0.75%
Emerging Markets 1.00%
Because of fee waivers (see below), Emerging Markets paid a management
fee of 0.64% during the fiscal year ended December 31, 1997.
ADVISORY AGREEMENTS
LMFA has entered into investment advisory agreements with Western
Asset and Batterymarch (each an "Advisory Agreement") to provide
investment advisory services to the Funds. These advisers have the
responsibility for making investment decisions and placing orders to buy
or sell a particular security.
Under its Advisory Agreement, Batterymarch serves as investment
adviser to International Equity and Emerging Markets. Batterymarch
receives an advisory fee from LMFA, computed daily and paid monthly at an
annual rate equal to 0.50% of International Equity's average daily net
assets and 0.75% of Emerging Markets' average daily net assets, prior to
any fee waivers, as discussed below.
Under its Advisory Agreement, Western Asset serves as investment
adviser to Global Government. Western Asset receives an advisory 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.
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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 is 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 also receives a
sub-administration fee from LMFA at an annual rate equal to 0.10% of the
Fund's average daily net assets for certain administrative services
performed.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent a Fund's
expenses related to Primary Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during that month annual
rates of that Fund's average daily net assets attributable to Primary
shares, as follows:
Global Government 1.90%, indefinitely
International Equity 2.25%, indefinitely
Emerging Markets 2.50% until May 1, 1999
These agreements are voluntary and may be terminated by LMFA at any
time. Each Fund pays all its other expenses which are not assumed by LMFA.
EXPENSE RATIOS
For the fiscal year ended December 31, 1997, the ratio of each Fund's
expenses to its average net assets (after application of any fee waivers)
was:
Global Government 1.86%
International Equity 2.17%
Emerging Markets 2.50%
In addition to management and distribution fees, each Fund will be
responsible for interest, taxes, brokerage fees and commissions, expenses
of preparing and printing prospectuses, proxy statements and reports to
shareholders and of distributing them to existing shareholders, custodian
charges, transfer agency fees, compensation of the independent directors,
legal and audit expenses, insurance expenses, shareholder meetings, proxy
solicitations, expenses of registering and qualifying Fund shares for sale
under federal and state law, government fees and expenses incurred in
connection with industry organizations.
LMFA
LMFA acts as adviser or manager to seventeen investment company
portfolios which had aggregate assets under management of approximately
$11.2 billion as of March 31, 1998. LMFA's address is 100 Light Street,
Baltimore, Maryland 21202.
Like other mutual funds, financial and business organizations around
the world, the Funds could be adversely affected if the computer systems
used by LMFA and other service providers do not properly process and
calculate date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." LMFA is taking
steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Funds' other major
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds.
WESTERN ASSET
Western Asset renders investment advice to fifteen open-end investment
companies and one closed-end investment company which together had
aggregate assets under management of approximately $5.2 billion as of
March 31, 1998. Western Asset also renders investment advice to private
accounts with fixed-income assets under management of approximately $33.7
billion as of that date. Western Asset has managed fixed-income portfolios
continuously since its founding in 1971, and has focused exclusively on
such accounts since 1984. The address of Western Asset is 117 East
Colorado Boulevard, Pasadena, California 91105.
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WESTERN ASSET GLOBAL
Western Asset Global, located at 155 Bishops-gate, London EC2M 3 TY,
also renders investment advice to institutional, private and commingled
fund portfolios with assets of over $3.0 billion as of March 31, 1998.
Western Asset Global has managed global fixed-income assets for U.S. and
non-U.S. clients since 1984.
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, 1998. The address of
Batterymarch is 200 Clarendon Street, Boston, Massachusetts 02116.
PORTFOLIO MANAGEMENT
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 since December 1994.
Batterymarch investment teams are 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
attributable to Primary Shares, and 0.75% of International Equity's and
Emerging Markets' average daily net assets attributable to Primary Shares;
and an annual service fee from each Fund equal to 0.25% of its average
daily net assets attributable to Primary Shares. The 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 for Primary Shares of 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. Legg Mason may enter into
agreements with unaffiliated dealers to sell Primary Shares of each Fund.
Legg Mason pays such dealers up to 90% of the distribution and shareholder
service fees that it receives from a Fund with respect to shares sold by
the dealers.
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 LMFA 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, 1997, Legg Mason received
$31,000, $68,000 and $23,000 for performing such services in connection
with Global Government, International Equity and Emerging Markets,
respectively.
The President and Treasurer of the Corporation are employed by Legg
Mason.
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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 in accordance with SEC rules. 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 are
considered. No assurance can be given that the 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.
Investors may obtain more information concerning the Navigator Class
from their financial advisor or any person making available to them shares
of the Primary Class, or by calling 1-800-822-5544.
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 100 Light 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.
30
<PAGE>
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<PAGE>
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<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, 1998
This wrapper is not part of the prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000 800 o 822 o 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.
250 W. Pratt Street
Baltimore, MD 21201
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.
<PAGE>
NAVIGATOR GLOBAL FUNDS
PROSPECTUS
MAY 1, 1998
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 a "Fund") 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, 1998 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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 Institutional
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 any qualified retirement plan of Legg
Mason, Inc. or of any of its affiliates. 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.
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 26
Description of the Corporation and its Shares 26
Legg Mason Wood Walker, Inc.
100 Light 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 0.75% 0.75% 0.64%(B)
12b-1 fees None None None
Other expenses 0.36% 0.42% 0.86%
-------------------------------------
Total operating
expenses 1.11% 1.17% 1.50%(B)
-------------------------------------
---------------------
(A) After fee waivers. Pursuant to voluntary expense limitations, LMFA and
each Fund's adviser have agreed to waive management fees to the extent
necessary to limit total operating expenses attributable to Navigator
Shares of each Fund (exclusive of taxes, interest, brokerage and
extraordinary expenses) as follows: for Global Government 1.11% of
average daily net assets indefinitely; for International Equity, 1.25%
of average daily net assets indefinitely; and for Emerging Markets,
1.50% of average daily net assets until May 1, 1999. No fee waivers
would be necessary for Global Government and International Equity.
(B) After fee waivers. In the absence of such waivers, the expected
management fee, other expenses, and total operating expenses of Emerging
Markets would be 1.00%, 0.86% and 1.86% of average net assets.
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 $12 $37 $64 $142
Emerging Markets $36 $47 $82 $179
Emerging Markets
(Assuming no redemption) $15 $47 $82 $179
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., independent accountants. Global Government's,
International Equity's and Emerging Markets' financial statements for the
year ended December 31, 1997 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 IN EXCESS NET OF NET
VALUE, INVESTMENT FUTURES AND FROM NET OF NET REALIZED REALIZED
BEGINNING INCOME FOREIGN CURRENCY INVESTMENT INVESTMENT INVESTMENT GAIN ON GAIN ON
OF YEAR (LOSS) TRANSACTIONS OPERATIONS INCOME INCOME INVESTMENTS INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
<S><C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1997 $ 10.41 $ .54 $ (.71) $ (.17) $ (.48) $ (.05) $(.11) $ --
1996 10.33 .59 .21 .80 (.62) -- (.10) --
1995 9.54 .63 1.32 1.95 (1.16) -- -- --
1994 10.27 .57(A) (.71) (.14) (.59) -- -- --
1993(D) 10.00 .36(A) .31 .67 (.36) -- (.04) --
INTERNATIONAL EQUITY TRUST
Years Ended Dec. 31,
1997 $ 12.09 $ .02 $ .19 $ .21 $ (.08) $ -- $(.44) $ --
1996 10.70 .02(B) 1.74 1.76 (.05) -- (.32) --
1995(E) 10.00 .04(B) .77 .81 (.04) -- -- (.07)
EMERGING MARKETS TRUST
Years Ended Dec. 31,
1997 $ 10.51 $ (.02)(C) $ (.63) $ (.65) $ (.01) $ -- $ -- $ --
1996(F) 10.00 (.03)(C) .57 .54 (.03) -- -- --
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------
NET
NET ASSET INVESTMENT AVERAGE NET ASSETS,
VALUE, EXPENSES INCOME (LOSS) PORTFOLIO COMMISSION END OF
TOTAL END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER RATE YEAR
DISTRIBUTIONS YEAR RETURN NET ASSETS NET ASSETS RATE PAID(G) (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
<S><C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1997 $ (.64) $ 9.60 (1.69)% 1.86% 5.39% 241% $ -- $136,732
1996 (.72) 10.41 8.22% 1.86% 5.80% 172% -- 161,549
1995 (1.16) 10.33 20.80% 1.81% 5.72% 169% -- 153,954
1994 (.59) 9.54 (1.40)% 1.34%(A) 5.71%(A) 127% -- 145,415
1993(D) (.40) 10.27 6.76%(H) 0.27%(A,I) 5.41%(A,I) 128%(I) -- 161,072
INTERNATIONAL EQUITY TRUST
Years Ended Dec. 31,
1997 $ (.52) $ 11.78 1.76% 2.17% .17% 59% $.0082 $227,655
1996 (.37) 12.09 16.49% 2.25%(B) .21%(B) 83% .0083 167,926
1995(E) (.11) 10.70 8.11%(H) 2.25%(B,I) .52%(B,I) 58%(I) -- 65,947
EMERGING MARKETS TRUST
Years Ended Dec. 31,
1997 $ (.01) $ 9.85 (6.18)% 2.50%(C) (.76)%(C) 63% $.0054 $ 65,302
1996(F) (.03) 10.51 5.40%(H) 2.50%(C,I) (.68)%(C,I) 46%(I) .0061 21,206
</TABLE>
------------------
(A) NET OF FEES WAIVED BY LMFA 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. IF NO FEES HAD BEEN WAIVED BY LMFA, THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS
FOLLOWS: 1994, 1.82%; AND 1993, 1.93%.
(B) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 2.25%.
IF NO FEES HAD BEEN WAIVED BY LMFA, THE ANNUALIZED RATIO OF EXPENSES TO
AVERAGE DAILY NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS FOLLOWS:
1996, 2.32%; AND 1995, 2.91%.
(C) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 2.50%.
IF NO FEES HAD BEEN WAIVED BY LMFA, THE ANNUALIZED RATIO OF EXPENSES TO
AVERAGE DAILY NET ASSETS FOR EACH PERIOD WOULD HAVE BEEN AS FOLLOWS:
1997, 2.86%; AND 1996, 3.71%.
(D) FOR THE PERIOD APRIL 15, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1993.
(E) FOR THE PERIOD FEBRUARY 17, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1995.
(F) FOR THE PERIOD MAY 28, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1996.
(G) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE AVERAGE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY THE FUNDS. THE REGULATIONS FOR AVERAGE COMMISSION
RATES ARE NOT APPLICABLE TO NON-EQUITY FUNDS.
(H) NOT ANNUALIZED
(I) ANNUALIZED
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, International Equity invests in common
stocks located outside the United States.
Total returns as of December 31, 1997 were as follows:
CUMULATIVE TOTAL GLOBAL INTERNATIONAL EMERGING
RETURN GOVERNMENT EQUITY MARKETS
- ----------------------------------------------------------
Primary Class:
One Year -1.69% +1.76% -6.18%(C)
Life of Class +35.29%(A) +28.16%(B) -1.11%(D)
AVERAGE ANNUAL
TOTAL RETURN
- ----------------------------------------------------------
Primary Class:
One Year -1.69% +1.76% -6.18%(C)
Life of Class +6.62%(A) +9.02%(B) -0.70%(D)
- ---------------
(A) INCEPTION OF GLOBAL GOVERNMENT -- APRIL 15, 1993.
(B) INCEPTION OF INTERNATIONAL EQUITY -- FEBRUARY 17, 1995.
(C) NET OF 2.0% REDEMPTION FEE ASSESSED WITHIN TWELVE MONTHS OF PURCHASE.
(D) INCEPTION OF EMERGING MARKETS -- MAY 28, 1996.
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
certain fees 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 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 15 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.
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").
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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 (see page 18); 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."
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 outside
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 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
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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 each 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).
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.
Additional fundamental and non-fundamental investment restrictions are
set forth in the Statement of Additional Information.
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
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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
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.
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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
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
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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 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.
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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 that Fund's 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 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
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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 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
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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 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.
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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. 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 8. 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.
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.
The market for lower-rated securities may be thinner and less active
than that for higher-rated securities. 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.
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, 1997, 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. A further description of Moody's and S&P's ratings is included
in the Appendix to the Statement of Additional Information.
MOODY'S Aaa/
RATINGS Aa/A Baa Ba B Caa Ca C NR
- ----------------------------------------------------------------------
Average 74.2% 4.5% 16.9% 2.9% -- 1.5% -- --%
AAA/ CC/
S&P RATINGS AA/A BBB BB B CCC C D NR
- ----------------------------------------------------------------------
Average 75.2% 3.8% 17.8% 1.7% -- 1.5% -- --%
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Global Government held no unrated securities during the fiscal year.
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 and Freddie Mac 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-related securities issued by Freddie
Mac, Fannie Mae, 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
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<PAGE>
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 Freddie Mac, Fannie Mae 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 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
17
<PAGE>
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.
Forward Commitments
The Fund may enter into commitments to purchase U.S. government
securities or other securities on a "forward commitment" basis, including
purchases on a "when-issued" basis or a "to be announced" basis. When such
transactions are negotiated, the price is fixed, at the time the
commitment is made, but delivery and payment for the securities takes
place at a later date. Such securities are often the most efficiently
priced and have the best liquidity in the bond market. During the period
between a commitment and settlement, no payment is made by the purchaser
for the securities purchased and, thus, no interest accrues to the
purchaser from the transaction. In a to be announced transaction, the Fund
has committed to purchase securities for which all specific information is
not yet known at the time of the trade, particularly the exact face amount
in forward commitment mortgage-backed securities transactions.
The Fund may sell the securities subject to a forward commitment
purchase, which may result in a gain or loss. When the Fund purchases
securities on a forward commitment basis, it assumes the risks of
ownership, including the risk of price fluctuation, at the time of
purchase, not at the time of receipt. Purchases of forward commitment
securities also involve a risk of loss if the seller fails to deliver
after the value of the securities has risen. Depending on market
conditions, the Fund's forward commitment purchases could cause its net
asset value to be more volatile. The Fund will direct its custodian to
place cash or U.S. government obligations in a separate account equal to
the commitments of the Fund to purchase securities as a result of its
forward commitment obligation.
The Fund may also enter into a forward commitment to sell only those
securities it owns and will do so only with the intention of actually
delivering the securities. The use of forward commitments enables the Fund
to hedge against anticipated changes in interest rates and prices. In a
forward sale, the Fund does not participate in gains or losses on the
security occurring after the commitment date. The Fund will direct its
custodian to place the securities in a separate account. Forward
commitments to sell securities also involve a risk of loss if the seller
fails to take delivery after the value of the securities has declined.
Further risks involving forward commitments are discussed in the section
"Risks of Futures, Options and Forward Currency Exchange Contracts,"
above.
The Fund does not expect that its purchases of forward commitments
will at any time exceed, in the aggregate, 20% of its total assets.
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.
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<PAGE>
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.
FOR EACH FUND:
PORTFOLIO TURNOVER
For the year ended December 31, 1997, Global Government's portfolio
turnover rate was 241%, International Equity's portfolio turnover rate was
59% and Emerging Markets' portfolio turnover rate was 63%. 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, which 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.
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.
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<PAGE>
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. 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, 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 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
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<PAGE>
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 that does not have an
agreement with Legg Mason or Fairfield. The Funds do not 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 by
Global Government and are declared and paid annually by 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 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;
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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 Navigator 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
Navigator 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. If the postal or other delilvery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional Navigator
Shares. No interest will accrue on amounts represented by uncashed
distribution or redemption checks. 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 it distributes to its shareholders.
Dividends from each 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. Under the Taxpayer Relief Act of 1997
("Tax Act"), different maximum tax rates apply to a noncorporate
taxpayer's net capital gain depending on the holding period of the
security and the taxpayer's marginal rate of federal income tax. The
relevant holding period is determined by how long the Fund has held the
portfolio security on which the gain was earned, not by how long you have
held your 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. The notice
will tell you what portion of the capital gain falls into each of the
different tax rate categories mentioned above.
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 Navigator 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 Navigator Shares of any Fund 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 at a loss
other shares of the same Fund (regardless of class), all or part of that
loss will not be deductible and instead will increase the basis of the
newly purchased shares.
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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 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.
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 and/or total return 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.
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. If a
Fund makes this election, then pursuant to the Tax Act, individuals who
have no more than $300 ($600 for married persons filing jointly) of
creditable foreign taxes included on Forms 1099 and all of whose foreign
source income is "qualified passive income" will be able to claim a
foreign tax credit without having to file the detailed Form 1116 that
otherwise is required.
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
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 in your state of residence. Some
Institutional Clients may not offer all of the Navigator Funds for
exchange.
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<PAGE>
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 19. 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.
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.
MANAGEMENT AGREEMENTS
Each Fund has a management agreement with LMFA which was approved by
the Fund's Board of Directors (each a "Management Agreement"). Under the
Management Agreements, LMFA is obligated to provide the Funds with
investment management and administrative services, and to oversee the
Funds' relationships with outside service providers, such as the
custodian, transfer agent, accountants, and lawyers.
For services under the Management Agreements, LMFA receives a fee from
each Fund, calculated daily and payable monthly, at the following annual
rates:
Global Government 0.75%
International Equity 0.75%
Emerging Markets 1.00%
Because of fee waivers (see below), Emerging Markets paid a management
fee of 0.64% during the fiscal year ended December 31, 1997.
ADVISORY AGREEMENTS
LMFA has entered into investment advisory agreements with Western
Asset and Batterymarch (each an "Advisory Agreement") to provide
investment advisory services to the Funds. These advisers have the
responsibility for making investment decisions and placing orders to buy
or sell a particular security.
Under its Advisory Agreement, Batterymarch serves as investment
adviser to International Equity and Emerging Markets. Batterymarch
receives an advisory fee from LMFA, computed daily and paid monthly at an
annual rate equal to 0.50% of International Equity's average daily net
assets and 0.75% of Emerging Markets' average daily net assets, prior to
any fee waivers, as discussed below.
Under its Advisory Agreement, Western Asset serves as investment
adviser to Global Government. Western Asset receives an advisory 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.
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 is 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 also receives a
sub-administration fee from LMFA at an annual rate equal to 0.10% of the
Fund's average daily net assets for certain administrative services
performed.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent a Fund's
expenses related to Navigator Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during that month annual
rates of that Fund's average daily net assets attributable to Navigator
shares, as follows:
Global Government......... 1.15%, indefinitely
International Equity...... 1.25%, indefinitely
Emerging Markets.......... 1.50% until May 1, 1999
These agreements are voluntary and may be terminated by LMFA at any
time. Each Fund pays all its other expenses which are not assumed by LMFA.
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EXPENSE RATIOS
For the fiscal year ended December 31, 1997, the ratio of each Fund's
expenses to its average net assets (after application of any fee waivers)
was:
Global Government 1.11%
International Equity 1.17%
Emerging Markets 1.50%
LMFA
LMFA acts as adviser or manager to seventeen investment company
portfolios which had aggregate assets under management of approximately
$11.2 billion as of March 31, 1998. LMFA's address is 100 Light Street,
Baltimore, Maryland 21202.
Like other mutual funds, financial and business organizations around
the world, the Funds could be adversely affected if the computer systems
used by LMFA and other service providers do not properly process and
calculate date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." LMFA is taking
steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Funds' other,
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Funds.
WESTERN ASSET
Western Asset renders investment advice to fifteen open-end investment
companies and one closed-end investment company which together had
aggregate assets under management of approximately $5.2 billion as of
March 31, 1998. Western Asset also renders investment advice to private
accounts with fixed-income assets under management of approximately $33.7
billion as of that date. Western Asset has managed fixed- income
portfolios continuously since its founding in 1971, and has focused
exclusively on such accounts since 1984. The address of Western Asset is
117 East Colorado Boulevard, Pasadena, California 91105.
WESTERN ASSET GLOBAL
Western Asset Global, located at 155 Bishopsgate, London EC2M 3 TY,
also renders investment advice to institutional, private and commingled
fund portfolios with assets of over $3.0 billion as of March 31, 1998.
Western Asset Global has managed global fixed-income assets for U.S. and
non-U.S. clients since 1984.
BATTERYMARCH
Batterymarch acts as investment adviser to institutional accounts,
such as corporate pension plan, 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, 1998. The address of
Batterymarch is 200 Clarendon Street, Boston, Massachusetts 02116.
PORTFOLIO MANAGEMENT
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 since December 1994.
Batterymarch investment teams are 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.
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<PAGE>
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.
Legg Mason and LMFA may make payments out of their own assets to
Fairfield or others to support the distribution of Navigator Shares and
Shareholder Servicing.
The 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 in accordance with SEC rules. 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 are
considered. No assurance can be given that the 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 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.
Investors may obtain more information concerning the Primary Class
from their financial advisor or by calling 1-800-822-5544.
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 100 Light 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
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Notes
<PAGE>
Notes
<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, 1998
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 Prospectuses for Primary Shares and for
Navigator Shares of the Funds, both dated May 1, 1998, 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 a "Fund" ) 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 countries other than the United States.
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.
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 any
qualified retirement plan of Legg Mason, Inc. or of any of its affiliates. 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") is 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 imposed
by the Funds. 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
- --------------------------------------------------------------------------------
100 Light 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 that Fund's shareholders.
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 331/3% 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 331/3% 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
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(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 331/3% 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;
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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 to exceed
any of the foregoing limitations.
Except as otherwise specified, the following investment limitations and
policies, and all other investment limitations and policies of the Funds, are
non-fundamental and may be changed by the Corporation's Board of Directors
without shareholder approval.
Each Fund may not:
1. 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;
2. 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);
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In addition, Global Government may not:
3. 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.
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.
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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 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,
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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 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 Freddie Mac because there is a
tendency for the conventional and privately-insured mortgages underlying Freddie
Mac 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. Thus, an increase in interest rates can slow prepayments
effectively extending the maturity of mortgage-related securities and making
them more sensitive to changes in value caused by interest-rate fluctuations.
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.
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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 Corporation'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 is 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
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
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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 for
widespread destruction or confiscation of property owned by individuals and
entities foreign to that country or ethnic region 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
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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 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 owed 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. Such securities may include those that are subject to restrictions
contained in the securities laws of other countries. Restricted securities may
be sold in the U.S. 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.
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.
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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.
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 contraparty
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.
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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 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.
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A Fund may write covered call options on securities in its portfolio.
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 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 may serve 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,
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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.
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 currency which the Adviser
expects to show a high degree of correlation to the first 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 within 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.
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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
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
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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 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 some 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.
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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:
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 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
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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.
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, do not 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.
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:
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(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.
(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
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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.
(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
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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. 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
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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
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
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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.
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 contracts. 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
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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:
BRADY BONDS
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 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 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
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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.
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 and 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.
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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
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 qualified retirement plans managed on a discretionary basis and
having net assets of at least $200 million, and to any qualified retirement plan
of Legg Mason, Inc. or of any of its affiliates. 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
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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"),
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 other
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 other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax 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
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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 markets 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 Global Government and
International Equity. 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
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"),
each Fund (which is treated as a separate corporation for federal income tax
purposes) 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) 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 (3) 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.
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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 other than a "controlled
foreign corporation" (i.e., a foreign corporation in which, on any day during
its taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which a Fund is a U.S. shareholder 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" ("QEF"), 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 QEF'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 by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gain were not distributed to the Fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Each Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also will be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included in income by the
Fund for prior taxable years. A Fund's adjusted basis in each PFIC's stock
subject to the election will be adjusted to reflect the amounts of income
included and deductions taken thereunder. Regulations proposed in 1992 would
provide a similar election with respect to the stock of certain PFICs.
29
<PAGE>
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 amount,
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.
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 balance will be treated as
short-term capital gain or loss. As of the date of this Statement of Additional
Information, it is not entirely clear whether that 60% portion will qualify for
the reduced maximum tax rates on noncorporate taxpayers' net capital gain
enacted by Taxpayer Relief Act of 1997 -- 20% (10% for taxpayers in the 15%
marginal tax bracket) for gain recognized on capital assets held for more than
18 months -- instead of the 28% rate in effect before that legislation, which
now applies to gain recognized on capital assets held
30
<PAGE>
for more than one year but not more than 18 months. However, technical
corrections legislation passed by the House of Representatives late in 1997
would clarify that the lower rates apply. 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.
If a Fund has an "appreciated financial position"--generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by a
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
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 federal alternative minimum tax.
MARKET DISCOUNT, ORIGINAL ISSUE DISCOUNT AND "PAY-IN-KIND" SECURITIES (Global
Government only)
Global Government may invest in Brady Bonds (as described in the
Prospectuses) 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.
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<PAGE>
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.
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:
P(1+T)(n) = 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:
YIELD = 2 [(a-b + 1)(6)] - 1
---
cd
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<PAGE>
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.
Except as noted below, in determining 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, the maturity of an obligation with one or more call
provisions is assumed to be the next call date 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, 1997 was 7.38%.
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 Primary Shares of 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
1997 9,908 3,621 13,529
</TABLE>
*April 15, 1993 (commencement of operations) to December 31, 1993.
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<PAGE>
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1997 would
have been $9,600, and the investor would have received a total of $3,504 in
distributions. Returns would have been lower if Global Government's adviser had
not waived certain fees 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 Primary Shares of 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.
<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
1997 12,641 174 12,815
</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, 1997 would
have been $11,780, and the investor would have received a total of $995 in
distributions. Returns would have been lower if International Equity's adviser
had not waived certain fees 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 Primary Shares of 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
1997 9,850 39 9,889
</TABLE>
*May 28, 1996 (commencement of operations) to December 31, 1996.
34
<PAGE>
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1997 would
have been $9,850, and the investor would have received a total of $40 in
distributions. Returns would have been lower if Emerging Markets' adviser had
not waived certain fees during the fiscal years ended 1996 and 1997.
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, Australasia, Far East Index ("EAFE 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
35
<PAGE>
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 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 $71.0 billion as of March 31, 1998.
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
36
<PAGE>
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 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, Martin Luther King, Jr.'s Birthday, 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.
37
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Investors may invest in shares of a Fund through IRAs, SEPs, SIMPLEs
and tax 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 your
Financial Advisor or Service Provider and your employer. Additional information
with respect to these plans is available upon request from your Financial
Advisor or Service Provider.
Traditional IRA. Certain Primary Share investors may obtain tax
advantages by establishing an IRA. Specifically, except as noted below, 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. A married investor who is not an active participant in such a
plan and files a joint income tax return with his or her spouse (and their
combined adjusted gross income does not exceed $150,000) is not affected by the
spouse's active participant status. 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 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 SARSEP, 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.
Roth IRA. A shareholder whose adjusted gross income (or combined
adjusted gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
Education IRA. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA,
38
<PAGE>
provided that no more than the maximum amount allowable under current law
(currently $500) may be contributed for any year to Education IRAs for the same
beneficiary. Contributions are not deductible and may not be made after the
beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or transferred to an Education IRA of a qualified
family member).
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
An employer with no more than 100 employees that does not maintain
another retirement plan 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 either matching
contributions up to 3% of each such employee's salary or a 2% nonelective
contribution.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) 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 their 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 100 Light Street, Baltimore, Maryland,
unless otherwise indicated.
JOHN F. CURLEY, JR.,* [07/24/39] Chairman of the Board and Director;
Retired Vice Chairman and Director of Legg Mason Wood Walker, Inc. and Legg
Mason, Inc.; President and Director of three Legg Mason funds; Chairman of the
Board and Trustee of one Legg Mason fund; Chairman of the Board, President and
Trustee of one Legg Mason fund; Chairman of the Board and Director of three Legg
Mason funds.
39
<PAGE>
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. 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; 200 Eastern Parkway, Brooklyn,
New York. Director of the Brooklyn Museum of Art; Director of six Legg Mason
funds; Trustee of two Legg Mason funds. Formerly: Director of the Baltimore
Museum of Art.
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; 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.
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.
40
<PAGE>
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, 1998, 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, 1997. 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 - $3,700 $29,400
Director
Charles F. Haugh - $3,700 $29,400
Director
Arnold L. Lehman - $3,700 $29,400
Director
Jill E. McGovern - $3,700 $29,400
Director
T. A. Rodgers - $3,700 $29,400
Director
</TABLE>
(A) Represents fees paid to each director during the fiscal year ended December
31, 1997.
(B) Represents aggregate compensation paid to each director during the calendar
year ended December 31, 1997. There are nine open-end investment companies
in the Legg Mason Complex (with a total of seventeen funds).
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland corporation, is
located at 100 Light Street, Baltimore, Maryland 21202. LMFA is a wholly owned
subsidiary of Legg Mason, Inc., which also is the parent
41
<PAGE>
of Legg Mason and each Fund's adviser. 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 7, 1997. LMFA is
responsible for managing the Fund consistent with the Fund's investment
objectives and policies described in the Prospectuses 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 Prospectuses, 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 has voluntarily
agreed to waive indefinitely its fees to the extent the Fund's total operating
expenses attributable to Primary Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) exceed during any month an annual rate of the Fund's
average daily net assets attributable to Primary Shares of 1.90%. For the years
ended December 31, 1997, 1996 and 1995, LMFA did not waive any management fees .
For the years ended December 31, 1997, 1996 and 1995, the Fund paid management
fees of $1,155,558, $1,150,265 and $1,120,329, respectively.
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 7,
1997. 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 attributable to Primary Shares. This agreement will expire on
May 1, 1999, unless extended by LMFA and Batterymarch. For the years ended
December 31, 1997,1996 and the period February 17, 1995
42
<PAGE>
(commencement of operations of International Equity) to December 31, 1995, LMFA
waived $0, $91,764, and $201,121 respectively, in management fees. For the same
periods, the Fund paid management fees of $1,616,187, $933,951, and $26,166
respectively.
For the year ended December 31, 1997, Emerging Markets paid management
fees of $554,454 (prior to waiver of $198,734). 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.
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, a wholly owned subsidiary 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 7, 1997. 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 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. For the
years ended December 31, 1997, 1996 and 1995, LMFA paid Western $616,282,
$613,478 and $407,240, respectively.
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.
43
<PAGE>
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., 200 Clarendon Street, Boston,
Massachusetts 02116, 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 years ended December 31, 1997, 1996 and the period February 17,
1995 (commencement ofoperations) to December 31, 1995, Batterymarch received
$1,077,462, $539,873 and $16,946 respectively for its services to International
Equity Trust. For the period May 28, 1996 (commencement of operations) to
December 31, 1996, Batterymarch waived its fees for its services to Emerging
Markets. For the year ended December 31, 1997, Batterymarch received $266,194.
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 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.
Continuation of the Sub-Advisory Agreement was most recently approved by the
Board of Directors on November 7, 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 Board of Directors. As
compensation for Western Asset Global's services and for expenses borne by
Western Asset Global under the Sub-Advisory Agreement, Western Asset pays
Western Asset Global monthly at an annual rate equal to 0.20% of the Fund's
average daily net assets. In addition, LMFA pays Western Asset Global
44
<PAGE>
a fee at an annual rate equal to 0.10% of the Fund's average daily net assets
for certain administrative expenses. Fees paid by LMFA to Western Asset Global
for the period May 1, 1997 to December 31, 1997 totaled $102,219.
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 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 7, 1997, 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
disruption of portfolio management.
45
<PAGE>
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
attributable to Primary Shares 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% indefinitely.
EMERGING MARKETS: 2.50% until May 1, 1999.
For the years ended December 31, 1997, 1996 and 1995, Global Government
paid full distribution and service fees of $1,155,558, $1,150,140 and
$1,120,329, respectively.
For the years ended December 31, 1997, 1996 and the period February 17,
1995 (commencement of operations) to December 31, 1995, International Equity
paid full distribution and service fees of $2,154,916, $1,245,267 and $303,049
respectively.
For the year ended December 31, 1997 Emerging Markets paid full
distribution and service fees of $554,454. 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.
For the year ended December 31, 1997, Legg Mason incurred the following
expenses in connection with distribution and shareholder services for each Fund:
<TABLE>
<CAPTION>
Global International Emerging
Government Equity Markets
<S><C>
Compensation to sales personnel $697,000 $1,254,000 $322,000
Advertising 32,000 42,000 60,000
Printing and mailing of prospectuses to prospective
shareholders 86,000 116,000 149,000
Other 448,000 1,302,000 710,000
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Global International Emerging
Government Equity Markets
<S><C>
Total $1,263,000 $2,714,000 $1,241,000
</TABLE>
The foregoing table reflects the allocation of certain items of overhead, using
assumptions believed by Legg Mason to be reasonable.
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, 1997 and 1996, Global
Government's portfolio turnover rates were 241% and 172%, respectively. For the
years ended December 31, 1997 and 1996, , International Equity's portfolio
turnover rates were 59% and 83%, respectively. For the year ended December 31,
1997 and the period May 28, 1996 (commencement of operations) to December 31,
1996, Emerging Markets' portfolio turnover rates were 63% and 46% (annualized),
respectively.
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 broker-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 Funds' benefit. Each adviser's fee is not reduced by
reason of its receiving such brokerage and research services. For the years
ended December 31, 1997 and 1996, Global Government paid no brokerage
commissions. For the years ended December 31, 1997 and 1996 , International
Equity paid $556,869 and $498,457, respectively in brokerage commissions. For
the year ended December 31, 1997, and the period May 28, 1996 (commencement of
operations) to December 31, 1996, Emerging Markets paid $496,536 and $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, 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
47
<PAGE>
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, serves as the Corporation's independent accountants.
FINANCIAL STATEMENTS
The Statement of Net Assets as of December 31, 1997; the Statements of
Operations for the year ended December 31, 1997; the Statements of Changes in
Net Assets for the years ended December 31, 1997 and December 31, 1996 ; 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 year ended December 31,
1997, are hereby incorporated by reference in this Statement of Additional
Information.
48
<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 26
Additional Tax Information 28
Performance Information 31
Valuation of Fund Shares 36
Tax-Deferred Retirement Plans 36
The Corporation's Directors and Officers 38
The Funds' Investment Adviser/Manager 40
Sub-Advisory Agreement 42
The Funds' Distributor 43
Portfolio Transactions and Brokerage 45
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent 46
The Corporation's Legal Counsel 46
The Corporation's Independent Accountants 46
Financial Statements 46
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.
B - 2
<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, the Legg Mason
International Equity Trust and the Legg Mason Emerging
Markets Trust for the year ended December 31, 1997 and the
Report thereon of the independent accountants are
incorporated into the Statement of Additional Information
by reference to the 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 27.1, 27.2 and 27.3, respectively.
(b) Exhibits
(1) (a) Articles of Incorporation(5)
(b) Articles Supplementary(5)
(c) Articles of Amendment(5)
(d) Articles Supplementary(2)
(e) Articles of Amendment(5)
(2) By-Laws(5)
(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(5)
(c) (i) Investment Sub-Advisory Agreement -- Global
Government Trust(5)
(ii) Sub-Administration Agreement -- Global Government
Trust -- 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(5)
(b) International Equity Trust(5)
(c) Emerging Markets Trust(3)
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian Agreement(5)
(a) Amendment to Custodian Agreement(5)
(9) (a) Transfer Agency and Service Agreement(5)
(b) Credit Agreement -- filed herewith
(10) Opinion and consent of counsel
(a) Global Government Trust(5)
(b) International Equity Trust(5)
(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
<PAGE>
(13) Agreement for providing initial capital(5)
(14) (a) Prototype IRA Plan(4)
(b) Prototype Corporate Simplified Employee Pension
Plan(4)
(c) Prototype SIMPLE Plan(4)
(15) Plan pursuant to Rule l2b-1
(a) Global Government Trust(5)
(b) International Equity Trust(5)
(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) (27) 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. 35 to the registration statement of Legg Mason Cash Reserve Trust,
SEC File No. 2-62218, filed December 31, 1997.
(5) Incorporated by reference to corresponding Exhibit of Post-Effective
Amendment No. 12 to the registration statement, SEC File No. 33-56672, filed
April 30, 1997.
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 14, 1998
-------------------------------------------------------------------
Capital Stock
par value $.001
---------------
Legg Mason Global Government Trust 8,829
Legg Mason International Equity Trust 26,227
Legg Mason Emerging Markets Trust 10,443
Item 27. Indemnification
<PAGE>
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.
Item 28. Business and Other Connections of Investment Adviser
<PAGE>
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. Information as to the officers and directors of
the Manager is included in its Form ADV filed August 11, 1997 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 June 25, 1997 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 June 27, 1997 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 January 27, 1997 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").
<TABLE>
<CAPTION>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ------------------ ------------------ -------------
<S><C>
Raymond A. Mason Chairman of the Board None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
John F. Curley, Jr. Retired Vice Chairman Chairman of the Board
of the Board and Director
James W. Brinkley President and Director None
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 and Director
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
F. Barry Bilson Senior Vice None
President and Director
Thomas M. Daly, Jr. Senior Vice None
President and Director
Jerome M. Dattel Senior Vice None
President and Director
Robert G. Donovan Senior Vice None
President and Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania 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
Joseph Sullivan Senior Vice None
President and Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Seth J. Lehr Senior Vice None
1735 Market St President
Philadelphia, PA 19103
Horace M. Lowman, Jr. Senior Vice None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
Gail Reichard Senior Vice None
President
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
Marie K. Karpinski Vice President Vice President
and Treasurer
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
</TABLE>
- --------------
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
<PAGE>
(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 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. 13 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, 1998.
LEGG MASON GLOBAL TRUST, INC.
By:/s/Marie K. Karpinski
______________________________
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 13 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, 1998
________________________________ and Director
John F. Curley, Jr.
/s/ Edward A. Taber, III President and Director April 28, 1998
________________________________
Edward A. Taber, III
/s/ Richard G. Gilmore* Director April 28, 1998
________________________________
Richard G. Gilmore*
/s/ Charles F. Haugh* Director April 28, 1998
________________________________
Charles F. Haugh*
/s/ Arnold L. Lehman* Director April 28, 1998
________________________________
Arnold L. Lehman*
/s/ Jill E. McGovern* Director April 28, 1998
________________________________
Jill E. McGovern*
/s/ T. A. Rodgers* Director April 28, 1998
________________________________
T. A. Rodgers*
/s/ Marie K. Karpinski Vice President April 28, 1998
________________________________ 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.
SUB-ADMINISTRATION AGREEMENT
This Agreement is made as of May 1, 1997, between Legg Mason Fund
Adviser, Inc. ("Fund Adviser"), a Maryland corporation, and Western Asset Global
Management, Ltd. ("Western Asset Global"), a corporation organized under the
laws of the United Kingdom;
WHEREAS, Fund Adviser acts as the administrator of Legg Mason Global
Government Trust ("Fund"), pursuant to a Management Agreement dated May 1, 1995
("Management Agreement");
WHEREAS, the Fund is a portfolio represented by a separate series of
shares of Legg Mason Global Trust, Inc. ("Corporation"), which is an open-end
management investment company registered under the Investment Company Act of
1940, as amended ("1940 Act"); and
WHEREAS, Fund Adviser desires to retain Western Asset Global to provide
certain administrative services for the Fund and Western Asset Global is willing
to provide such services;
NOW, THEREFORE, in consideration of the foregoing and mutual promises
set forth below, the parties agree as follows:
1. Appointment.
Fund Adviser hereby appoints Western Asset Global for the term of this
Agreement to perform the services described herein on Schedule I for the Fund.
Western Asset Global hereby accepts such appointment and agrees to perform the
duties hereinafter set forth.
2. Representations and Warranties of Fund Adviser.
Fund Adviser hereby represents and warrants to Western Asset Global,
which representations and warranties shall be deemed to be continuing, that:
(a) It is duly organized and existing under the laws of the
jurisdiction of its organization, with full power to carry on its business as
now conducted, to enter into this Agreement and to perform its obligations
hereunder;
(b) This Agreement has been duly authorized, executed and delivered by
Fund Adviser in accordance with all requisite action and constitutes a valid and
legally binding obligation of Fund Adviser, enforceable in accordance with its
terms;
(c) It has been duly authorized by the Corporation to appoint Western
Asset Global to perform the services described in this Agreement; and
(d) It is conducting its business in compliance with all applicable
laws and regulations, both state and federal, and has obtained all regulatory
licenses, approvals and consents necessary to carry on its business as now
conducted; there is no statute, regulation, rule, order or judgment binding on
it and no provision of its charter or by-laws, nor of any mortgage, indenture,
credit agreement or other contract binding on it or affecting its property which
would prohibit its execution or performance of this Agreement.
3. Representations and Warranties of Western Asset Global.
Western Asset Global hereby represents and warrants to Fund Adviser,
which representations and warranties shall be deemed to be continuing, that:
(a) It is duly organized and existing under the laws of the
jurisdiction of its organization, with full power to carry on its business as
now conducted, to enter into this Agreement and to perform its obligations
<PAGE>
hereunder;
(b) This Agreement has been duly authorized, executed and delivered by
Western Asset Global in accordance with all requisite action and constitutes a
valid and legally binding obligation of Western Asset Global, enforceable in
accordance with its terms; and
(c) It is conducting its business in compliance with all applicable
laws and regulations and has obtained all regulatory licenses, approvals and
consents necessary to carry on its business as now conducted; there is no
statute, regulation, rule, order or judgment binding on it and no provision of
its charter or by-laws, nor of any mortgage, indenture, credit agreement or
other contract binding on it or affecting its property which would prohibit its
execution or performance of this Agreement.
4. Delivery of Documents.
(a) Fund Adviser will promptly deliver to Western Asset Global true and
correct copies of each of the following documents as currently in effect and
will promptly deliver to it all future amendments and supplements thereto, if
any:
(i) The Corporation's Articles of Incorporation
("Articles");
(ii) The Corporation's bylaws (the "Bylaws");
(iii) Resolutions of the Corporation's board of directors
("Board") authorizing the execution, delivery and performance
of this Agreement by Fund Adviser;
(iv) The Corporation's registration statement most
recently filed with the Securities and Exchange Commission
("SEC") relating to the shares of the Fund ("Registration
Statement"), including the Corporation's Prospectus and
Statement of Additional Information pertaining to the Fund
(collectively, the "Prospectus"); and
(v) Annual and semiannual reports to the shareholders of
each class of Fund shares.
(b) Fund Adviser shall use its best efforts to have each copy of the
Articles, Bylaws, Registration Statement and Prospectus, and all amendments
thereto, and copies of Board resolutions certified by the Secretary or an
Assistant Secretary of the Corporation.
5. Duties and Obligations of Western Asset Global.
(a) Subject to the direction and control of the Board and Fund Adviser,
and the provisions of this Agreement, Western Asset Global shall provide to the
Fund the administrative services set forth on Schedule I attached hereto.
(b) In performing hereunder, Western Asset Global shall provide at its
expense, office space, facilities, equipment and personnel necessary for the
Fund's operations.
(c) Western Asset Global shall not provide under this Agreement any
services relating to the investment advisory or sub-advisory functions of the
Corporation or the Fund, distribution of shares of the Fund, maintenance of the
Corporation's or the Fund's financial records or any services normally performed
by the Corporation or Fund's counsel or independent auditors.
(d) Fund Adviser shall use its best efforts to cause its and the
Corporation's officers, advisors, sponsor, distributor, legal counsel,
independent accountants, and transfer agent to cooperate with Western Asset
Global and to provide Western Asset Global, upon request, with such information,
documents and advice relating to the Corporation or the Fund as is within the
possession or knowledge of such persons, in
2
<PAGE>
order to enable Western Asset Global to perform its duties hereunder.
(e) Western Asset Global may apply to an officer of Fund Adviser for
written instructions with respect to any matter arising in connection with
Western Asset Global's performance of this Agreement, and Western Asset Global
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance with such instructions. Such application for instructions
may, at the option of Western Asset Global, set forth in writing any action
proposed to be taken or omitted to be taken by Western Asset Global with respect
to its duties or obligations under this Agreement and the date on and/or after
which such action shall be taken; such date must provide Fund Adviser a
reasonable amount of time to respond to such application for instructions.
Western Asset Global shall not be liable for any action taken or omitted to be
taken by it in good faith in accordance with a proposal included in any such
application on or after the date specified therein unless, prior to taking or
omitting to take any such action, Western Asset Global has received written
instructions in response to such application specifying the action to be taken
or omitted or requesting a delay in Western Asset Global's acting in accordance
with such proposal. Western Asset Global may consult with counsel to Fund
Adviser or the Corporation and shall be fully protected with respect to anything
done or omitted by it in good faith in accordance with the advice or opinion of
such counsel.
6. Services Not Exclusive.
Western Asset Global's services hereunder, as described on Schedule I,
are not deemed to be exclusive, and Western Asset Global shall be free to render
similar services to others. Nothing herein contained shall be deemed to limit or
restrict the right of Western Asset Global, any affiliate of Western Asset
Global, or any employee of Western Asset Global or its affiliate to engage in
and devote time and attention to other businesses or to render services of
whatever kind or nature.
7. Books and Records.
In compliance with the requirements of Section 31(a) of the 1940 Act
and Rule 31a-3 thereunder, 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 records required to be
maintained by Rule 31a-1 under the 1940 Act.
8. Compensation.
For the services which Western Asset Global will render to Fund Adviser
and the Fund under this Agreement, Fund Adviser will pay Western Asset Global a
fee, computed daily and paid monthly, at an annual rate equal to 0.10% of the
Fund's average daily net assets. Fees due to Western Asset Global hereunder
shall be paid promptly to Western Asset Global by Fund Adviser 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.
9. Allocation of Expenses.
Except as otherwise provided herein, all costs and expenses arising or
incurred in connection with the performance of this Agreement shall be paid by
the Fund, including but not limited to, organizational costs and costs of
maintaining the Fund's existence, taxes, interest, brokerage fees and
commissions, the Fund's insurance premiums, compensation and expenses of the
Corporation's directors, officers or employees, the Fund's legal, accounting and
audit expenses, management, advisory, sub-advisory, administration and
shareholder servicing fees, charges of custodians, transfer and dividend
disbursing agents, expenses (including clerical expenses) incident to the
issuance, redemption or repurchase of Fund shares, fees and expenses incident to
the registration or qualification of the Corporation or the Fund's shares under
the securities laws of any jurisdiction, costs (including printing and mailing
costs) of preparing and distributing the
3
<PAGE>
Fund's Prospectus, reports, notices and proxy material to Fund shareholders, all
expenses incidental to holding meetings of the Board and Fund shareholders, and
extraordinary expenses as may arise, including litigation affecting the
Corporation or the Fund and legal obligations relating thereto for which the
Corporation may have to indemnify its directors and officers.
10. Indemnification.
(a) Fund Adviser agrees to indemnify and hold harmless Western Asset
Global from and against any costs, losses, expenses, damages, liabilities or
claims (including reasonable attorneys' and accountants' fees) ("Losses") which
are sustained or incurred or which may be asserted against Western Asset Global
by reason of any action taken or omitted to be taken by Western Asset Global in
good faith hereunder in reliance upon (i) the Registration Statement or
Prospectus, (ii) any instructions of an officer of Fund Adviser or the
Corporation, or (iii) any opinion of legal counsel for Fund Adviser or the
Corporation, or arising out of transactions or other activities of Fund Adviser,
the Corporation or the Fund which occurred prior to the commencement of this
Agreement; provided, that Western Asset Global shall not be indemnified for
Losses arising out of any errors in the Prospectus or Registration Statement
caused by information provided or omitted by Western Asset Global, or Losses
arising out of Western Asset Global's gross negligence, bad faith, or willful
misconduct or Western Asset Global's breach of this Agreement. Fund Adviser also
agrees to indemnify and hold harmless Western Asset Global from and against any
and all Losses, which are sustained or incurred or which may be asserted against
Western Asset Global by reason of or as a result of Fund Adviser's gross
negligence, bad faith, or willful misconduct or its reckless disregard of its
obligations under this Agreement. If any Loss gives rise to a right of Fund
Adviser for indemnification by the Fund under the Management Agreement, Fund
Adviser will split any such indemnity with Western Asset Global in proportion
that such Loss was borne by each. This indemnity shall be a continuing
obligation of Fund Adviser, its successors and assigns, notwithstanding the
termination of this Agreement.
(b) Western Asset Global agrees to indemnify and hold harmless Fund
Adviser from and against any and all Losses which are sustained or incurred or
which may be asserted against Fund Adviser by reason of or as a result of
Western Asset Global's gross negligence, bad faith, or willful misconduct or its
reckless disregard of its obligations under this Agreement, provided that Fund
Adviser shall not be indemnified for Losses arising out of Fund Adviser's gross
negligence, bad faith, or willful misconduct or Fund Adviser's breach of this
Agreement. This indemnity shall be a continuing obligation of Western Asset
Global, its successors and assigns, notwithstanding the termination of this
Agreement.
(c) Actions taken or omitted by a party in reliance on oral or written
instructions by the other party or upon any information, order, indenture, stock
certificate, power of attorney, assignment, affidavit or other instrument
reasonably believed by a party to be genuine or bearing the signature of a
person or persons reasonably believed to be authorized to sign, countersign or
execute the same, or upon the opinion of legal counsel, shall be conclusively
presumed to have been taken or omitted in good faith.
11. Termination.
This Agreement may be terminated without payment of any penalty at any
time by either party on not less than sixty (60) days' written notice to the
other party and will be terminated immediately upon termination of the
Management Agreement with respect to the Fund.
12. Further Actions.
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes thereof.
13. Amendments.
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only
4
<PAGE>
by an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
14. 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 and assigns; provided,
however, that this Agreement shall not be assignable by Fund Adviser without the
written consent of Western Asset Global or by Western Asset Global without the
written consent of Fund Adviser accompanied by the authorization or approval of
the Board.
15. Governing Law.
This Agreement shall be construed in accordance with the laws of the
State of Maryland.
16. Notices.
All notices, requests, consents and other communications pursuant to
this Agreement in writing shall be sent as follows:
if to Fund Adviser, at
100 Light Street
Baltimore, MD 21202
Attention: Marie K. Karpinski
if to Western Asset Global,
155 Bishopgate
London EC2M 3TY
Attention: Laura Panayotou
or at such other place as may from time to time be designated in writing.
Notices hereunder shall be effective upon receipt.
17. Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original; but such counterparts together shall
constitute only one instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first written
above.
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Kathi D. Bair By: /s/ Marie K. Karpinski
_____________________ ______________________________________
Kathi D. Bair Name: Marie K. Karpinski
Title: Vice President and Treasurer
Attest: WESTERN ASSET GLOBAL MANAGEMENT LIMITED
By: /s/ Mary Ann Cleary By: /s/ L Panayotou
_____________________ ______________________________________
Mary Ann Cleary Name: L Panayotou
Title: Director
6
<PAGE>
Schedule I
FUND ADMINISTRATION SERVICES
SUB-ADMINISTRATION AGREEMENT
Trade support and analytical functions, including:
a. Overseeing trade clearing by broker-dealers and transfer agents
b. Reconciling account and trading information
c. Ensuring that each trade complies with investment policies and
limitations
d. Preparing the portion of the month-end compliance package for
which Western Asset Global Management Company, the Fund's
sub-adviser, is responsible; and
e. Preparing additional materials, as requested by Fund Adviser,
Western Asset Management Company or the Corporation's Board of
Directors
Exhibit 9b
================================================================================
CREDIT AGREEMENT
DATED AS OF FEBRUARY 20, 1998
AMONG
THE FUNDS AND PORTFOLIOS PARTIES HERETO,
THE BANKS PARTY HERETO AS LENDERS
AND
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, AS AGENT
ARRANGED BY
BANCAMERICA ROBERTSON STEPHENS
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S><C>
1. DEFINITIONS, INTERPRETATION OF AGREEMENT AND COMPLIANCE WITH FINANCIAL
RESTRICTIONS......................................................................................... 1
1.1 Definitions.................................................................................... 1
1.2 Other Definitional Provisions.................................................................. 9
1.3 Interpretation of Agreement.................................................................... 9
1.4 Compliance with Financial Restrictions......................................................... 10
1.5 Assumptions Regarding Structure................................................................ 10
1.6 Authority of Adviser; Adviser Disclaimer....................................................... 10
2. COMMITMENTS OF THE BANKS AND CERTAIN LOAN TERMS...................................................... 11
2.1 Loans.......................................................................................... 11
2.2 Loan Options................................................................................... 11
2.3 Borrowing Procedures........................................................................... 11
2.4 Continuation and/or Conversion of Loans........................................................ 12
2.5 Note Evidencing Loans.......................................................................... 13
2.6 Source of Repayment............................................................................ 13
2.7 Extension of Scheduled Termination Date........................................................ 13
3. INTEREST AND FEES.................................................................................... 14
3.1 Interest....................................................................................... 14
3.2 Commitment Fee................................................................................. 14
3.3 Method of Calculating Interest and Fees........................................................ 15
4. PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION OF THE COMMITMENTS
AND SETOFF........................................................................................... 15
4.1 Place of Payment............................................................................... 15
4.2 Prepayments.................................................................................... 15
4.3 Reduction or Termination of the Commitment Amount.............................................. 16
4.4 Setoff......................................................................................... 16
4.5 Borrowing Base................................................................................. 16
4.6 Payments by the Banks to the Agent............................................................. 16
4.7 Sharing of Payments............................................................................ 17
5. ADDITIONAL PROVISIONS RELATING TO LOANS.............................................................. 18
5.1 Increased Cost................................................................................. 18
5.2 Deposits Unavailable or Interest Rate Unascertainable or Inadequate; Impracticability.......... 18
5.3 Changes in Law Rendering Eurodollar Loans Unlawful............................................. 19
5.4 Discretion of the Bank as to Manner of Funding................................................. 19
5.5 Funding Losses................................................................................. 20
5.6 Capital Adequacy............................................................................... 20
5.7 Additional Provisions with respect to Federal Funds Rate Loan.................................. 21
6. WARRANTIES........................................................................................... 21
6.1 Existence...................................................................................... 21
6.2 Authorization.................................................................................. 21
6.3 No Conflicts................................................................................... 22
6.4 Validity and Binding Effect.................................................................... 22
6.5 No Default..................................................................................... 22
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S><C>
6.6 Financial Statements........................................................................... 22
6.7 Litigation..................................................................................... 22
6.8 Liens.......................................................................................... 23
6.9 Partnerships................................................................................... 23
6.10 Purpose........................................................................................ 23
6.11 Compliance..................................................................................... 23
6.12 Pension and Welfare Plans...................................................................... 23
6.13 Taxes.......................................................................................... 24
6.14 Subsidiaries; Investments...................................................................... 24
6.15 Full Disclosure................................................................................ 24
6.16 Investment Policies............................................................................ 24
7. COVENANTS............................................................................................ 24
7.1 Financial Statements and Other Reports......................................................... 24
7.2 Notices........................................................................................ 26
7.3 Existence...................................................................................... 27
7.4 Nature of Business............................................................................. 27
7.5 Books, Records and Access...................................................................... 27
7.6 Insurance...................................................................................... 27
7.7 Dividends...................................................................................... 28
7.8 Investment Policies and Restrictions........................................................... 28
7.9 Taxes.......................................................................................... 28
7.10 Compliance..................................................................................... 29
7.11 Pension Plans.................................................................................. 29
7.12 Merger, Purchase and Sale...................................................................... 29
7.13 Asset Coverage Ratio........................................................................... 29
7.14 Liens.......................................................................................... 30
7.15 Guaranties..................................................................................... 30
7.16 Other Agreements............................................................................... 30
7.17 Transactions with Related Parties.............................................................. 30
7.18 Payment of Management Fees..................................................................... 30
7.19 Other Indebtedness............................................................................. 31
7.20 Changes to Trust Agreement, etc................................................................ 31
7.21 Violation of Investment Restrictions, etc...................................................... 31
7.22 Proceeds of Loans.............................................................................. 31
---- -----------------------------------------------------------------------------------------------
8. CONDITIONS PRECEDENT TO ALL LOANS.................................................................... 31
8.1 Notice......................................................................................... 31
8.2 Default........................................................................................ 31
8.3 Warranties..................................................................................... 31
8.4 Certification.................................................................................. 31
8.5 Form U-1....................................................................................... 32
8.6 Borrowing Certificate.......................................................................... 32
8.7 Minimum Net Asset Value........................................................................ 32
9. CONDITIONS PRECEDENT TO INITIAL LOANS................................................................ 32
9.1 Note........................................................................................... 32
9.2 Resolutions.................................................................................... 32
9.3 Incumbency Certificate......................................................................... 32
9.4 Opinion........................................................................................ 33
9.5 Net Asset Value Certificate.................................................................... 33
9.6 Consent of Investment Adviser.................................................................. 33
10. ADDITION OF NEW PARTIES.............................................................................. 33
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S><C>
10.1 New Parties.................................................................................... 33
11. EVENTS OF DEFAULT AND REMEDIES....................................................................... 33
11.1 Events of Default.............................................................................. 33
11.2 Remedies....................................................................................... 35
12. THE AGENT............................................................................................ 36
12.1 Appointment and Authorization.................................................................. 36
12.2 Delegation of Duties........................................................................... 36
12.3 Liability of Agent............................................................................. 36
12.4 Reliance by Agent.............................................................................. 37
12.5 Notice of Event of Default..................................................................... 37
12.6 Credit Decision................................................................................ 38
12.7 Indemnification of Agent....................................................................... 38
12.8 Agent in Individual Capacity................................................................... 39
12.9 Successor Agent................................................................................ 39
13. GENERAL.............................................................................................. 39
13.1 Waiver and Amendments.......................................................................... 39
13.2 Notices........................................................................................ 40
13.3 Expenses....................................................................................... 41
13.4 Funds Indemnification.......................................................................... 41
13.5 Information.................................................................................... 42
13.6 Severability................................................................................... 42
13.7 Law............................................................................................ 43
13.8 Successors..................................................................................... 43
13.9 Waiver of Jury Trial........................................................................... 44
</TABLE>
EXHIBITS
EXHIBIT A - BORROWING CERTIFICATE
EXHIBIT B - FORM OF PROMISSORY NOTE (Fund without Portfolios)
EXHIBIT B-1 - PROMISSORY NOTE (Fund with Portfolios)
EXHIBIT C - DESIGNATION OF PORTFOLIOS
EXHIBIT D - SCHEDULE OF LITIGATION
EXHIBIT E - SCHEDULE OF CONTINGENT LIABILITIES
EXHIBIT F - BORROWING BASE CERTIFICATE
EXHIBIT G - FUNDS' AND PORTFOLIOS' INVESTMENT RESTRICTIONS
EXHIBIT H - CONSENT LETTER
EXHIBIT I - FORM OF OPINION OF COUNSEL
EXHIBIT J - FORM OF ASSIGNMENT AND ACCEPTANCE
SCHEDULES
SCHEDULE I - COMMITMENTS AND PRO RATA SHARES
SCHEDULE II - OFFSHORE AND DOMESTIC LENDING OFFICES,
ADDRESSES FOR NOTICES
iii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of February 20, 1998 (this
"Agreement"), is entered into among each of the funds (each, a "Fund")
originally a party hereto or which may become a party hereto pursuant to the
terms hereof, the various banks as are or may become party hereto pursuant to
the terms hereof (individually, a "Bank" and, collectively, the "Banks") and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), a national
banking association, as agent (in such capacity, the "Agent") for the Banks.
In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:
1. DEFINITIONS, INTERPRETATION OF AGREEMENT AND
COMPLIANCE WITH FINANCIAL RESTRICTIONS.
1.1 Definitions. In addition to the terms defined elsewhere in
this Agreement, the following terms shall have the meanings indicated for
purposes of this Agreement (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Act" means the Investment Company Act of 1940, as amended,
modified, or supplemented from time to time, and all rules and regulations
promulgated thereunder, and any successor statute and associated regulations.
"Adviser" means Legg Mason Fund Adviser, Inc. or Legg Mason
Capital Management, Inc., as the case may be, as investment adviser or
sub-adviser to a Fund or a Portfolio together with any successor thereto
permitted by Section 7.2(f) hereof.
"Adviser Persons" is defined in Section 1.6.
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such Person. A Person shall be deemed to control another Person if
the controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, membership interests, by contract,
or otherwise.
"Agent" has the meaning assigned to such term in the
introductory paragraph of this Agreement.
<PAGE>
"Agent-Related Persons" means BofA and any successor agent
arising under Section 12.9, together with their respective Affiliates
(including, in the case of BofA, the Arranger), and the officers, directors,
employees, agents and attorneys-in-fact of such Persons and Affiliates.
"Agent's Payment Office" means the address for payments set
forth on Schedule II hereto in relation to the Agent or such other address as
the Agent may from time to time specify.
"Agreement" means this Credit Agreement, as it may be amended,
modified or supplemented from time to time.
"Arranger" means BancAmerica Robertson Stephens.
"Asset Coverage Ratio" means, with respect to any Fund or
Portfolio at any time, the ratio which the value of the Total Assets of such
Fund or Portfolio (reduced by the value of assets subject to Liens) at such time
less all liabilities and indebtedness not represented by Senior Securities of
such Fund or Portfolio, bears to the aggregate amount of Senior Securities
Representing Indebtedness of such Fund or Portfolio at such time.
"Assignee" has the meaning assigned to such term in Section
13.8(b).
"Assignment and Acceptance" has the meaning assigned to such
term in Section 13.8(b).
"Attorney Costs" means and includes any and all reasonable
fees and disbursements of any law firm or other external counsel, the reasonable
allocated cost of internal legal services and all disbursements of internal
counsel.
"Bank" and "Banks" have the meanings assigned to such terms in
the introductory paragraph of this Agreement.
"BofA" has the meaning assigned to such term in the
introductory paragraph of this Agreement.
"Banking Day" means any day other than a Saturday, Sunday or
legal holiday on which banks are authorized or required to be closed in Chicago,
Illinois, New York, New York and San Francisco, California and, with respect to
Eurodollar Loans, a day on which dealings in Dollars may be carried on by the
Agent in the interbank eurodollar market.
"Borrowing" means a borrowing hereunder consisting of Loans of
the same type made to a Fund or Portfolio on the same day by the Banks under
Section 2
2
<PAGE>
and, other than in the case of Federal Funds Rate Loans, having the same
Interest Period.
"Borrowing Base" means the amount defined as such in Section
4.5 with respect to each Fund or Portfolio, as the case may be.
"Borrowing Base Certificate" means a Borrowing Base
Certificate as defined in Section 7.1(c).
"Borrowing Certificate" means a certificate provided by a Fund
or Portfolio, in the form of Exhibit A hereto.
"Capitalized Lease" of any Person means all monetary
obligations of such Person under any leasing or similar arrangement which, in
accordance with GAAP, are or would be classified as capitalized leases on a
balance sheet of such Person.
"Code" means the Internal Revenue Code of 1986 and any
successor statute of similar import, together with the regulations thereunder,
in each case as in effect from time to time. References to sections of the Code
shall be construed to also refer to any successor sections.
"Commitment" means, relative to any Bank, such Bank's
obligation to make Loans pursuant to Section 2.1.
"Commitment Amount" means, on any date, $150,000,000, as such
amount may be reduced from time to time pursuant to Section 4.3.
"Credit Documents" means this Agreement, any Notes and all
other documents delivered to the Agent or any Bank in connection herewith.
"Dollars" and the symbol "$" mean lawful money of the United
States of America.
"Eligible Lender" means an entity that is a "bank" (as such
term is defined in the Act) but not an "affiliated person" (as such term is
defined in the Act) or "principal underwriter" (as such term is defined in the
Act) of any Fund or Portfolio or an "affiliated person" (as such term is defined
in the Act) of any such Person.
"Eurocurrency Reserve Requirement" means, with respect to any
Eurodollar Loan for any Interest Period, a percentage equal to the daily average
during such Interest Period of the percentages in effect on each day of such
Interest Period, as prescribed by the Federal Reserve Board (or any successor),
for determining the aggregate maximum reserve requirements (including all basic,
supplemental, marginal and other reserves) applicable to "Eurocurrency
liabilities" pursuant to Regulation D or
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any other then applicable regulation of the Federal Reserve Board (or any
successor) which prescribes reserve requirements applicable to "Eurocurrency
liabilities," as presently defined in Regulation D. Without limiting the effect
of the foregoing, the Eurocurrency Reserve Requirement shall reflect any other
reserves required to be maintained against (i) any category of liabilities that
includes deposits by reference to which the Interbank Rate (Reserve Adjusted) is
to be determined or (ii) any category of extensions of credit or other assets
that includes the Loans. For purposes of this Agreement, any Eurodollar Loan
hereunder shall be deemed to be "Eurocurrency liabilities," as defined in
Regulation D, and, as such, shall be deemed to be subject to such reserve
requirements without the benefit of, or credit for, proration, exceptions or
offsets which may be available from time to time under Regulation D.
"Eurodollar Loan" means any Loan which bears interest at a
rate determined with reference to the Interbank Rate (Reserve Adjusted).
"Eurodollar Margin" means 0.50%.
"Event of Default" means any of the events described in
Section 11.1.
"Federal Funds Rate" means, for any day, the rate per annum as
quoted by the Federal Reserve Bank of New York and confirmed in the daily
statistical release designated as H.15, or any successor publication, published
by the Federal Reserve Bank of New York (including any such successor "H.15")
for the preceding Banking Day opposite the caption "Federal Funds (Effective)";
or, if for any relevant day such rate is not so published on any such preceding
Banking Day, the rate for such day will be the arithmetic mean as determined by
the Agent of the rates for the last transaction in overnight Federal funds
arranged prior to 9:00 a.m. (New York City time) on that day by each of three
leading brokers of Federal funds transactions in New York City selected by the
Agent.
"Federal Funds Rate Margin" means 0.50%.
"Federal Funds Rate Loan" means any loan which bears interest
at a rate determined with reference to the Federal Funds Rate.
"Federal Reserve Board" means the Board of Governors of the
Federal Reserve System.
"Fiscal Year" means each fiscal year of any Fund or Portfolio,
as the case may be. References to a Fiscal Year with a number corresponding to
any calendar year (e.g. "Fiscal Year 1994") refer to the Fiscal Year ending on a
date occurring during such calendar year.
"Fund" has the meaning assigned to such term in the Preamble.
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"GAAP" means generally accepted accounting principles as
applied in the preparation of the financial statements of the Funds and
Portfolios referred to in Section 6.6.
"Indebtedness" of any Person means, without duplication, (i)
any obligation of such Person for borrowed money, including, without limitation,
(a) any obligation of such Person evidenced by bonds, debentures, notes or other
similar debt instruments or arising out of a reverse repurchase transaction, and
(b) any obligation for borrowed money which is non-recourse to the credit of
such Person but which is secured by a Lien on any asset of such Person; (ii) any
obligation of such Person on account of deposits or advances; (iii) any
obligation of such Person for the deferred purchase price of any property or
services, except Trade Accounts Payable; (iv) any obligation of such Person as
lessee under a Capitalized Lease; (v) any Indebtedness of another Person secured
by a Lien on any asset of such first Person, whether or not such Indebtedness is
assumed by such first Person; and (vi) any guaranty or other contingent
liability, direct or indirect, with respect to any obligation of another Person,
except for the endorsement of items for collection in the ordinary course of
such first Person's business. For all purposes of this Agreement, the
Indebtedness of any Person shall include the Indebtedness of any partnership or
joint venture in which such Person is a general partner or joint venturer.
"Indemnified Liabilities" has the meaning assigned to such
term in Section 13.4.
"Indemnified Person" has the meaning assigned to such term in
Section 13.4.
"Interbank Rate," applicable to any Interest Period, means the
rate of interest per annum determined by the Agent as the rate at which dollar
deposits in the approximate amount of BofA's Eurodollar Loan for such Interest
Period would be offered by BofA's Grand Cayman Branch, Grand Cayman, B.W.I. (or
such other office as may be designated for such purpose by BofA), to major banks
in the offshore dollar interbank market at their request at approximately 11:00
a.m. (New York City time) two Banking Days prior to the commencement of such
Interest Period.
"Interbank Rate (Reserve Adjusted)" means, with respect to
each Interest Period for a Eurodollar Loan, a rate per annum (rounded upward to
the nearest 1/100 of 1%) determined pursuant to the following formula:
Interbank Rate = Interbank Rate
(Reserve Adjusted) 1-Eurocurrency Reserve Requirement
The Interbank Rate shall be adjusted automatically as to all Eurodollar
Loans then outstanding as of the effective date of any change in the
Eurocurrency Reserve Requirement.
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"Interest Period" means with respect to any Eurodollar Loan,
the period commencing on the Borrowing date of such Eurodollar Loan, and ending
on the date which is one day, one week, two weeks or three weeks later, as the
case may be (in each case as selected by the applicable Fund or Portfolio, as
the case may be, pursuant to Section 2.3 or Section 2.4); provided, however,
that:
(a) any Interest Period which would otherwise end on a day
which is not a Banking Day shall end on the next succeeding Banking Day
unless such next succeeding Banking Day falls in another calendar
month, in which case such Interest Period shall end on the next
preceding Banking Day; and
(b) no Interest Period shall extend beyond the Termination
Date.
"Lien" means any mortgage, pledge, hypothecation, judgment
lien or similar legal process, title retention lien, or other lien or security
interest, including, without limitation, the interest of a vendor under any
conditional sale or other title retention agreement and the interest of a lessor
under any Capitalized Lease. The term Lien shall not include the property
interest acquired by a counterparty in connection with a securities repurchase
agreement between a Fund or Portfolio, as the case may be, and a counterparty.
"Loan" means a loan by a Bank to a Fund or Portfolio, as the
case may be, pursuant to Section 2.1, and shall be a Federal Funds Rate Loan or
a Eurodollar Loan (each of which shall be a "type" of Loan).
"Majority Banks" means, at any time, at least two Banks then
holding at least 66-2/3% of the then aggregate unpaid principal amount of the
Loans or, if no such principal amount is then outstanding, at least two Banks
then having at least 66-2/3% of the Commitments.
"Material Adverse Change" means any change that the Majority
Banks determine to be material and adverse to (x) the condition (financial or
otherwise), business or prospects of a Fund or Portfolio, as the case may be, or
(y) the ability of a Fund or Portfolio, as the case may be, to duly and
punctually pay and perform all or any of its obligations under this Agreement or
the relevant Notes; provided, however, that if a Fund's or a Portfolio's Asset
Coverage Ratio equals or exceeds 6 to 1, a Material Adverse Change shall not
have occurred.
"Material Adverse Effect" means a material and adverse effect
on (i) the condition (financial or other), business, operations or prospects of
a Fund or Portfolio, as the case may be, or (ii) the ability of a Fund or
Portfolio, as the case may be, to duly and punctually pay and perform its
obligations under this Agreement and its Note.
"Net Asset Value" means, at any date, Total Assets less Total
Liabilities.
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"Note" means the promissory note of a Fund or Portfolio, as
the case may be, substantially in the form set forth as Exhibit B or Exhibit
B-1, as appropriate, as such promissory note may be amended, modified or
supplemented from time to time, and the term "Note" shall include any
substitutions for, or renewals of, such promissory note.
"Originating Bank" has the meaning assigned to such term in
Section 13.8(c).
"Participant" has the meaning assigned to such term in Section
13.8(c).
"Payment Date" means (i) with respect to any Eurodollar Loan,
the last day of each Interest Period with respect thereto; and (ii) as to any
Federal Funds Rate Loan and any fees, the last day of each March, June,
September and December, commencing on the first such date to occur after the
date hereof.
"Person" means an individual, partnership, corporation, trust,
joint venture, joint stock company, association, unincorporated organization,
government or agency or political subdivision thereof, or other entity.
"Plan" means any "pension plan," or "welfare benefit plan" as
such terms are defined in the Employee Retirement Income Security Act of 1974,
as amended, or any successor statute.
"Portfolio" means each series or class of shares of a Fund
that constitutes a "series" under the Act, which is a signatory to this
Agreement or any amendment hereto or which such Fund has previously identified
to the Banks as a Portfolio in a certificate in the form of Exhibit C and has
been approved by the Banks hereunder.
"Pro Rata Share" means, as to any Bank at any time, the
percentage equivalent (expressed as a decimal, rounded to the ninth decimal
place) at such time of such Bank's Commitment divided by the combined
Commitments of all Banks, as set forth on Schedule I, as such amount may be
adjusted from time to time as a result of an assignment made by such Bank
pursuant to Section 13.8 or otherwise.
"Reference Rate" means, at any time, the rate of interest then
most recently announced by the BofA at San Francisco, California as its
reference rate. It is a rate set by the BofA based upon various factors
including the BofA's costs and desired return, general economic conditions and
other factors, and is used as a reference point for pricing some loans. Loans
may be priced at, above or below the Reference Rate. Any change in the Reference
Rate shall take effect at the opening of business on the date specified in the
public announcement of such change.
"Related Party" means, with respect to a Fund or Portfolio, as
the case may be, and for purposes of Section 7.17 only, any Person (i) which
directly or
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indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, such Fund or Portfolio, (ii) which beneficially
owns or holds 5% or more of the equity interest of such Fund or Portfolio or
(iii) 5% or more of the equity interest of which is beneficially owned or held
by such Fund or Portfolio. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"Senior Security" means any bond, debenture, note, or similar
obligation or instrument constituting a security and evidencing indebtedness,
and any stock of a class having priority over any other class as to distribution
of assets or payment of dividends.
"Senior Security Representing Indebtedness" means any Senior
Security other than stock.
"Subsidiary" means, with respect to a Fund or Portfolio, as
the case may be, (i) any corporation more than 50% of whose stock of any class
or classes having by the terms thereof ordinary voting power to elect a majority
of the directors of such corporation (irrespective of whether or not at the time
stock of any class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time owned
by the Fund or Portfolio and/or one or more Subsidiaries of such Fund or
Portfolio and (ii) any partnership, association, joint venture or other entity
in which such Fund or Portfolio and/or one or more Subsidiaries of such Fund or
Portfolio has more than a 50% equity interest at the time.
"Taxes" with respect to any Person means taxes, assessments or
other governmental charges or levies imposed upon such Person, its income or any
of its properties, franchises or assets.
"Termination Date" means February 19, 1999, or such earlier
date as may be fixed by the Funds and Portfolios on at least 15 Banking Days'
prior written or telephonic notice received by the Agent. The Funds and
Portfolios shall promptly confirm any telephonic notice in writing. Upon the
request of the Funds and Portfolios, and in the Banks' sole discretion, the
Termination Date may be extended for successive 364-day periods as provided in
Section 2.7.
"Total Assets" means, with respect to a Fund or Portfolio, as
the case may be, as of any date, an amount equal to the aggregate fair market
value of all items which would be set forth as assets on a balance sheet of such
Fund or Portfolio on such date in accordance with GAAP. "Fair market value," for
purposes of this definition, shall be determined as follows: each portfolio
security traded on a national securities exchange or traded over-the-counter and
quoted on the Nasdaq National Market (or similar quotation system providing
daily quotations with respect to the last sale prices of traded securities)
shall be valued at the last sale price on the date of valuation; provided that
any security so
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traded and quoted for which there was no sale on the date of valuation, and
securities traded over-the-counter but not quoted on the Nasdaq National Market
or any such similar quotation system, shall be valued at an amount equal to the
arithmetic mean of the most recent available bid and asked quotations therefor,
except that debt securities not traded on a national securities exchange nor
quoted on the Nasdaq National Market or any such similar quotation system shall
be assigned such values as shall be determined with respect thereto by the
pricing service normally utilized by such Fund or Portfolio to determine the
fair market value of such securities. Upon the written request of the Agent, a
Fund or Portfolio shall promptly furnish all such information as the Agent shall
reasonably request relating to the value of any portfolio security or other
asset of such Fund or Portfolio or the assignment of values thereto by such Fund
or Portfolio or any other Person.
"Total Liabilities" means, with respect to a Fund or Portfolio
as of any date, the aggregate amount of all items which would be set forth as
liabilities on a balance sheet of such Fund or Portfolio on such date in
accordance with GAAP.
"Trade Accounts Payable" of any Person means trade accounts
payable of such Person with a maturity of not greater than ninety (90) days
incurred in the ordinary course of such Person's business.
"Trust Agreement" means, with respect to a Fund that is a
business trust, such Fund's Declaration of Trust, as amended from time to time.
"Unmatured Event of Default" means any event or condition
which, with the lapse of time or giving of notice to a Fund or a Portfolio, or
both, would constitute an Event of Default.
1.2 Other Definitional Provisions. Unless otherwise defined or
the context otherwise requires, all financial and accounting terms used herein
or in any certificate or other document made or delivered pursuant hereto shall
be defined in accordance with GAAP. Unless otherwise defined therein, all terms
defined in this Agreement shall have the defined meanings when used in a Note or
in any certificate or other document made or delivered pursuant hereto.
1.3 Interpretation of Agreement. A Section or an Exhibit is,
unless otherwise stated, a reference to a section hereof or an exhibit hereto,
as the case may be. Section captions used in this Agreement are for convenience
only, and shall not affect the construction of this Agreement. The words
"hereof," "herein," "hereto," and "hereunder" and words of similar purport when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. Unless expressly indicated otherwise,
when used in this Agreement (including the Schedules and Exhibits hereto) "from"
means "from and including" and "to" means "to but excluding". Unless expressly
indicated otherwise, when used in this Agreement (including the Schedules and
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Exhibits hereto) "to the best of a Person's knowledge" means "to the best of
such Person's knowledge after due inquiry".
1.4 Compliance with Financial Restrictions. Compliance with
each of the financial ratios and restrictions contained in Section 7 shall,
except as otherwise provided herein, be determined in accordance with GAAP
consistently followed.
1.5 Assumptions Regarding Structure. The parties acknowledge
and agree that certain of the Funds under this Agreement are comprised of
separate Portfolios and that such Portfolios are not separately existing legal
entities entitled to enter into contractual agreements or to execute instruments
and, for these reasons, the relevant Funds are executing this Agreement and the
relevant Notes on behalf of their specified respective Portfolios.
1.6 Authority of Adviser; Adviser Disclaimer. Each of the
Funds and Portfolios hereby confirms that its Adviser has been duly authorized
to act on behalf of such Fund or Portfolio for purposes of this Agreement and
the relevant Note and to take all actions which such Fund or such Portfolio is
entitled or required to take hereunder or thereunder, including, without
limitation, requesting the making, continuation or conversion of Loans on behalf
of a Fund or Portfolio pursuant to Section 2, reducing or terminating the
Commitment as to one or more Funds or Portfolios, and executing and delivering
Borrowing Certificates, Borrowing Base Certificates and any and all other
certificates, reports, financial information and notices required to be
delivered to the Agent and/or the Banks hereunder. Notwithstanding the foregoing
or anything to the contrary contained in this Agreement, the parties hereto
acknowledge and agree that (a) in taking any such action hereunder or under a
Note the Adviser is acting solely in its capacity as investment adviser for the
Funds and Portfolios and not in its individual capacity and (b) neither the
Adviser nor any of its officers, employees or agents (with the Adviser,
collectively, "Adviser Persons") shall have any liability whatsoever to any Bank
or the Agent for any action taken or omitted to be taken by any of them in
connection with this Agreement or any Note nor shall any of them be bound by or
liable for any indebtedness, liability or obligation hereunder or under the Note
and (c) no Adviser Person shall be responsible in any manner to the Agent or the
Banks for the truth, completeness or accuracy of any statement, representation,
warranty or certification contained in this Agreement or in any information,
report, certificate or other document furnished by the Adviser on behalf of any
Fund or Portfolio in connection with this Agreement, including, without
limitation, any Borrowing Certificate, any Borrowing Base Certificate, and any
certificate or notice furnished pursuant to Section 7.1 or 7.2 hereof; provided
that, in the case of clauses (b) and (c) above, the conduct of the Adviser
Persons or any of them did not constitute negligence, misconduct or a breach of
any obligation to any Fund or Portfolio.
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2. COMMITMENTS OF THE BANKS AND CERTAIN LOAN TERMS.
2.1 Loans. Subject to the terms and conditions of this Agreement
and in reliance upon the warranties of each of the Funds set forth herein, each
Bank severally agrees to make individual loans (collectively called the "Loans"
and individually called a "Loan") to the Funds or, in the case of a Fund
comprised of one or more Portfolios, to such Portfolios as are shown on the
signature pages hereof or which are designated in the manner specified in
Section 10.1, in immediately available funds, as designated in a Borrowing
Certificate provided pursuant to Section 2.3, which Loans each Fund or
Portfolio, as the case may be, may repay and reborrow during the period from the
date hereof to, but not including, the Termination Date. The commitment of each
Bank and the outstanding principal amount of Loans made by each Bank hereunder
shall not exceed at any time the aggregate amount set forth on Schedule I (such
amount as the same may be reduced under Section 4.3 or as a result of one or
more assignments as permitted herein, the Bank's "Commitment"); provided,
however, that, after giving effect to any Borrowing, the aggregate principal
amount of all outstanding Loans shall not at any time exceed the Commitment
Amount, and provided that the aggregate principal amount of all Loans
outstanding from time to time to any Fund or Portfolio, as the case may be,
shall not exceed the Borrowing Base for such Fund or Portfolio.
2.2. Loan Options. Each Loan shall be either a Federal Funds Rate
Loan or a Eurodollar Loan, as shall be selected by the relevant Fund or
Portfolio, except as otherwise provided herein. Any combination of types of
Loans may be outstanding at the same time, except that no more than three Loans
having different Interest Periods may be outstanding at any one time with
respect to each Fund or, with respect to a Fund comprised of Portfolios, each
Portfolio of that Fund.
2.3 Borrowing Procedures.
(a) Notice to Agent. A Fund or Portfolio shall give the Agent
prior written or telephonic notice of each Loan, which shall be received by the
Agent, in the case of a Federal Funds Rate Loan, not later than 11:00 a.m.,
Chicago time, on the Borrowing date with respect to such Loan, or, in the case
of a Eurodollar Loan, not later than 11:00 a.m., Chicago time, three (3) Banking
Days prior to the Borrowing date with respect to such Loan. Each such notice
shall specify (i) the Borrowing date (which shall be a Banking Day), (ii) the
amount and type of Loan, (iii) the initial Interest Period for such Loan, and
(iv) in the case of a Fund with Portfolios, the name of the Portfolio that will
utilize the proceeds of such Loan. Each Loan shall be in a minimum amount of
$500,000 or in an integral multiple of $100,000 in excess thereof. The relevant
Fund or Portfolio shall promptly confirm each such telephonic notice in writing
by providing to the Agent a Borrowing Certificate signed by such Fund's or
Portfolio's Treasurer or Assistant Treasurer or a designated officer of the
Adviser, on behalf of the Fund or Portfolio (it being understood, however, that
the Fund's, the Portfolio's or the Adviser's failure to confirm any telephonic
notice or otherwise comply with the provisions of this Section 2.3 shall not
affect the obligation of the relevant Fund or Portfolio to repay each Loan in
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accordance with the terms of this Agreement and the relevant Notes). In the
event that more than one Loan request is made on any Banking Day, the Agent
shall, for purposes of ensuring that the aggregate of the then-outstanding Loans
and the Loans which are the subject of Loan requests will not exceed the
Commitment Amount, process the Loan requests in the order of receipt.
(b) Notice to Banks. The Agent will promptly notify each Bank of
its receipt of any Loan request and of the amount of such Bank's Pro Rata Share
of the requested Loan.
(c) Transfers to Agent. Each Bank will make the amount of its Pro
Rata Share of each Loan available to the Agent for the account of the borrowing
Fund or Portfolio at the Agent's Payment Office by 1:00 p.m. (Chicago time) on
the Borrowing date requested by the borrowing Fund or Portfolio in funds
immediately available to the Agent for deposit to the account which the Agent
shall from time to time specify by notice to the Banks. The proceeds of all such
Loans will then be made available to the borrowing Fund or Portfolio by the
Agent in accordance with written instructions provided to the Agent by the Fund
or Portfolio in like funds as received by the Agent. No Bank's obligation to
make any Loan shall be affected by any other Bank's failure to make any Loan.
(d) Disbursement to Fund or Portfolio. The Agent will pay to the
relevant Fund or Portfolio the amount of each Loan on the date specified in the
notice of Borrowing with respect to such Loan upon satisfaction of the
applicable conditions precedent with respect to such Loan.
2.4 Continuation and/or Conversion of Loans. A Fund or Portfolio
may elect to continue an outstanding Eurodollar Loan into a subsequent Interest
Period to begin on the day following the last day of such current Interest
Period or convert a Eurodollar Loan into a Federal Funds Rate Loan by giving the
Agent prior written or telephonic notice of such continuation or conversion,
which shall be received by the Agent not later than 11:00 a.m., Chicago time,
three (3) Banking Days prior to the effective date of any continuation or
conversion which results in a Eurodollar Loan or 11:00 a.m., Chicago time, on
the date of conversion with respect to such Loan that is to be continued as a
Federal Funds Rate Loan; provided that no Loan shall be outstanding for a period
of more than twenty-one (21) days and provided further, that there shall be no
more than three Interest Periods in respect of a Loan. Each such notice shall
specify (a) the effective date of continuation or conversion (which shall be a
Banking Day), (b) the amount of such Loan, and (c) the Interest Period for such
Loan. The Fund or Portfolio making such an election shall promptly confirm each
such telephonic notice in writing by providing the Agent a new Borrowing
Certificate signed by the relevant Fund's or Portfolio's Treasurer or Assistant
Treasurer or a designated officer of the Adviser, on behalf of such Fund or
Portfolio. Absent timely notice of continuation or conversion, each Eurodollar
Loan shall automatically convert into a Federal Funds Rate Loan on the last day
of the current Interest Period for such Loan unless paid in full on such last
day.
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At any time that an Event of Default or an Unmatured Event of Default shall
exist, any Loans may be converted or continued only as Federal Funds Rate Loans.
The Agent will promptly notify each Bank of its receipt of a request to convert
or continue a Loan. All conversions and continuations shall be made ratably
according to the respective outstanding principal amounts of the Loans with
respect to which the notice was given held by each Bank.
2.5 Note Evidencing Loans. The Loans made to a Fund or Portfolio
by each Bank under its Commitment shall be evidenced by a Note, which shall be
dated as of the date hereof and shall mature (unless accelerated pursuant to
Section 11.2) on the Termination Date. All Loans made by the Banks to a Fund or
Portfolio pursuant to this Agreement and all payments of principal shall be
evidenced by the Banks in their records which records shall be rebuttably
presumptive evidence of the subject matter thereof.
2.6 Source of Repayment.
(a) Notwithstanding any other provision of this Agreement, the
parties agree that the assets and liabilities of each Portfolio of a Fund are
separate and distinct from the assets and liabilities of each other Portfolio of
that Fund. No Portfolio or Fund shall be liable or shall be charged for any
debt, obligation, liability, fee, or expense arising out of or in connection
with a transaction entered into by or on behalf of any other Portfolio or Fund
or any judgment with respect thereto.
(b) With respect to each Fund that is organized as a Massachusetts
business trust, the parties hereby agree that this Agreement is not executed on
behalf of the trustees of such Fund as individuals, and the obligations of such
Fund, or a Portfolio of such Fund (with respect to a Fund with Portfolios),
under this Agreement and its Note(s) are not binding on any of the trustees,
officers or shareholders of such Fund individually, but are binding upon only
the assets and property of such Fund or Portfolio, as the case may be.
(c) Nothing in this Section 2.6 shall affect the rights of the
Agent or the Banks against Adviser Persons as provided in Section 1.6.
2.7 Extension of Scheduled Termination Date. Between 60 and 45
days prior to the scheduled Termination Date, the Funds and Portfolios may, by
written notice to the Agent, request that all Banks extend for an additional 364
days the scheduled Termination Date. The Agent shall deliver a copy of such
notice to each Bank promptly following its receipt thereof. Such extension so
requested shall become effective on the then-current scheduled Termination Date
if (and only if) on or prior to 30 days after such notice, each Bank shall have
consented to such extension in writing by notice to the Agent. If a Bank shall
not respond to any such request, it shall be deemed to have refused to extend.
The Agent shall promptly inform the Funds and Portfolios of each Bank's consent
to or rejection of, or failure to consent to, any Termination Date extension
request. If any Bank (a "Non-Extending Bank") shall not agree to such extension,
but Banks holding at least 66% of the Commitments shall agree to such
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extension, the Funds and Portfolios may request one or more of the other Banks
to purchase the Commitment of the Non-Extending Bank or, with the consent of the
Agent, the Funds and Portfolios may request an Eligible Lender to purchase the
Commitment of the Non-Extending Bank (any such Bank or Eligible Lender
purchasing all or a portion of such Commitment being called a "Replacement
Bank"). Any such purchase by a Replacement Bank shall be subject to the terms of
Section 13.8(b), except that the relevant Fund(s) and/or Portfolio(s) shall pay
any cost related to breakage of existing Interest Periods or the cost of funding
existing Loans for the remainder of existing Interest Periods.
3. INTEREST AND FEES.
3.1 Interest.
(a) Federal Funds Rate Loans. The unpaid principal amount of each
Federal Funds Rate Loan shall bear interest prior to maturity at a rate per
annum equal to the Federal Funds Rate in effect from time to time plus the
Federal Funds Rate Margin. Accrued interest on each Federal Funds Rate Loan
shall be payable on each Payment Date and at maturity.
(b) Eurodollar Loans. The unpaid principal amount of each
Eurodollar Loan shall bear interest prior to maturity at a rate per annum equal
to the Interbank Rate (Reserve Adjusted) in effect for each Interest Period with
respect to such Eurodollar Loan plus the Eurodollar Margin. Accrued interest on
each Eurodollar Loan shall be payable on each Payment Date and at maturity.
(c) Interest After Maturity. Each Fund and, in the case of a Fund
comprised of Portfolios, each Fund on behalf of its Portfolios shall pay to the
Banks interest on any amount of principal of any Loan borrowed on behalf of each
such Fund or Portfolio which is not paid when due, whether at stated maturity,
by acceleration or otherwise, accruing from and including the date such amount
shall have become due to, but not including, the date of payment thereof in full
at the rate per annum which is equal to the greater of (i) 2% in excess of the
rate applicable to the unpaid principal amount immediately before it became due,
or (ii) 2% in excess of the Reference Rate in effect from time to time. After
maturity, accrued interest shall be payable on demand.
3.2 Commitment Fee. The Funds and Portfolios shall collectively
pay to the Banks a commitment fee equal to 0.07% per annum on the average daily
unused portion of the Commitment Amount from time to time during the period from
and including the date of this Agreement to, but not including, the earlier of
the Termination Date or the date of termination of the Commitment Amount
pursuant to Section 4.3 or 11.2. Such commitment fee shall be payable in arrears
on each Payment Date and a pro-rated installment shall be payable on the
Termination Date or the date of termination of the Commitments for any period
then ending for which such commitment fee shall not
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have been theretofore paid. Notwithstanding the foregoing, the amount of the
commitment fee shall be reduced pro rata in accordance with any termination, or
reduction from time to time in the Commitment Amount. Each Fund or Portfolio, as
the case may be, shall be liable only for its portion of the commitment fee, and
such Fund or Portfolio shall not be liable for any portion of the commitment fee
of any other Fund or Portfolio. The Funds shall notify the Agent at least two
Banking Days in advance of a commitment fee Payment Date of the manner in which
the fees to be paid on such Payment Date are to be allocated among the Funds and
Portfolios.
3.3 Method of Calculating Interest and Fees. Interest on each
Loan shall be calculated on the basis of a year consisting of 360 days and paid
for actual days elapsed, calculated as to each Interest Period from and
including the first day thereof to, but not including, the last day thereof. Any
fees shall be calculated on the basis of a year consisting of 360 days and paid
for actual days elapsed.
4. PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION OF THE
COMMITMENTS AND SETOFF.
4.1 Place of Payment. All payments hereunder (including payments
with respect to the Notes) shall be made without setoff or counterclaim and
shall be made to the Agent in immediately available funds prior to 12:30 p.m.,
California time, on the date due at Bank of America, ABA No. 1210-0035-8, Agency
Administration Services, #5596, Account No.122331-16136, Reference: Legg Mason,
or at such other place or for such other account as may be designated by the
Agent to the Funds and Portfolios in writing. Any payments received after such
time shall be deemed received on the next Banking Day. The Agent will promptly
distribute to each Bank its Pro Rata Share (or other applicable share as
expressly provided herein) of such payment in like funds as received. Subject to
the definition of the term "Interest Period," whenever any payment to be made
hereunder or under a Note shall be stated to be due on a date other than a
Banking Day, such payment may be made on the next succeeding Banking Day, and
such extension of time shall be included in the calculation of interest or any
fees.
4.2 Prepayments.
(a) Mandatory Prepayments. If at any time the outstanding
principal balance of a Fund's or Portfolio's, as the case may be, Loans
hereunder shall exceed the then-current Borrowing Base of such Fund or
Portfolio, such Fund or Portfolio shall immediately prepay the outstanding
principal amount of such Loans in an amount equal to such excess, subject to the
indemnification provisions of Section 5.5.
(b) Optional Prepayments. Each Fund or Portfolio, as the case may
be, may from time to time, upon at least two (2) Banking Days' prior written or
telephonic notice received by the Agent, prepay the principal of the Loans to
such Fund or Portfolio in whole or in part, as contemplated by Section 2.1;
provided, however, that any partial
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prepayment of principal shall be in a minimum amount of $100,000 or in an
integral multiple of $100,000 in excess thereof, and provided further, that any
prepayment of principal shall be subject to the indemnification provisions of
Section 5.5, but shall otherwise be without any premium or penalty. Such Fund or
Portfolio shall promptly confirm any telephonic notice of prepayment in writing.
4.3 Reduction or Termination of the Commitment Amount. The Funds
and Portfolios may from time to time, upon at least 30 calendar days' prior
written or telephonic notice given by or on behalf of the Funds and Portfolios
and received by the Agent, permanently reduce the Commitment Amount, but only
upon payment of the unpaid principal amount of the Loans, if any, in excess of
the then-reduced amount of the Commitment Amount, plus (i) accrued interest to
the date of such payment on the principal amount being repaid and (ii) any
amount required to indemnify the Banks pursuant to Section 5.5 in respect of
such payment. Any such reduction shall be in a minimum amount of $1,000,000 and
in an integral multiple of $500,000 and shall be applied to each Bank according
to its Pro Rata Share. The Funds and Portfolios may at any time on like notice
terminate the Commitments upon payment in full of (a) the Loans, (b) accrued
interest thereon to the date of such payment, (c) any amount required to
indemnify the Banks pursuant to Section 5.5 in respect of such payment, and (d)
any other liabilities of the Funds and Portfolios hereunder. The Funds and
Portfolios shall promptly confirm any telephonic notice of reduction or
termination of the Commitments in writing.
4.4 Setoff. In addition to and not in limitation of all other
rights and remedies (including other rights of setoff) that the Banks may have,
a Bank shall, upon the occurrence of any Event of Default described in Section
11.1 or any Unmatured Event of Default described in Section 11.1(e), have the
right to appropriate and apply to any payment of any and all Loans and other
liabilities of a Fund or Portfolio hereunder (whether or not then due), in such
order of application as such Bank may elect, any and all balances, credits,
deposits (general or special, time or demand, provisional or final), accounts or
moneys of such Fund or Portfolio (and not any other Fund or Portfolio) then or
thereafter with such Bank. A Bank shall promptly advise the relevant Fund or
Portfolio and the Agent of any such setoff and application made with respect to
the Fund or Portfolio, but failure to do so shall not affect the validity of
such setoff and application.
4.5 Borrowing Base. The borrowing base (the "Borrowing Base") of
each Fund or Portfolio, as the case may be, as of any date shall be the amount
shown on each Borrowing Base Certificate or Borrowing Certificate, if
applicable, furnished from time to time with respect to such Fund or Portfolio.
4.6 Payments by the Banks to the Agent.
(a) Unless the Agent receives notice from a Bank at least one
Banking Day prior to the date of such Borrowing, that such Bank will not make
available as and when required hereunder to the Agent for the account of the
relevant Fund or Portfolio the
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amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that
each Bank has made such amount available to the Agent in immediately available
funds on the Borrowing date and the Agent may (but shall not be so required), in
reliance upon such assumption, make available to the relevant Fund or Portfolio
on such date a corresponding amount. If and to the extent any Bank shall not
have made its full amount available to the Agent in immediately available funds
and the Agent in such circumstances has made available to the relevant Fund or
Portfolio such amount, that Bank shall on the Banking Day following such
Borrowing date make such amount available to the Agent, together with interest
at the Federal Funds Rate for each day during such period. A notice of the Agent
submitted to any Bank with respect to amounts owing under this subsection (a)
shall be conclusive, absent manifest error. If such amount is so made available,
such payment to the Agent shall constitute such Bank's Loan on the Borrowing
date for all purposes of this Agreement. If such amount is not made available to
the Agent on the Banking Day following the Borrowing date, the Agent will notify
the relevant Fund or Portfolio of such failure to fund, and upon demand by the
Agent, the relevant Fund shall pay such amount to the Agent for the Agent's
account, together with interest thereon for each day elapsed since the date of
such Borrowing, at a rate per annum equal to the interest rate applicable at the
time to the Loans comprising such Borrowing.
(b) The failure of any Bank to make any Loan on any Borrowing date
shall not relieve any other Bank of any obligation hereunder to make a Loan on
such Borrowing date, but no Bank shall be responsible for the failure of any
other Bank to make the Loan to be made by such other Bank on any Borrowing date.
4.7 Sharing of Payments. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Loans made by it any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Agent of such fact and (b) purchase from the other
Banks such participations in the Loans made by them as shall be necessary to
cause such purchasing Bank to share the excess payment pro rata with each of
them; provided, however, that if all or any portion of such excess payment is
thereafter recovered from the purchasing Bank, such purchase shall to that
extent be rescinded and each other Bank shall repay to the purchasing Bank the
purchase price paid therefor, together with an amount equal to such paying
Bank's ratable share (according to the proportion of (i) the amount of such
paying Bank's required repayment to the purchasing Bank to (ii) the total amount
so recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. Each
Fund and Portfolio agrees that any Bank so purchasing a participation from
another Bank may, to the fullest extent permitted by law, exercise all its
rights of payment (including the right of set-off with respect to such
participation) as fully as if such Bank were the direct creditor of the relevant
Fund in the amount of such participation. The Agent will keep records (which
shall be conclusive and binding in the absence of manifest error) of
participations purchased under this Section and will in each case notify the
Banks following any such purchases or repayments.
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5. ADDITIONAL PROVISIONS RELATING TO LOANS.
5.1 Increased Cost. If, as a result of any law, rule, regulation,
treaty or directive, or any change therein or in the interpretation or
administration thereof, or compliance by a Bank with any request or directive
(whether or not having the force of law) from any court or governmental
authority, agency or instrumentality:
(a) any tax, duty or other charge with respect to any Loan, any
Note, or such Bank's obligation to make Loans is imposed, modified or deemed
applicable, or the basis of taxation of payments to such Bank of the principal
of, or interest on, any Loan (other than taxes imposed on the overall net income
of such Bank by the jurisdiction in which such Bank has its principal office) is
changed;
(b) any reserve, special deposit, special assessment or similar
requirement against assets of, deposits with or for the account of, or credit
extended by, such Bank is imposed, modified or deemed applicable; or
(c) any other condition affecting this Agreement or any Loan is
imposed on such the Bank or the interbank eurodollar market,
and such Bank determines that, by reason thereof, the cost to such Bank of
making or maintaining any Loan is increased, or the amount of any sum receivable
by such Bank hereunder or under the Note in respect of any Loan is reduced,
then each Fund and/or each Portfolio, as the case may be, whose Loan is affected
by the foregoing shall pay to such Bank upon demand such additional amount or
amounts as will compensate such Bank for such additional cost or reduction, not
to exceed an amount or amounts reasonably incurred, upon presentation by such
Bank of a statement in the amount or amounts and setting forth such Bank's
calculation thereof (provided that such Bank has not been compensated for such
additional cost or reduction in the calculation of the Eurocurrency Reserve
Requirement). Determinations by a Bank for purposes of this Section 5.1 of the
additional amounts required to compensate such Bank in respect of the foregoing
shall be conclusive in the absence of manifest error. In determining such
amounts, the relevant Bank may use any reasonable averaging, attribution and
allocation methods.
5.2 Deposits Unavailable or Interest Rate Unascertainable or
Inadequate; Impracticability. If any Fund or Portfolio has any Eurodollar Loan
outstanding or a Fund or Portfolio, as the case may be, has notified the Agent
of its intention to borrow a Eurodollar Loan as provided herein, then in the
event that, prior to any Interest Period, a Bank shall have determined in good
faith (which determination shall be conclusive and binding on the parties
hereto) that:
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(i) deposits of the necessary amount for the relevant
Interest Period are not available to such Bank in the interbank
eurodollar market or that, by reason of circumstances affecting such
market, adequate and reasonable means do not exist for ascertaining the
Interbank Rate applicable to such Interest Period; or
(ii) the Interbank Rate (Reserve Adjusted) will not
adequately and fairly reflect the cost to such Bank of making or
funding the Eurodollar Loans for such Interest Period; or
(iii) the making or funding of Eurodollar Loans has become
impracticable as a result of any event occurring after the date of this
Agreement which, in the opinion of such Bank, materially and adversely
affects such Loans or such Bank's obligation to make such Loans,
then (x) any notice of a new Eurodollar Loan previously given by or on behalf of
any Fund or Portfolio, as the case may be, and not yet borrowed or converted
shall be deemed to be a notice to make a Federal Funds Rate Loan, and (y)
provided that such Fund or Portfolio has been notified of such determination by
the relevant Bank, such Fund or Portfolio shall be obligated, at its election,
either to prepay in full the outstanding Eurodollar Loans without any premium or
penalty (except as provided in Section 5.5) on the last day of the then-current
Interest Period with respect thereto or to convert any such Loans to Federal
Funds Rate Loans on such last day, unless payment or conversion of such Loans is
demanded sooner.
5.3 Changes in Law Rendering Eurodollar Loans Unlawful. If at any
time due to any new law, treaty or regulation, or any interpretation thereof by
any governmental or other regulatory authority charged with the administration
thereof, or for any other reason arising subsequent to the date hereof, it shall
become unlawful for a Bank to fund any Eurodollar Loan, Eurodollar Loans shall
not be made hereunder by such Bank for so long as it would be unlawful for such
Bank to do so. If any such change shall make it unlawful for a Bank to continue
any Eurodollar Loan previously made by it hereunder, each Fund or Portfolio
having Eurodollar Loans outstanding at such time shall, after being notified by
such Bank of the occurrence of such event, on the earlier of (i) the last day of
the then-current Interest Period or (ii) if required by such law, regulation or
interpretation, on such date as shall be specified in such notice, at such
Fund's or Portfolio's option, either convert each such Eurodollar Loan to a
Federal Funds Rate Loan or prepay such Loan to such Bank in full without any
premium or penalty (but subject to Section 5.5).
5.4 Discretion of the Bank as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, each Bank shall
be entitled to fund and maintain its funding of all or any part of its
Eurodollar Loans in any manner it sees fit; it being understood, however, that
for purposes of this Agreement, all determinations hereunder shall be made as if
such Bank had actually funded and maintained each
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Eurodollar Loan during the Interest Period for such Loan through the purchase of
deposits having a term corresponding to such Interest Period and bearing an
interest rate equal to the Interbank Rate for such Interest Period (whether or
not such Bank shall have granted any participations in such Eurodollar Loan).
The Funds and Portfolios acknowledge that the Banks may fund all or any part of
the Loans by sales of participations to various participants, provided such
participants are banks.
5.5 Funding Losses. Each Fund or Portfolio, as the case may
be, will indemnify each Bank upon demand against any loss or expense which such
Bank may sustain or incur (including, without limitation, any loss or expense
sustained or incurred in obtaining, liquidating or employing deposits or other
funds acquired to effect, fund or maintain any Loan, but not including any loss
or expense incurred as a result of such Bank's gross negligence or wilful
misconduct) as a consequence of (i) any failure of any such Fund or Portfolio to
make any payment when due of any amount due hereunder, (ii) any failure of any
such Fund or Portfolio to borrow, continue or convert a Loan on a date specified
therefor in a notice thereof or (iii) any payment (including any payment made
pursuant to the Bank's demand for payment of the unpaid principal of the Loans),
prepayment or conversion of any Loan on a date other than the last day of the
Interest Period for such Loan. Other than the indemnification provided above, no
premium or penalty shall be payable in connection with any of the circumstances
described above.
5.6 Capital Adequacy. If a Bank shall reasonably determine
that the application or adoption of any law, rule, regulation, directive,
interpretation, treaty or guideline regarding capital adequacy, or any change
therein or in the interpretation or administration thereof, whether or not
having the force of law (including, without limitation, application of changes
to Regulation H and Regulation Y of the Federal Reserve Board issued by the
Federal Reserve Board and regulations of the Comptroller of the Currency,
Department of the Treasury, 12 CFR Part 3, Appendix A, issued by the Comptroller
of the Currency), increases the amount of capital required or expected to be
maintained by such Bank or any entity controlling such Bank, and such increase
is based upon the existence of such Bank's obligations hereunder and other
commitments of this type, then from time to time the relevant Fund(s) or
Portfolio(s), as the case may be, shall pay to such Bank an amount equal to such
amount or amounts as will compensate such Bank or such controlling entity, as
the case may be, for such increased capital requirement within ten (10) Banking
Days upon presentation of a certificate of such Bank setting forth the amount or
amounts and the Bank's calculation thereof, which certificate shall be
conclusive in the absence of manifest error. The determination of any amount or
amounts to be paid under this Section 5.6 shall be based upon any reasonable
averaging, attribution and allocation methods. In this connection, the relevant
Bank shall allocate such amount or amounts among its customers in good faith to
which such Bank has made loans of the type covered hereby and on an equitable
basis. A certificate of a Bank setting forth the amount or amounts as shall be
necessary to compensate the Bank and a calculation of such amount or amounts as
specified in this Section 5.6 shall be delivered to such Fund or Portfolio and
shall be conclusive in the absence of manifest error.
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5.7 Additional Provisions with respect to Federal Funds Rate
Loan. The selection by a Fund or Portfolio of the Federal Funds Rate and the
maintenance of advances at such rate shall be subject to the following
additional terms and conditions:
(a) If, after a Fund or Portfolio has elected to borrow or
maintain any Loan at the Federal Funds Rate, the Agent notifies such
Fund or Portfolio that reasonable means do not exist for the Agent to
determine the Federal Funds Rate, as determined by the Agent in its
sole discretion, then the principal of the Loan subject to the Federal
Funds Rate shall accrue or shall continue to accrue interest at the
Reference Rate.
(b) If any treaty, statute, regulation or interpretation
thereof, or any directive, guideline, or other requirement of a central
bank or fiscal authority (whether or not having the force of law) shall
prohibit the maintenance of any Loan subject to the Federal Funds Rate,
then on and as of the date the prohibition becomes effective, the
principal subject to that prohibition shall accrue or shall continue to
accrue interest at the Reference Rate.
6. WARRANTIES. To induce the Banks and the Agent to enter into this
Agreement, grant the Commitments and to make the Loans, each Fund hereby
warrants with respect to itself and, as may be relevant with respect to a Fund
comprised of Portfolios, its respective Portfolios that:
6.1 Existence. It is an open-end, management investment company
within the meaning of the Act and is duly organized, validly existing and in
good standing under the laws of the state of its organization. It is in good
standing and is duly qualified to do business in each state where, because of
the nature of its respective activities or properties, such qualification is
required, except where the failure to be so qualified would not have a Material
Adverse Effect. If it is a Fund comprised of Portfolios, each of its Portfolios
is a series of shares of beneficial interest in, or common stock of, such Fund
(which shares have been and will be duly authorized, validly issued, fully paid
and non-assessable by such Fund) and legally constitutes a fund or portfolio
permitted to be marketed to investors pursuant to the provisions of the Act.
6.2 Authorization. It is duly authorized to execute and
deliver this Agreement and its Notes and is and, so long as this Agreement shall
remain in effect with respect to it, will continue to be duly authorized to
borrow monies hereunder on its own behalf or, if it is a Fund comprised of one
or more Portfolios, on behalf of each such Portfolio, and to perform its
obligations under this Agreement and its Notes. The execution, delivery and
performance by it of this Agreement and its Notes and the effecting of its
Borrowings hereunder on its own behalf or, if it is a Fund comprised of
Portfolios, on behalf of its respective Portfolios, do not and will not require
any consent or approval of, or registration with, any governmental agency or
authority.
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6.3 No Conflicts. The execution, delivery and performance by
it of this Agreement and its Notes do not and, so long as this Agreement shall
remain in effect with respect to it, will not (i) conflict with any provision of
law, (ii) conflict with its constituent documents or, as applicable, its Trust
Agreement, (iii) conflict with any agreement binding upon it, (iv) conflict with
either its most recent prospectus or its most recent statement of additional
information, (v) conflict with any court or administrative order or decree
applicable to it or (vi) require, or result in, the creation or imposition of
any Lien on any of its assets.
6.4 Validity and Binding Effect. This Agreement is, and its
Notes when duly executed and delivered will be, a legal, valid and binding
obligation of such Fund or Portfolio, enforceable against it in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, receivership, fraudulent conveyance, fraudulent transfer,
moratorium or other similar laws of general application affecting the
enforcement of creditors' rights or by general principles of equity limiting the
availability of equitable remedies. The claims of the Banks under its Notes for
Borrowings hereunder will rank at least pari passu with the claims of all its
other unsecured creditors, except those whose claims are preferred solely by any
bankruptcy, insolvency, liquidation or other similar laws of general
application.
6.5 No Default. It is not in default under any agreement or
instrument to which it is a party or by which any of its respective properties
or assets is bound or affected, which default might have a Material Adverse
Effect. To the best of the Fund's knowledge, no Event of Default or Unmatured
Event of Default with respect to it or, if it is comprised of Portfolios, its
Portfolios, has occurred and is continuing.
6.6 Financial Statements. Its most recent audited Statement of
Assets and Liabilities and its most recent semi-annual asset statement, copies
of which have been or will be furnished to the Agent and the Banks, have been
prepared in conformity with GAAP applied on a basis consistent with that of the
preceding Fiscal Year or period and present fairly its financial condition as at
such dates and the results of its operations for the periods then ended, subject
(in the case of the interim financial statement) to year-end audit adjustments.
Since the date of its most recent Statement of Assets and Liabilities and such
semi-annual asset statement, there has been no material adverse change in such
financial condition or, if it is comprised of Portfolios, any of its Portfolios,
except for fluctuations in value of its assets or the assets of such Portfolios
due to market conditions and shareholder purchases and redemptions.
6.7 Litigation. No claims, litigation, arbitration proceedings
or governmental proceedings are pending or, to the best of its knowledge,
threatened against or are affecting it or, if it is comprised of Portfolios, its
Portfolios, the results of which, if adversely determined, could reasonably be
expected to have a Material Adverse Effect, except those referred to in a
schedule furnished to the Agent and the Banks contemporaneously herewith and
attached hereto as Exhibit D. Other than any liability incident to such claims,
litigation or proceedings or provided for or disclosed in the
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financial statements referred to in Section 6.6 or listed on Exhibit E, neither
such Fund nor any of its Portfolios, in the case of a Fund comprised of
Portfolios, to the best of its knowledge, has any contingent liabilities which
are material to it other than those incurred in the ordinary course of business.
6.8 Liens. None of the property, revenues or assets of such
Fund or any of its Portfolios, in the case of a Fund comprised of Portfolios, is
subject to any Lien, except (i) Liens in favor of the Agent, if any, (ii) Liens
for current Taxes not delinquent or Taxes being contested in good faith and by
appropriate proceedings and as to which such reserves or other appropriate
provisions as may be required by GAAP are being maintained, (iii) Liens as are
necessary in connection with a secured letter of credit opened by such Fund or
Portfolio in connection with the Fund's or the Portfolio's trustees/directors'
and officers' errors and omissions liability insurance policy, (iv) Liens in
connection with advances of cash or securities made, or in connection with any
taxes, charges, expenses, assessments, claims or liabilities incurred, by a
Fund's or Portfolio's custodian and (v) Liens in connection with the payment of
initial and variation margin in connection with authorized futures and options
transactions and collateral arrangements with respect to options, futures
contracts, options on futures contracts, when-issued or delayed delivery
securities or other authorized investments or portfolio management techniques.
6.9 Partnerships. Such Fund or Portfolio is not a partner or
joint venturer in any partnership or joint venture.
6.10 Purpose. The proceeds of the Loans will be used by such
Fund or, if it is comprised of Portfolios, by its Portfolios, as may be
designated in the relevant Borrowing Certificate, for short-term liquidity and
other temporary emergency purposes, which purposes are permitted by such Fund's
or Portfolio's prospectus and statement of additional information and the Act.
Neither the making of any Loan nor the use of the proceeds thereof will violate
or be inconsistent with the provisions of Federal Reserve Board Regulations G,
T, U or X. Each such Fund acknowledges that Loans made to it or to it on behalf
of its Portfolios, as the case may be, may be deemed by the Federal Reserve
Board to be "purpose loans" under Regulation U because of such Fund's status as
an investment company (or the functional equivalent thereof).
6.11 Compliance. Such Fund or Portfolio is in compliance with
all statutes and governmental rules and regulations, consents, orders and
decrees applicable to it, including, without limitation, the Act, other than any
statutes, governmental rules and regulations the non-compliance with which will
not have a Material Adverse Effect on such Fund's or Portfolio's operations,
assets or financial condition.
6.12 Pension and Welfare Plans. Such Fund or Portfolio has not
established or maintained, nor is it liable under or in respect of, any Plan.
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6.13 Taxes. Such Fund or Portfolio has filed all tax returns
that are required to have been filed and has paid, or made adequate provisions
for the payment of, all of its Taxes that are due and payable, except such
Taxes, if any, as are being contested in good faith and by appropriate
proceedings and as to which such reserves or other appropriate provisions as may
be required by GAAP have been maintained. Such Fund or Portfolio is not aware of
any proposed assessment against it for additional Taxes (or any basis for any
such assessment) which might be material in amount to it. Such Fund or Portfolio
has complied with all requirements of the Code applicable to regulated
investment companies so as to be relieved of federal income tax on net
investment income and net capital gains distributed to shareholders of the Fund
or Portfolio.
6.14 Subsidiaries; Investments. Such Fund or Portfolio has no
Subsidiaries and no equity investment or interest in any other Person other than
portfolio securities which may have been acquired in the ordinary course of
business.
6.15 Full Disclosure. No representation or warranty contained
in this Agreement or in any other document or instrument furnished to the Agent
and the Banks in connection herewith contains any untrue statement of any
material fact as of the date when made or omits to state any material fact
necessary to make the statements herein or therein not misleading as of the date
when made.
6.16 Investment Policies. The assets of such Fund or Portfolio
are being invested in accordance with the investment policies and restrictions
set forth in each of its most recent prospectus and its most recent statement of
additional information, except for incidents of inadvertent non-compliance
therewith which will not, individually or in the aggregate, have a Material
Adverse Effect on the Fund's or Portfolio's business or financial condition.
7. COVENANTS. From the date of this Agreement and thereafter until
the expiration or termination of the Commitments and until its Note or Notes and
other liabilities are paid in full, each Fund agrees with respect to itself and,
if it is comprised of Portfolios, its Portfolios, that, unless the Majority
Banks shall otherwise expressly consent in writing:
7.1 Financial Statements and Other Reports. Subject to the
last sentence of this Section 7.1, to furnish to the Agent, with sufficient
copies for each Bank:
(a) Audit Reports. As soon as available and in any
event within 60 days after each of its Fiscal Years, a copy of its
annual audited Statement of Assets and Liabilities, including a
statement of investments, prepared in conformity with GAAP and
certified by an independent certified public accountant who shall be
satisfactory to the Majority Banks, together with a certificate from
such accountant (i) acknowledging to the Agent such accountant's
understanding that the Agent and the Banks are relying on such
Statement of
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Assets and Liabilities, (ii) containing a computation of, and showing
compliance with, the financial ratio contained in Section 7.13 and
(iii) to the effect that, in making the examination necessary for the
signing of such Statement of Assets and Liabilities, such accountant
has not become aware of any Event of Default or Unmatured Event of
Default that has occurred and is continuing, or if such accountant has
become aware of any such event, describing it and the steps, if any,
being taken to cure it;
(b) Semi-Annual Asset Statements. Within 60 days after the
end of the first six months of its Fiscal Year, a copy of its published
semi-annual asset statement, prepared in conformity with GAAP;
(c) Borrowing Base Certificate. In addition to each
Borrowing Certificate provided pursuant to Section 2.3, not later than
7 days after the end of each calendar quarter, or at any other time
reasonably requested by the Agent, a certificate of a designated
officer of its Adviser, acting on its behalf, in the form set forth as
Exhibit F hereto (a "Borrowing Base Certificate"), certifying, as of
the end of such quarter, as to the current Borrowing Base of it or, if
it is comprised of Portfolios, each of its Portfolios to which Loans
were made during such quarter or are outstanding at the end of such
quarter, and showing all calculations used in determining such amounts;
(d) Officer's Certificate. Within 15 days after the end of
each calendar quarter during which a Loan was outstanding at the end of
such quarter, a certificate of a designated officer of the borrowing
Fund's or Portfolio's Adviser, acting on such Fund's or Portfolio's
behalf, certifying to the effect that, to the best of such Adviser's
knowledge, no Event of Default or Unmatured Event of Default has
occurred and is continuing and containing a computation of, and showing
compliance with, the financial ratio contained in Section 7.13;
(e) Securities and Exchange Commission and Other Reports.
Copies of each filing and report made by it with or to any securities
exchange or the Securities and Exchange Commission (other than any
filing or report not sent to investors) and of each communication
(other than marketing and other non-financial communications sent in
the ordinary course of business) from it to investors generally,
promptly upon the filing or making thereof; and
(f) Requested Information. Promptly from time to time such
other reports or information as the Agent or any Bank may reasonably
request, including, without limitation, those required pursuant to
Section 8.5.
Notwithstanding the foregoing, such Fund or Portfolio may fulfill its
obligations to the Agent and the Banks under paragraphs (a), (b) and (e) of this
Section 7.1 by providing to the Agent (with copies sufficient for each Bank)
(without duplication) each report, statement, mailing and distribution (other
than transaction confirmations and
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dividend statements) sent to shareholders of such Fund or Portfolio, including
all statements of additional information, for which the Agent and the Banks
shall be deemed to have made specific requests.
7.2 Notices. Notify the Agent in writing of any of the
following immediately upon learning of the occurrence thereof, describing the
same and, if applicable, stating the steps being taken by the Person(s) affected
with respect thereto:
(a) Default. The occurrence of an Event of Default or an
Unmatured Event of Default;
(b) Litigation. The institution of any litigation,
arbitration proceeding or governmental proceeding which, if adversely
determined, could reasonably be expected to have a Material Adverse
Effect;
(c) Judgment. The entry of any judgment or decree against
such Fund or Portfolio if the aggregate amount of all judgments and
decrees then outstanding against such Fund or Portfolio exceeds
$1,000,000 or, if less, 1% of the Fund's or Portfolio's assets, after
deducting (i) the amount with respect to which such Fund or Portfolio
is insured and with respect to which the insurer has assumed
responsibility in writing, and (ii) the amount for which such Fund or
Portfolio is otherwise indemnified if the terms of such indemnification
and the Person providing such indemnification are satisfactory to the
Majority Banks;
(d) Pricing Service Information. The occurrence of any
change in the pricing services utilized by such Fund or Portfolio as
referred to in the definition of "Total Assets";
(e) Name Changes. The occurrence of a change of name
(whether of its legal name or a "d/b/a" designation) of such Fund or,
if it is comprised of Portfolios, any of its Portfolios. The Fund or,
if it is a Fund comprised of Portfolios, the Fund, on behalf of the
affected Portfolio(s), shall promptly execute and deliver to each Bank
a new Note executed in its new name, together with such other documents
in connection therewith as the Bank shall reasonably request;
(f) Other Changes. Upon becoming aware of any potential
change of such Fund's or Portfolio's Adviser or distributor or the
appointment of any sub-adviser or any Person acting in a similar
capacity to an Adviser (and in any event not later than 30 days prior
to the time as the board of trustees or directors of such Fund is to
consider approval of such change or appointment or otherwise determines
to recommend such change or appointment (if necessary) to its
shareholders for their approval) and, not later than 30 days prior to
the occurrence of any change of such Fund's or Portfolio's custodian,
independent accountant, sponsor or administrator, notice thereof;
provided that a mailing to
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shareholders with respect to any of the foregoing shall not be deemed
to be sufficient notice hereunder; and provided further, that if, in
the good faith judgment of the Majority Banks such proposed change will
result or has resulted in a change in the Majority Banks' analysis of
the creditworthiness of such Fund or Portfolio or, in the case of any
such proposed change of such Fund's or Portfolio's Adviser or if a new
Adviser, any sub-adviser or any other Person acting in a similar
capacity to an Adviser is appointed, such Adviser, new Adviser,
sub-adviser or other Person fails to provide the Banks with a letter in
the form of Exhibit H, then the Banks may terminate their Commitments
to lend to such Fund or Portfolio hereunder upon giving 30 days' notice
to such Fund or Portfolio, and at the end of such 30-day period, all
Loans outstanding to such Fund or Portfolio shall become immediately
due and payable; and
(g) Other Events. The occurrence of such other events
as the Agent may from time to time reasonably specify.
7.3 Existence. Except as specified in Section 7.12(a), maintain
and preserve its existence as a registered investment company and, if it is
comprised of Portfolios, the respective existence of each Portfolio as a
"series" within the meaning of the Act, and maintain and preserve all rights,
privileges, licenses, copyrights, trademarks, trade names, franchises and other
authority to the extent material and necessary for the conduct of its business
in the ordinary course as conducted from time to time, unless such Fund or
Portfolio has no Loans outstanding and has irrevocably notified the Agent that
it shall not request any Loans hereunder.
7.4 Nature of Business. (a) Continue in, and limit its
operations to, the business of an open-end, management investment company,
within the meaning of the Act, and (b) maintain in full force and effect at all
times all governmental licenses, registrations, permits and approvals necessary
for the continued conduct of its business, including, without limitation, its
registration with the Securities and Exchange Commission under the Act as an
open-end diversified investment company, unless in the case of this clause (b)
only the failure to do so would not have a Material Adverse Effect.
7.5 Books, Records and Access. Maintain complete and accurate
books and records in which full and correct entries in conformity with GAAP
shall be made of all dealings and transactions in relation to such Fund's or
Portfolio's business and activities; upon reasonable notice, permit access by
the Agent and the Banks to its books and records during normal business hours
and permit the Agent or a Bank, as the case may be, to make copies of such books
and records; provided, however, that neither the Agent nor the Banks shall have
access to the shareholder lists of the Fund and, as the case may be, its
Portfolios.
7.6 Insurance. Maintain in full force and effect insurance to
such extent and against such liabilities as is commonly maintained by companies
similarly situated, including, but not limited to (i) such fidelity bond
coverage as shall be required
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by Rule 17g-1 promulgated under the Act or any similar or successor provision
and (ii) errors and omissions, director and officer liability, and other
insurance against such risks and in such amounts (and with such co-insurance and
deductibles) as is usually carried by other companies of established reputation
engaged in the same or similar businesses and similarly situated.
7.7 Dividends. Not declare or pay any dividends, except for
(i) dividends not in excess of such Fund's or Portfolio's undistributed net
investment income, net short-term capital gains and net gains from foreign
currency transactions; (ii) annual dividends not in excess of such Fund's or
Portfolio's net realized capital gains for each year in respect of which such
annual dividend is declared or paid; and (iii) any other dividends necessary to
reduce or eliminate any liability of the Fund or the Portfolio for federal,
state, local or foreign income or excise taxes; provided, however, that
dividends declared in good faith, but later recharacterized as a return of
capital due to foreign currency transactions or other unforeseeable events,
shall not be deemed in violation of this section.
7.8 Investment Policies and Restrictions.
(a) Without prior written notice to the Agent of at least 30
days (which notice the Agent shall communicate to the Banks promptly following
the receipt thereof), rescind, amend or modify any investment policy described
as "fundamental" in any prospectus or any registration statement(s) that may be
on file with the Securities and Exchange Commission with respect thereto
(collectively herein, a "proposed change"). If, in the judgment of the Majority
Banks, such proposed change will result in a change in such Banks' analysis of
the creditworthiness of such Fund or Portfolio, and if such proposed change is
implemented with respect to such Fund or Portfolio, the Commitments to such Fund
or Portfolio shall, as of the time such fundamental change is implemented,
terminate, and all Loans outstanding from the Banks to such Fund or Portfolio,
as well as all other amounts owing to the Banks from such Fund or Portfolio,
shall thereupon become immediately due and payable.
(b) Except in the case of a "fundamental" investment policy
(which, as contemplated by subparagraph (a) above, requires prior notice),
notify the Agent within 30 days after rescinding, amending or modifying any of
the investment restrictions as set forth in Exhibit G hereto with respect to it
or, if it is comprised of Portfolios, any of its Portfolios.
(c) Any notice to the Agent pursuant to this Section 7.8
shall be given in writing pursuant to the procedures described in the last
sentence of Section 7.1.
7.9 Taxes. Pay when due all of its Taxes, unless and only to
the extent that such Taxes are being contested in good faith and by appropriate
proceedings and such Fund or Portfolio shall have set aside on its books such
reserves or other appropriate provisions therefor as may be required by GAAP.
Such Fund or Portfolio shall at all times comply with all requirements of the
Code applicable to
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regulated investment companies, to such effect as not to be subject to federal
income taxes on net investment income and net capital gains distributed to its
shareholders.
7.10 Compliance. Comply with all statutes and governmental
rules and regulations applicable to it, including, without limitation, the Act,
except were non-compliance with any such statute, rule or regulation could not
be reasonably expected to have a Material Adverse Effect.
7.11 Pension Plans. Not enter into, or incur any liability
relating to, any Plan.
7.12 Merger, Purchase and Sale. Not:
(a) be a party to any merger or consolidation; provided, however, that
any Fund or Portfolio can merge or consolidate with any other Person in
accordance with 17 C.F.R. ss. 270.17a-8 if (i) such merger or consolidation
complies in all respects with the requirements of 17 C.F.R. ss. 270.17a-8 and
all rules promulgated in connection therewith, (ii) the surviving entity assumes
all of the obligations to the Agent and the Banks of the merging or
consolidating Funds and/or Portfolios prior to such merger or consolidation and
(iii) in the judgment of all the Banks the financial condition and investment
policies and restrictions of the surviving entity are not fundamentally
different from those of the merging or consolidating Funds and/or Portfolios
prior to such merger or consolidation;
(b) except as permitted by Section 7.12(a) and except for sales or
other dispositions of portfolio securities in the ordinary course of its
business, sell, transfer, convey, lease or otherwise dispose of all or any
substantial part of its assets; or
(c) except as permitted by Section 7.12(a), purchase or otherwise
acquire all or substantially all the assets of any Person without the review and
consent thereto of the Banks, which consent shall not be unreasonably withheld.
For purposes of this Section 7.12 only, (i) a sale, transfer,
conveyance, lease or other disposition of assets shall be deemed to be a
"substantial part" of the assets of any Fund or Portfolio only if the value of
such assets, when added to the value of all other assets sold, transferred,
conveyed, leased or otherwise disposed of by such Fund or Portfolio (other than
in the normal course of business and a redemption in kind made pursuant to 17
C.F.R. ss. 270.18f-1) during the same Fiscal Year, exceeds 15% of such Fund's or
Portfolio's Total Assets determined as of the end of the immediately preceding
Fiscal Year and (ii) a redemption in kind of securities made pursuant to 17
C.F.R. ss. 270.18f-1 shall not be deemed to be a transaction covered by this
Section 7.12.
7.13 Asset Coverage Ratio. Not at any time permit its Asset
Coverage Ratio or, if it is comprised of Portfolios, the Asset Coverage Ratio of
each of its Portfolios, to be less than 4 to 1 or such other more restrictive
ratio as may be set forth in
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any prospectus or statement of additional information with respect to such Fund
or Portfolio.
7.14 Liens. Not create or permit to exist any Lien with respect to
any property, revenues or assets now owned or hereafter acquired, except (i)
Liens in favor of the Agent and the Banks, if any, (ii) Liens for current Taxes
not delinquent or Taxes being contested in good faith and by appropriate
proceedings and as to which such reserves or other appropriate provisions as may
be required by GAAP are being maintained, (iii) Liens as are necessary in
connection with a secured letter of credit opened by such Fund or Portfolio in
connection with the Fund's or the Portfolio's trustees/directors' errors and
omissions liability insurance policy and (iv) Liens in connection with futures
and options transactions and collateral arrangements with respect to options,
futures contracts, options on futures contracts, when-issued or delayed delivery
securities or other investments or portfolio management techniques authorized by
its prospectus..
7.15 Guaranties. Not become or be a guarantor or surety of, or
otherwise become or be responsible in any manner (whether by agreement to
purchase any obligations, stock, assets, goods or services, or to supply or
advance any funds, assets, goods or services, or otherwise) with respect to, any
undertaking of any other Person, except for the endorsement, in the ordinary
course of collection, of instruments payable to it or its order.
7.16 Other Agreements. Not enter into any agreement containing
any provision that would be violated or breached by such Fund's or Portfolio's
performance of its obligations hereunder or under any instrument or document
delivered or to be delivered by such Fund or Portfolio hereunder or in
connection herewith.
7.17 Transactions with Related Parties. Not enter into or be a
party to any transaction or arrangement, including, without limitation, the
purchase, sale, lease or exchange of property or the rendering of any service,
with any Related Party, except in the ordinary course of and pursuant to the
reasonable requirements of such Fund's or Portfolio's business and upon fair and
reasonable terms no less favorable to such Fund or Portfolio than would be
obtainable in a comparable arm's-length transaction with a Person not a Related
Party; provided, however, that a transaction or arrangement that does not
violate the Act and the regulations of the Securities and Exchange Commission
thereunder shall be deemed to be in compliance with this Section 7.17.
7.18 Payment of Management Fees. At any time that (x) an Event
of Default or an Unmatured Event of Default shall have occurred and be
continuing with respect to such Fund or Portfolio and (y) Loans are outstanding
with respect to such Fund or Portfolio, not pay, or cause to be paid, any
management or advisory fees of any type in respect of such Fund or Portfolio to
its Adviser, whether pursuant to the terms of an investment advisory agreement
or not; provided, however, that notwithstanding the
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foregoing, such Fund or Portfolio shall not be prohibited to record on its
financial statement accruals with respect to such management or advisory fees.
7.19 Other Indebtedness. Not incur or permit to exist any
Indebtedness, other than (i) the Loans, (ii) other Indebtedness payable to the
Banks and (iii) reverse repurchase transactions in an amount not exceeding that
permitted by the Fund's or Portfolio's investment restrictions.
7.20 Changes to Trust Agreement, etc. Not make or permit to be
made any material changes to its Trust Agreement or constituent documents, as
the case may be, without the prior written consent of the Majority Banks.
7.21 Violation of Investment Restrictions, etc. Not violate or
take any action which would result in a violation of any of the investment
restrictions or fundamental investment policies of such Fund or the Portfolios
of such Fund as from time to time in effect, except for such inadvertent
violations as would not, individually or in the aggregate, have a Material
Adverse Effect upon the financial condition or business of such Fund or
Portfolio.
7.22 Proceeds of Loans. To utilize the proceeds of each Loan
made to it in strict accordance with the designated usage for such Loan as set
forth in the Borrowing Certificate with respect to such Loan.
8. CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Banks to
make any Loan to a Fund or, in the case of a Fund comprised of Portfolios, a
Portfolio, or, in the case of Section 2.4, to continue or convert any Eurodollar
Loan to any Fund or Portfolio into a subsequent Interest Period, is subject to
the satisfaction of each of the following conditions precedent:
8.1 Notice. The Agent shall have received timely notice of
such Loan in accordance with Section 2.3 or 2.4, as applicable.
8.2 Default. Before and after giving effect to such Loan, no
Event of Default or Unmatured Event of Default shall have occurred and be
continuing with respect to such Fund or Portfolio.
8.3 Warranties. Before and after giving effect to such Loan,
the warranties in Section 6 (other than the warranty in Section 6.7) shall be
true and correct as though made on the date of such Loan, except for such
changes as are specifically permitted hereunder.
8.4 Certification. Each request for a Loan shall be deemed to
be a certification that the conditions precedent set out in Sections 8.2 and 8.3
have been satisfied.
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8.5 Form U-1. Each Fund and, in the case of a Fund comprised
of Portfolios, each Portfolio of such Fund, shall have executed and delivered to
the Agent a Form U-1 required under Regulation U of the Federal Reserve Board,
in form and substance satisfactory to the Agent (including, without limitation,
disclosures on such form as if Loans to be made to such Fund or Portfolio were
"purpose loans" secured indirectly by margin stock, all as more fully set forth
in Regulation U), and shall have executed, delivered and/or provided any and all
other certifications and/or information reasonably requested by the Agent in
connection therewith, including updates of information required in connection
therewith.
8.6 Borrowing Certificate. The Agent shall have received a
Borrowing request from such Fund or, in the case of a Fund comprised of
Portfolios, the relevant Portfolio as contemplated by Section 2.3.
8.7 Minimum Net Asset Value. The Net Asset Value of such Fund
or Portfolio at the time of a Borrowing request shall be at least $10,000,000.
9. CONDITIONS PRECEDENT TO INITIAL LOANS. This Agreement shall take
effect from the later of February 20, 1998 and the first day that the Agent
shall have received counterparts hereof signed by each of the parties hereto.
The obligation of the Banks to make the initial Loans hereunder is subject to
the satisfaction of the conditions precedent, in addition to the applicable
conditions precedent set forth in Section 8 above, each Fund or Portfolio, as
the case may be, shall have delivered to the Agent all of the following, each
duly executed and dated the date of the initial Loan or such earlier date as is
satisfactory to the Agent and in form and substance satisfactory to the Agent
and its counsel:
9.1 Note. Its Notes in favor of each Bank.
9.2 Resolutions. A copy, duly certified by the secretary or an
assistant secretary of such Fund or Portfolio, of (i) the resolutions of such
Fund's or Portfolio's trustees or directors authorizing or ratifying the
execution and delivery of this Agreement and such Fund's Notes or, in the case
of a Fund comprised of one or more Portfolios, the Notes of each such Portfolio,
and authorizing the Borrowings hereunder, (ii) all documents evidencing other
necessary trust or corporate action, as the case may be, and (iii) all approvals
or consents, if any, with respect to this Agreement and the aforesaid Note(s).
9.3 Incumbency Certificate. A certificate of the secretary or
an assistant secretary of such Fund certifying the names of the Fund's officers
and/or other persons authorized to sign this Agreement, the Notes of such Fund
or, as appropriate, such Fund's Portfolio(s), and all other documents or
certificates to be delivered hereunder, together with the true signatures of
such officers.
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9.4 Opinion. An opinion of counsel to such Fund or Portfolio,
addressed to the Agent and the Banks, substantially in the form of Exhibit I.
9.5 Net Asset Value Certificate. A certificate of the net
asset value of such Fund and, if the Fund is comprised of Portfolios, the
Portfolio on whose behalf the Loan is being made.
9.6 Consent of Investment Adviser. A letter from the Fund's or
Portfolio's Adviser addressed to the Agent and the Banks, substantially in the
form of Exhibit H.
10. ADDITION OF NEW PARTIES.
10.1 New Parties. Subject to the prior consent of each of the
Banks, which may be granted or withheld in its sole discretion, one or more
Funds or Portfolios may become parties hereunder by delivering to the Agent a
notice in the form of Exhibit C and such other documentation and financial
information with respect to such Fund or Portfolio as the Banks may request.
11. EVENTS OF DEFAULT AND REMEDIES.
11.1 Events of Default. Each of the following shall constitute
an Event of Default with respect to a Fund or Portfolio, as the case may be,
under this Agreement (it being understood that an Event of Default with respect
to a Fund or Portfolio, as the case may be, shall not constitute an Event of
Default with respect to any other Fund or other Portfolio of that Fund):
(a) Non-Payment. Default in the payment when due of any
principal of, or interest on, any Loan made to such Fund or Portfolio,
as the case may be, or any fee hereunder payable by such Fund or
Portfolio, as the case may be.
(b) Non-Payment of Other Indebtedness. Default in the payment
when due, whether by acceleration or otherwise (subject to any
applicable grace period), of any Indebtedness of, or guaranteed by,
such Fund or Portfolio, as the case may be, in excess of 5% of such
Fund's or Portfolio's, as the case may be, then respective total Net
Asset Value.
(c) Acceleration of Other Indebtedness. Any event or
condition shall occur that results in the acceleration of the maturity
of any Indebtedness of, or guaranteed by, such Fund or Portfolio, as
the case may be, or enables the holder or holders of such other
Indebtedness or any trustee or agent for such holders (any required
notice of default having been given and any
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applicable grace period having expired) to accelerate the maturity of
such other Indebtedness in excess of 5% of such Fund's or Portfolio's,
as the case may be, then respective total Net Asset Value.
(d) Other Obligations. Default in the payment when due,
whether by acceleration or otherwise, or in the performance or
observance (subject to applicable grace periods, if any) of (i) any
obligation or agreement of such Fund or Portfolio, as the case may be,
to or with the Agent or any Bank (other than any obligation or
agreement of such Fund or Portfolio hereunder or under such Fund's or
Portfolio's Note), or (ii) any material obligation or agreement of such
Fund or Portfolio, as the case may be, to or with any other Person,
except only to the extent that the existence of any such default is
being contested by such Fund or Portfolio, as the case may be, in good
faith and by appropriate proceedings and such Fund or Portfolio, as the
case may be, shall have set aside on its books such reserves or other
appropriate provisions therefor as may be required by GAAP.
(e) Insolvency. The Fund or Portfolio, as the case may be,
becomes insolvent, or generally fails to pay, or admits in writing its
inability to pay, its debts as they mature, or applies for, consents to
or acquiesces in, the appointment of a trustee, receiver or other
custodian for such Fund or Portfolio, as the case may be, or for a
substantial part of its property, or makes a general assignment for the
benefit of creditors; or, in the absence of such application, consent
or acquiescence, a trustee, receiver or other custodian is appointed
for such Fund or Portfolio, as the case may be, or for a substantial
part of the property of such Fund or Portfolio, as the case may be, and
is not discharged within 30 days; or any bankruptcy, reorganization,
debt arrangement or other proceeding under any bankruptcy or insolvency
law, or any dissolution or liquidation proceeding, is instituted by or
against such Fund or Portfolio, as the case may be, and, if instituted
against such Fund or Portfolio, as the case may be, is consented to or
acquiesced in by such Fund or Portfolio, as the case may be, or remains
for 30 days undismissed; or any warrant of attachment or similar legal
process is issued against any substantial part of the property of such
Fund or Portfolio, as the case may be, which is not released within 30
days of service.
(f) Agreements. Such Fund or Portfolio, as the case may be,
shall (i) default in the performance of its agreement under Section
7.13 or (ii) default in the performance of its other agreements herein
set forth (and not constituting an Event of Default under any of the
other subsections of this Section 11.1), and such default shall
continue for 30 days (or 3 days in the case of such Fund's or
Portfolio's, as the case may be, agreement contained in the last
sentence of the definition of "Total Assets") after notice thereof to
such Fund or Portfolio, as the case may be, from the Agent or a Bank.
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(g) Warranty. Any warranty made by such Fund or Portfolio, as
the case may be, herein, or in any schedule, statement, report, notice,
certificate or other writing furnished by such Fund or Portfolio, as
the case may be, on or as of the date as of which the facts set forth
therein are stated or certified, is untrue or misleading in any
material respect when made or deemed made; or any certification made or
deemed made by such Fund or Portfolio, as the case may be, to the Agent
and the Banks is untrue or misleading in any material respect on or as
of the date made or deemed made.
(h) Litigation. There shall be entered against such Fund or
Portfolio, as the case may be, one or more judgments or decrees in
excess of $1,000,000.00 in the aggregate at any one time outstanding,
excluding those judgments or decrees (i) that shall have been stayed or
discharged less than 30 calendar days from the entry thereof and (ii)
those judgments and decrees for and to the extent which such Fund or
Portfolio, as the case may be, is insured and with respect to which the
insurer has assumed responsibility in writing or for and to the extent
which such Fund or Portfolio, as the case may be, is otherwise
indemnified if the terms of such indemnification and the Person
providing such indemnification are satisfactory to the Majority Banks.
(i) Material Adverse Change. The Majority Banks shall have
determined in good faith that a Material Adverse Change has occurred.
(j) Investment Company Act. Such Fund or Portfolio, as the
case may be, shall no longer be in compliance with the Act after giving
effect to all notice and cure periods thereunder where such
non-compliance or lack of good standing would have a Material Adverse
Effect upon the financial condition or business of such Fund or
Portfolio, as the case may be.
(k) Investment Advisor; Custodian. Such Fund's or
Portfolio's, as the case may be, Adviser shall cease to be an
investment advisor of such Fund, or State Street Bank and Trust Company
shall cease to be the custodian of such Fund's or Portfolio's assets;
provided, however, that, it shall be an Event of Default if, in the
case of Bartlett Europe Fund only, State Street Bank and Trust Company
shall cease to be the custodian of its domestic assets or The Chase
Manhattan Bank shall cease to be the sub-custodian of its foreign
assets.
(l) Investment Restrictions; Investment Policies. Such Fund
or Portfolio, as the case may be, shall violate or take any action that
would result in a violation of any of the investment restrictions or
fundamental investment policies of such Fund or Portfolio as from time
to time in effect where such violation would have a Material Adverse
Effect upon such Fund or Portfolio.
11.2 Remedies. If any Event of Default described in Section 11.1
shall have occurred and be continuing, the Agent may, and following the
direction of the
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Majority Banks shall, declare the Commitments to be terminated with respect to
the applicable Fund or Portfolio, as the case may be, and such Fund's or
Portfolio's, as the case may be, obligations under its Notes to be due and
payable, whereupon the Commitments shall immediately terminate with respect to
such Fund or Portfolio, as the case may be, and such Fund's or Portfolio's, as
the case may be, Notes shall become immediately due and payable, all without
advance notice of any kind (except that if an event described in Section 11.1(e)
occurs, the Commitments shall immediately terminate with respect to such Fund or
Portfolio, as the case may be, and the obligations under the Notes with respect
to such Fund or Portfolio, as the case may be, shall become immediately due and
payable without declaration or advance notice of any kind). The Agent shall
promptly advise such Fund or Portfolio, as the case may be, of any such
declaration, but failure to do so shall not impair the effect of such
declaration. If an Event of Default shall have occurred, the Agent may exercise
on behalf of itself and the Banks all rights and remedies available to it and
the Banks against such Fund or Portfolio under the Credit Documents or
applicable law.
12. THE AGENT
12.1 Appointment and Authorization. Each Bank hereby irrevocably
(subject to Section 12.9) appoints, designates and authorizes the Agent to take
such action on its behalf under the provisions of this Agreement and each other
Credit Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other Credit
Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Credit Document, the Agent shall not have any duties
or responsibilities, except those expressly set forth herein, nor shall the
Agent have or be deemed to have any fiduciary relationship with any Bank, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Credit Document or
otherwise exist against the Agent.
12.2 Delegation of Duties. The Agent may execute any of its duties
under this Agreement or any other Credit Document by or through agents,
employees or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Agent shall not be
responsible for the negligence or misconduct of any agent or attorney-in-fact
that it selects with reasonable care.
12.3 Liability of Agent. None of the Agent-Related Persons shall
(i) be liable to the Banks for any action taken or omitted to be taken by any of
them under or in connection with this Agreement or any other Credit Document or
the transactions contemplated hereby (except for its own gross negligence or
willful misconduct) or (ii) be responsible in any manner to any of the Banks for
any recital, statement, representation or warranty made by a Fund or Portfolio
or any officer or agent thereof contained in this Agreement or in any other
Credit Document, or in any certificate, report, statement or other document
referred to or provided for in, or received by the Agent under or in
36
<PAGE>
connection with, this Agreement or any other Credit Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Credit Document, or for any failure of a Fund or Portfolio or any
other party to any Credit Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Bank to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in or conditions of this Agreement or any other Credit
Document or to inspect the properties, books or records of a Fund or Portfolio.
12.4 Reliance by Agent. (a) The Agent shall be entitled to rely,
and shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement, or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including counsel to
the Funds), independent accountants and other experts selected by the Agent. The
Agent shall be fully justified in failing or refusing to take any action under
this Agreement or any other Credit Document unless it shall first receive such
advice or concurrence of the Majority Banks as it deems appropriate, and if it
so requests, it shall first be indemnified to its satisfaction by the Banks
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action (other than liability or expense
arising from its gross negligence or willful misconduct). The Agent shall in all
cases be fully protected from any claim by any Bank in acting, or in refraining
from acting, under this Agreement or any other Credit Document in accordance
with a request or consent of the Majority Banks and such request, and any action
taken or failure to act pursuant thereto shall be binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Section 9, each Bank that has executed this Agreement shall be
deemed to have consented to, approved or accepted, or be satisfied with each
document or other matter either sent by the Agent to such Bank for consent,
approval, acceptance or satisfaction, or required thereunder to be consented to,
approved by, acceptable or satisfactory to the Bank.
12.5 Notice of Event of Default. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Event of Default, except with
respect to defaults in the payment of principal, interest and fees required to
be paid to the Agent for the account of the Banks, unless the Agent shall have
received written notice from a Bank or a Fund referring to this Agreement,
describing such Event of Default and stating that such notice is a "notice of
default". The Agent will notify the Banks of its receipt of any such notice. The
Agent shall take such action with respect to such Event of Default as may be
requested by the Majority Banks in accordance with Section 11.2; provided,
however, that unless and until the Agent has received any such request, the
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with
37
<PAGE>
respect to such Event of Default as it shall deem advisable or in the best
interest of the Banks.
12.6 Credit Decision. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Funds and the Portfolios, shall be deemed to constitute any representation or
warranty by any Agent-Related Person to any Bank. Each Bank represents to the
Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition, and creditworthiness of the
Funds and the Portfolios, and all applicable bank regulatory laws relating to
the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Funds and the Portfolios hereunder.
Each Bank also represents that it will, independently and without reliance upon
any Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Credit Documents and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition, and creditworthiness of the Funds and the Portfolios.
Except for notices, reports and other documents expressly herein required to be
furnished to the Banks by the Agent, the Agent shall not have any duty or
responsibility to provide any Bank with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition, or creditworthiness of the Funds and the Portfolios which may come
into the possession of any of the Agent-Related Persons.
12.7 Indemnification of Agent. Whether or not the transactions
contemplated hereby are consummated, the Banks shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of the Funds
and without limiting the obligation of the Funds to do so), pro rata, from and
against any and all Indemnified Liabilities; provided, however, that no Bank
shall be liable for the payment to the Agent-Related Persons of any portion of
such Indemnified Liabilities resulting solely from such Person's gross
negligence or willful misconduct. Without limitation of the foregoing, each Bank
shall reimburse the Agent upon demand for its ratable share of any costs or
out-of-pocket expenses (including Attorney Costs) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Credit Document, or any
document contemplated by or referred to herein, to the extent that the Agent is
not reimbursed for such expenses by or on behalf of the Funds; provided that the
obligations of the Banks to pay or reimburse BofA for Attorney Costs incurred in
the preparation and delivery of this Agreement and the other Credit Documents
delivered in connection with the Closing shall not exceed $25,000. The
undertaking in this Section shall survive the payment of all obligations
hereunder and under the Notes and the resignation or replacement of the Agent.
38
<PAGE>
12.8 Agent in Individual Capacity. BofA and its Affiliates may
make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Funds, the
Portfolios and their Affiliates as though BofA were not the Agent hereunder and
without notice to or consent of the Banks. The Banks acknowledge that, pursuant
to such activities, BofA or its Affiliates may receive information regarding the
Funds, the Portfolios or their Affiliates (including information that may be
subject to confidentiality obligations in favor of the Funds, the Portfolios or
their Affiliates) and acknowledge that the Agent shall be under no obligation to
provide such information to them. With respect to its Loans, BofA shall have the
same rights and powers under this Agreement as any other Bank and may exercise
the same as though it were not the Agent, and the terms "Bank" and "Banks"
include BofA in its individual capacity.
12.9 Successor Agent. The Agent may, and at the request of the
Majority Banks shall, resign as Agent upon 30 days' notice to the Banks, the
Funds and the Portfolios. If the Agent resigns under this Agreement, the
Majority Banks shall appoint from among the Banks a successor agent for the
Banks, which successor agent shall be subject to approval by the Funds and the
Portfolios. If no successor agent is appointed prior to the effective date of
the resignation of the Agent, the Agent may appoint, after consulting with the
Banks, the Funds and the Portfolios, a successor agent from among the Banks.
Upon the acceptance of its appointment as successor agent hereunder, such
successor agent shall succeed to all the rights, powers and duties of the
retiring Agent and the term "Agent" shall mean such successor agent, and the
retiring Agent's appointment, powers and duties as Agent shall be terminated.
After any retiring Agent's resignation hereunder as Agent, the provisions of
this Section 12 and Sections 13.3 and 13.4 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement. If no successor agent has accepted appointment as Agent by the date
which is 30 days following a retiring Agent's notice of resignation, the
retiring Agent's resignation shall nevertheless thereupon become effective, the
Banks shall perform all of the duties of the Agent hereunder and the Funds and
Portfolios shall make any payments otherwise required to be made by them
hereunder to the Agent to the Banks directly until such time, if any, as the
Majority Banks appoint a successor agent as provided for above.
13. GENERAL.
13.1 Waiver and Amendments. No failure or delay on the part of
the Banks in the exercise of any power or right, and no course of dealing
between any Fund or Portfolio and the Banks, shall operate as a waiver of such
power or right, nor shall any single or partial exercise of any power or right
preclude other or further exercise thereof or the exercise of any other power or
right. The remedies provided for herein are cumulative and not exclusive of any
remedies which may be available to the Banks at law
39
<PAGE>
or in equity. No notice to or demand on a Fund or Portfolio not required
hereunder or under such Fund's or Portfolio's Notes shall in any event entitle
such Fund or Portfolio to any other or further notice or demand in similar or
other circumstances or constitute a waiver of the right of the Banks to any
other or further action in any circumstances without notice or demand. No
amendment or waiver of any provision of any Credit Document, and no consent with
respect to any departure by a Fund or Portfolio therefrom, shall be effective
unless the same shall be in writing and adopted by the Majority Banks and each
Fund and Portfolio, and then any such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given; provided
that no such amendment, waiver or consent shall, unless in writing and signed by
each Bank, do any of the following:
(a) increase or extend the Commitment of any Bank (or
reinstate any Commitment terminated pursuant to Section 11.2),
(b) postpone or delay any date fixed by any Credit Document
for any payment of principal of or interest on the Loans or any fees or
other amounts in connection therewith,
(c) reduce the principal of or interest on any Loan,
(d) reduce any fees or other amounts payable to any of the
Bank under any Credit Document, or
(e) amend the definition of "Majority Banks" or any provision
of this Section 13.1;
and provided further, that no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Majority Banks or all Banks,
as the case may be, affect the rights or duties of the Agent under any Credit
Document.
13.2 Notices. Except as otherwise expressly provided herein,
any notice hereunder to each Fund or Portfolio, the Agent or the Banks shall be
in writing (including telegraphic or telecopy communication) and shall be given
to the intended recipient at its address or telecopier number set forth on
Schedule II hereto or at such other address or telecopier number as such Person
may, by written notice, designate as its address or telecopier number for
purposes of notice hereunder. All such notices shall be deemed to be given when
transmitted by telecopier, delivered to the telegraph office, personally
delivered or, in the case of a mailed notice, when sent by registered or
certified mail, postage prepaid, in each case addressed as specified in this
Section 13.2; provided, however, that notices to the Agent under Sections 1.1
(definition of the term "Termination Date"), 2.3, 2.4, 4.2 and 4.3 shall not be
effective until actually received by the Agent.
40
<PAGE>
13.3 Expenses. Subject to the provisions of Section 2.6, each
Fund and Portfolio shall:
(i) whether or not any Loan is made hereunder, pay or reimburse BofA
(including in its capacity as Agent) within five Banking Days after demand for
all reasonable costs and expenses incurred by BofA (including in its capacity as
Agent) in connection with the development, preparation, delivery, administration
and execution of, and any amendment, supplement, waiver or modification to (in
each case, whether or not consummated), this Agreement, any Credit Document and
any other documents prepared in connection herewith or therewith, and the
consummation of the transactions contemplated hereby and thereby, including
reasonable Attorney Costs incurred by BofA (including in its capacity as Agent)
with respect thereto; provided, however, that notwithstanding the foregoing, the
obligations of the Funds and Portfolios to pay or reimburse BofA for Attorney
Costs incurred in the preparation and delivery of this Agreement and the other
Credit Documents delivered in connection with the Closing shall not exceed
$25,000.
(ii) pay or reimburse the Agent, the Arranger and each Bank within five
Banking Days after demand for all costs and expenses (including reasonable
Attorney Costs) incurred by them in connection with the enforcement, attempted
enforcement, or preservation of any rights or remedies under this Agreement or
any other Credit Document during the existence of an Event of Default or after
acceleration of the Loans (including in connection with any "workout" or
restructuring regarding the Loans and including in any insolvency proceeding or
appellate proceeding).
13.4 Funds Indemnification.
(a) Subject to the provisions of Section 2.6, whether or not the
transactions contemplated hereby are consummated, the Funds and Portfolios shall
indemnify and hold the Agent-Related Persons, and each Bank and each of its
respective officers, directors, employees, counsel, agents and attorneys-in-fact
(each, an "Indemnified Person"), harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, charges, expenses and disbursements (including Attorney Costs) of any
kind or nature whatsoever which may at any time (including at any time following
repayment of the Loans and the termination, resignation or replacement of the
Agent or replacement of any Bank) be imposed on, incurred by or asserted against
any such Person in any way relating to or arising out of this Agreement or any
document contemplated by or referred to herein, or the transactions contemplated
hereby, or any action taken or omitted by any such Person under or in connection
with any of the foregoing, including with respect to any investigation,
litigation or proceeding (including any insolvency proceeding or appellate
proceeding) related to or arising out of this Agreement or the Loans or the use
of the proceeds thereof, whether or not any Indemnified Person is a party
thereto (all the foregoing, collectively, the "Indemnified Liabilities");
provided that (i) no Fund or Portfolio shall have an obligation hereunder to any
Indemnified Person with respect to Indemnified Liabilities resulting solely from
the
41
<PAGE>
gross negligence or willful misconduct of such Indemnified Person and (ii) each
Fund and Portfolio shall be liable only for its portion of the Indemnified
Liabilities and such Fund or Portfolio shall not be liable for any portion of
the Indemnified Liabilities of any other Fund or Portfolio. The Funds shall from
time to time notify the Agent of the manner in which the Indemnified Liabilities
are to be allocated among the Funds and Portfolios.
(b) Promptly after receipt by an Indemnified Person under subsection
(a) above of notice of the commencement of any action, such Indemnified Person
shall, if a claim in respect thereof is to be made against a Fund or Portfolio
under such subsection, promptly notify such Fund or Portfolio in writing of the
commencement thereof, but the omission so to notify such Fund or Portfolio shall
not relieve it from any liability which it may have to any Indemnified Person
otherwise than under such subsection. In case any such action shall be brought
against any Indemnified Person and it shall notify the relevant Fund or
Portfolio of the commencement thereof, the indemnifying Fund or Portfolio shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other Fund or Portfolio similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such Indemnified Person
(who shall not, except with the consent of the Indemnified Person, be counsel to
the indemnifying Fund(s) or Portfolio(s)), and, upon such assumption, the
indemnifying Fund(s) and/or Portfolio(s) shall no longer be responsible for the
Attorney Costs of counsel retained by such Indemnified Person; provided that in
no event shall any settlement or compromise of any such claims, actions or
demands be made without the consent of the Indemnified Person, the consent of
which shall not be unreasonably withheld.
(c) The agreements in this Section 13.4 shall survive payment of all
other obligations of the Funds and Portfolios hereunder and under the Notes.
13.5 Information. The Agent and the Banks agree not to
disclose without the prior consent of any Fund or Portfolio any information with
respect to such Fund or Portfolio which is furnished pursuant to this Agreement
and which is designated by or on behalf of the Fund or Portfolio as
confidential, except that the Agent or any Bank may disclose any such
information (a) as has become generally available to the public other than by
breach of this Section 13.5, (b) as may be required by law or legal process, (c)
to examiners and regulatory agencies having jurisdiction over the Agent or any
Bank and (d) to potential participants and assignees, provided that any such
participant or assignee has been made aware of this Section 13.5 and agreed in
writing to be bound by its provisions.
13.6 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
42
<PAGE>
13.7 Law. This Agreement and the Notes shall be contracts made
under and governed by the internal laws of the State of Illinois.
13.8 Successors. (a) This Agreement shall be binding upon the
Funds, the Portfolios, the Agent and the Banks and their respective successors
and assigns and shall inure to the benefit of the Funds, the Portfolios, the
Agent and the Banks and the permitted successors and assigns of the Agent and
the Banks.
(b) None of the Agent, any Bank, any Fund or any Portfolio may
assign its rights or duties hereunder without the consent of the other parties
hereto; provided, however, that any Bank may, with the consent of the Funds and
Portfolios, which consent shall not be unreasonably withheld, at any time assign
and delegate to one or more Eligible Lenders (each an "Assignee") all, or any
ratable part of all, of the Loans, the Commitments and the other rights and
obligations of such Bank hereunder, in a minimum amount of $5,000,000; provided,
however, that the Funds and Portfolios and the Agent may continue to deal solely
and directly with such Bank in connection with the interest so assigned to an
Assignee until (i) written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee,
shall have been given to the Funds and Portfolios and the Agent by such Bank and
the Assignee; (ii) such Bank and its Assignee shall have delivered to the Funds
and Portfolios and the Agent an Assignment and Acceptance in the form of Exhibit
J ("Assignment and Acceptance") together with any Note or Notes subject to such
assignment; (iii) the Agent has acknowledged receipt in writing of the
Assignment and Acceptance; and (iv) the assignor Bank or the Assignee has paid
to the Agent a processing fee in the amount of $3,500. From and after the date
that the Agent notifies the assignor Bank that it has received an executed
Assignment and Acceptance and payment of the above-referenced processing fee,
(i) the Assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, shall have the rights and obligations of a Bank under
the Credit Documents, and (ii) the assignor Bank shall, to the extent that
rights and obligations hereunder and under the other Credit Documents have been
assigned by it pursuant to such Assignment and Acceptance, relinquish its rights
and be released from its obligations under the Credit Documents. A Bank may,
without the consent of any of the Funds or the Portfolios, grant a security
interest in a Note and, in connection therewith, assign its rights in such Note,
to any Federal Reserve Bank in accordance with applicable law.
(c) Any Bank may at any time sell to one or more Eligible Lenders
(each, a "Participant") participating interests in any Loans, the Commitment of
such Bank and the other interests of such Bank in any Loans, (the "Originating
Bank") under the Credit Documents; provided, however, that: (i) the Originating
Bank's obligations under this Agreement shall remain unchanged, (ii) the
Originating Bank shall remain solely responsible for the performance of such
obligations, (iii) the Funds and Portfolios and the Agent shall continue to deal
solely and directly with the Originating Bank in connection with the Originating
Bank's rights and obligations under the Credit Documents, and
43
<PAGE>
(iv) no Bank shall transfer or grant any participating interest under which the
Participant has rights to approve any amendment to, or any consent or waiver
with respect to, any Credit Document, except to the extent such amendment,
consent or waiver would require unanimous consent of the Banks as described in
the first proviso to Section 13.1. In the case of any such participating
interest, the Participant shall be entitled to the benefit of Sections 5.1, 5.3,
5.4, 5.5 and 13.4 as though it were also a Bank hereunder (and the Originating
Bank shall not be entitled to the benefits of such sections with respect to the
portion of any Loans in which it has sold a participating interest), and if
amounts outstanding under the Credit Documents are due and unpaid, or shall have
been declared or shall have become due and payable upon the occurrence of an
Event of Default, each Participant shall be deemed to have the right of set-off
in respect of its participating interest in amounts owing under the Credit
Documents to the same extent as if the amount of its participating interest were
owing directly to it as a Bank under this Agreement.
13.9 Waiver of Jury Trial. EACH OF THE AGENT, THE BANKS AND
EACH FUND AND PORTFOLIO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (i) UNDER THIS AGREEMENT OR UNDER ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (ii) ARISING FROM ANY BANKING
RELATIONSHIP ARISING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH
ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
13.10 Disclaimer. None of the shareholders, trustees,
officers, employees and other agents of any Fund or Portfolio shall be
personally bound by or liable for any indebtedness, liability or obligation
hereunder, under any Note or under any judgment on this Agreement or any Note
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder or thereunder.
* * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
LEGG MASON VALUE TRUST, INC.
By: /s/ MARIE K. KARPINSKI
________________________________
Title: Vice President and Treasurer
_____________________________
44
<PAGE>
LEGG MASON TOTAL RETURN TRUST, INC.
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON SPECIAL INVESTMENT
TRUST, INC.
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON INVESTORS TRUST, INC.,
ON BEHALF OF LEGG MASON AMERICAN
LEADING COMPANIES TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON INVESTORS TRUST, INC.,
ON BEHALF OF LEGG MASON BALANCED
TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON GLOBAL TRUST, INC., ON
BEHALF OF LEGG MASON GLOBAL
GOVERNMENT TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
45
<PAGE>
LEGG MASON GLOBAL TRUST, INC., ON
BEHALF OF LEGG MASON INTERNATIONAL
EQUITY TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON GLOBAL TRUST, INC., ON
BEHALF OF LEGG MASON EMERGING MARKETS
TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON TAX-FREE INCOME FUND,
ON BEHALF OF LEGG MASON MARYLAND
TAX-FREE INCOME TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON TAX-FREE INCOME FUND,
ON BEHALF OF LEGG MASON PENNSYLVANIA
TAX-FREE INCOME TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON TAX-FREE INCOME FUND,
ON BEHALF OF LEGG MASON TAX-FREE
INTERMEDIATE-TERM INCOME TRUST
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
46
<PAGE>
LEGG MASON INCOME TRUST, INC., ON
BEHALF OF LEGG MASON U.S.
GOVERNMENT INTERMEDIATE-TERM
PORTFOLIO
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON INCOME TRUST, INC., ON
BEHALF OF LEGG MASON INVESTMENT
GRADE INCOME PORTFOLIO
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
LEGG MASON INCOME TRUST, INC., ON
BEHALF OF LEGG MASON HIGH YIELD
PORTFOLIO
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
47
<PAGE>
BARTLETT CAPITAL TRUST, ON
BEHALF OF BARTLETT VALUE
INTERNATIONAL FUND
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
BARTLETT CAPITAL TRUST, ON
BEHALF OF BARTLETT EUROPE FUND
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
BARTLETT CAPITAL TRUST, ON
BEHALF OF BARTLETT BASIC VALUE FUND
By: /s/ Marie K. Karpinski
________________________________
Title: Vice President and Treasurer
_____________________________
48
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, as Agent
By: /s/ John G. Hayes
_________________________________
Title: Vice President
______________________________
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, as a Bank
By: /s/ John G. Hayes
_________________________________
Title: Vice President
______________________________
FIRST UNION NATIONAL BANK
By: /s/ Austin Rodgers
_________________________________
Title: Senior Vice President
______________________________
STATE STREET BANK AND TRUST COMPANY
By: /s/ Anne Marie Gualfierri
_________________________________
Title: Vice President
______________________________
49
<PAGE>
SCHEDULE I
COMMITMENTS
AND PRO RATA SHARES
<TABLE>
<CAPTION>
Pro Rata
Bank Commitment Share
-----------------------------------------------
<S><C>
Bank of America National
Trust and Savings Association $ 50,000,000 33 1/3%
First Union National Bank $ 50,000,000 33 1/3%
State Street Bank and Trust Company $ 50,000,000 33 1/3%
TOTAL $150,000,000 100%
</TABLE>
<PAGE>
SCHEDULE II
OFFSHORE AND DOMESTIC LENDING OFFICES,
ADDRESSES FOR NOTICES
FUNDS AND PORTFOLIOS:
LEGG MASON WOOD WALKER, INC.
100 Light Street
Baltimore, MD 21202
Attention: Marie K. Karpinski, Funds Accounting
Telephone: (410) 454-2790
Facsimile: (410) 454-3445
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
1850 Gateway Boulevard, Fifth Floor
Concord, California 94520
Attention: Marti J. Monahan
Telephone: (510) 675-8414
Facsimile: (510) 675-8500
ADDRESS TO SEND CERTIFICATES AND FINANCIAL STATEMENTS
Agency Management Services
231 South LaSalle Street, 10th Floor
Chicago, Illinois 60697
Attention: Lizet Flores
Telephone: (312) 828-6642
Facsimile: (312) 987-0889
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank
DOMESTIC AND OFFSHORE LENDING OFFICE:
1850 Gateway Boulevard, Fifth Floor
Concord, California 94520
Attention: Marti J. Monahan
Telephone: (510) 675-8414
Facsimile: (510) 675-8500
NOTICES (OTHER THAN LOAN REQUESTS AND NOTICES OF
CONVERSION/CONTINUATION):
231 South LaSalle Street, 10th Floor
Chicago, Illinois 60697
Attention: John Hayes
Telephone: (312) 828-1632
Facsimile: (312) 987-0889
FIRST UNION NATIONAL BANK
DOMESTIC AND OFFSHORE LENDING OFFICE:
First Union National Bank
One First Union Center
301 S. College St., DC-5
Charlotte, NC 28288-0735
Attention: Lisa Mowery
Telephone: (704) 383-0558
Facsimile: (704) 383-7611
<PAGE>
NOTICES (OTHER THAN LOAN REQUESTS AND NOTICES OF
CONVERSION/CONTINUATION):
First Union National Bank
One First Union Center
301 S. College St., DC-5
Charlotte, NC 28288-0735
Attention: Robert Beatty
Telephone: (704) 383-1640
Facsimile: (704) 383-7611
STATE STREET BANK AND TRUST COMPANY
DOMESTIC AND OFFSHORE LENDING OFFICE:
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Attention: Anne Marie Gualtierri
Telephone: (617) 985-8956
Facsimile: (617) 985-4833
NOTICES (OTHER THAN LOAN REQUESTS AND NOTICES OF
CONVERSION/CONTINUATION):
State Street Bank and Trust Company
1776 Heritage Drive
4th Floor, North
North Quincy, MA 02171
Attention: Anne Marie Gualtierri
Telephone: (617) 985-8956
Facsimile: (617) 985-4833
<PAGE>
EXHIBIT A
BORROWING CERTIFICATE
Reference is made to that certain Credit Agreement, dated as of February
20, 1998 (the "Credit Agreement"), among the funds and portfolios party thereto,
the banks party thereto as lenders (the "Banks") and Bank of America National
Trust and Savings Association, as agent (the "Agent"). Capitalized terms used
herein and not otherwise defined shall have the meanings given to such terms in
the Credit Agreement. Pursuant to the terms of the Credit Agreement, the
undersigned, on behalf of and with respect to the [Name of Fund or Portfolio],
hereby represents and certifies to the Banks as follows:
1. On _______________, the undersigned, on behalf of the [Name of Fund
or Portfolio], requested that the Banks make a [type of Loan] in the principal
amount of $___________to be made on _____________ and having a tenor of
____________________.
2. The Fund or Portfolio that will use the proceeds of such Loan is
___________________.
3. The purpose for which such Loan will be used is ____________________
_______________________________________________________________________.
4. As of ____________________, the Asset Coverage Ratio of such Fund or
Portfolio is _____________________, calculated as follows:
(a) Total Assets (less the value of assets
subject to Liens)(1): _____________________
(b) minus liabilities and Indebtedness
not represented by Senior
Securities: _____________________
(c) divided by Senior Securities Rep-
resenting Indebtedness(2): _____________________
(d) equals Asset Coverage Ratio: _____________________.
5. As of _____________________, the Borrowing Base for such Fund or
- --------
(1) Use immediately preceding Banking Day.
(2) For each Borrowing Certificate provided in connection with a request
for a Loan, for each Borrower, Total Assets should include the amount
of the proposed Loan.
(3) For each Borrowing Certificate provided in connection with a request
for a Loan, for each Borrower, Senior Securities Representing
Indebtedness should include the amount of the proposed Loan.
<PAGE>
Portfolio is calculated as follows:
(a) Total Assets (less the value of assets
subject to Liens), net of liabilities
and Indebtedness not represented by
Senior Securities
$_____________________
(b) Indebtedness
$_____________________
(c) Gross Assets
[(a) plus (b)]
$_____________________
(d) Gross Borrowing Base
[25.0% of (c)] $_____________________
(e) Available Borrowing Base
[(d) minus (b)]
$_____________________
(f) Loans requested today [not to exceed (e)]
$_____________________
6. The undersigned further certifies, on behalf of the Fund or
Portfolio, that (a) the proceeds of such Loan will be utilized solely by the
Fund or Portfolio designated above and (b) no Event of Default, to the best of
its knowledge, or Unmatured Event of Default has occurred and is continuing as
of the date of this Borrowing Certificate.
Date: _____________________ __________, as investment adviser
to
[Name of Fund or Portfolio]
By: _______________________
Title: _______________________
<PAGE>
EXHIBIT B
Non-Negotiable
PROMISSORY NOTE
$__,000,000.00 Baltimore, Maryland: as of _______ __, 199_
FOR VALUE RECEIVED, the undersigned (the "Fund") promises to pay to
___________(the "Bank"), on the Termination Date (as defined in the Credit
Agreement hereinafter referred to) the principal sum of _____________
($__,000,000.00) or, if less, the then aggregate unpaid principal amount of
Federal Funds Rate Loans and Eurodollar Loans (as such terms are defined in the
Credit Agreement) as may have been borrowed by the Fund from the Bank under the
Credit Agreement. The Fund may borrow, repay and reborrow hereunder in
accordance with the provisions of the Credit Agreement. All Federal Funds Rate
Loans and Eurodollar Loans and all payments of principal shall be recorded by
the holder in its records.
The Fund further promises to pay to the order of the Bank interest on
the aggregate unpaid principal amount hereof from time to time outstanding from
the date hereof until paid in full at the rates per annum which shall be
determined in accordance with the provisions of the Credit Agreement. Accrued
interest shall be payable on the dates specified in the Credit Agreement.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
Bank of America National Trust and Savings Association, ABA No. 071000039,
Chicago Account Administration, Account No. 47-03421, Reference: Legg Mason, or
at such other place as may be designated by the Bank to the Fund in writing.
This Note is the Note referred to in, and evidences indebtedness
incurred under, a Credit Agreement dated as of February 20, 1998 (herein, as it
may be amended, modified or supplemented from time to time, called the "Credit
Agreement") among the Fund, the other parties thereto and the Bank, to which
Credit Agreement reference is made for a statement of the terms and provisions
thereof, including those under which the Fund is permitted and required to make
prepayments and repayments of principal of such indebtedness and under which
such indebtedness may be declared to be immediately due and payable.
Neither the shareholders, trustees or directors, as the case may be,
officers, employees and other agents of the Fund shall be personally bound by or
liable for any
<PAGE>
indebtedness, liability or obligation hereunder nor shall resort be had to their
private property for the satisfaction of any obligations or claim hereunder.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is made under and governed by the internal laws of the State
of Illinois.
Address: [NAME OF FUND]
100 Light Street
Baltimore, MD 21202
By: _________________________
Title: _________________________
<PAGE>
EXHIBIT B-1
Non-Negotiable
PROMISSORY NOTE
$__,000,000.00 Baltimore, Maryland: as of _______ __, 199_
FOR VALUE RECEIVED, the undersigned (the "Fund"), on behalf of the
Portfolio designated below ("Portfolio"), promises to pay to _________ (the
"Bank"), on the Termination Date (as defined in the Credit Agreement hereinafter
referred to) the principal sum of ______________ ($__,000,000.00) or, if less,
the then aggregate unpaid principal amount of Federal Funds Rate Loans and
Eurodollar Loans (as such terms are defined in the Credit Agreement) as has been
borrowed by the Fund on behalf of the undersigned Portfolio from the Bank under
the Credit Agreement. The Fund, on behalf of the Portfolio, may borrow, repay
and reborrow hereunder in accordance with the provisions of the Credit
Agreement. All Federal Funds Rate Loans and Eurodollar Loans and all payments of
principal shall be recorded by the holder in its records.
Anything in this Note to the contrary notwithstanding, the Portfolio
shall be liable hereunder only for Federal Funds Rate Loans and Eurodollar Loans
borrowed by the Fund on behalf of such Portfolio under the Credit Agreement and
other obligations with respect thereto. The sole source of repayment of the
principal of and interest on each Loan hereunder and other obligations with
respect thereto made with respect to the Portfolio shall be the revenues and
assets of such Portfolio and not from any other asset of the Fund or any other
Portfolio of the Fund.
The Fund, on behalf of the Portfolio, further promises to pay to the
order of the Bank interest on the aggregate unpaid principal amount hereof from
time to time outstanding from the date hereof until paid in full at the rates
per annum which shall be determined in accordance with the provisions of the
Credit Agreement. Accrued interest shall be payable on the dates specified in
the Credit Agreement.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
Bank of America National Trust and Savings Association, ABA No. 071000039,
Chicago Account Administration, Account No. 47-03421, Reference: Legg Mason, or
at such other place as may be designated by the Bank to the Fund in writing.
This Note is the Note referred to in, and evidences indebtedness
incurred under, a Credit Agreement dated as of February 20, 1998 (herein, as it
may be amended, modified or supplemented from time to time, called the "Credit
Agreement") among the Fund, on behalf of the Portfolio, the other parties
thereto and the Bank, to which Credit Agreement
<PAGE>
reference is made for a statement of the terms and provisions thereof, including
those under which the Portfolio is permitted and required to make prepayments
and repayments of principal of such indebtedness and under which such
indebtedness may be declared to be immediately due and payable.
Neither the shareholders, trustees or directors, as the case may be,
officers, employees and other agents of the Portfolio shall be personally bound
by or liable for any indebtedness, liability or obligation hereunder nor shall
resort be had to their private property for the satisfaction of any obligations
or claim hereunder.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is made under and governed by the internal laws of the State
of Illinois.
Address: [NAME OF FUND] ON BEHALF OF
100 Light Street [NAME OF PORTFOLIO]
Baltimore, MD 21202
By: _________________________
Title: _________________________
_____________________________
<PAGE>
EXHIBIT C
DESIGNATION OF PORTFOLIOS
Any of the following designated Portfolios of [Name of Fund] (the
"Fund") may hereafter utilize the proceeds of Loans made to the Fund under the
Credit Agreement dated as of February 20, 1998, assuming that the Bank has
previously notified such Fund that it has approved such Portfolio as a borrower
under such Credit Agreement and that all conditions of lending with respect to
any such Portfolio and the Fund have been satisfied:
Legal Name d/b/a (if any)
---------- --------------
____________________ _______________________
____________________ _______________________
____________________ _______________________
<PAGE>
EXHIBIT D
SCHEDULE OF LITIGATION
None
<PAGE>
EXHIBIT E
SCHEDULE OF CONTINGENT LIABILITIES
None
<PAGE>
EXHIBIT F
BORROWING BASE CERTIFICATE
Reference is made to that certain Credit Agreement dated as of February 20,
1998 (the "Credit Agreement") among the funds and portfolios party thereto, the
banks party thereto as lenders (the "Banks") and Bank of America National Trust
and Savings Association, as agent (the "Agent"). Capitalized terms used herein
and not otherwise defined shall have the meaning given to such terms in the
Credit Agreement. Pursuant to the terms of the Credit Agreement, the
undersigned, on behalf of the [Name of Fund] [on behalf of the applicable
Portfolio], certifies to the Agent and the Banks as follows:
As of _____________________, the Borrowing Base for such Fund or
Portfolio is calculated as follows:
(a) Total Assets (less the value of assets
subject to Liens), net of liabilities
and Indebtedness not represented by
Senior Securities $___________________
(b) Indebtedness $___________________
(c) Gross Assets
[(a) plus (b)] $___________________
(d) Gross Borrowing Base
[25.0% of (c)] $___________________
(e) Available Borrowing Base
[(d) minus (b)]
$___________________
Date: ____________________ ____________________, as investment
adviser to [Name of Fund]
By: ____________________________
Title: ____________________________
<PAGE>
EXHIBIT G
FUNDS' AND PORTFOLIOS' INVESTMENT RESTRICTIONS
For a Fund's or Portfolio's investment restrictions, please see the most
recent Prospectus and Statement of Additional Information for such Fund or
Portfolio as indicated below:
LEGG MASON VALUE TRUST, INC.
Primary Share Prospectus dated July 31, 1997 Revised September 9, 1997, as
amended November 19, 1997
Navigator Share Prospectus dated July 31, 1997, as amended November 19, 1997
Statement of Additional Information dated July 31, 1997
LEGG MASON TOTAL RETURN TRUST, INC.
Primary Share Prospectus dated July 31, 1997 Revised September 9, 1997, as
amended November 19, 1997
Navigator Share Prospectus dated July 31, 1997, as amended November 19, 1997
Statement of Additional Information dated July 31, 1997
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
Primary Share Prospectus dated July 31, 1997 Revised September 9, 1997, as
amended November 19, 1997
Navigator Share Prospectus dated July 31, 1997, as amended November 19, 1997
Statement of Additional Information dated July 31, 1997
LEGG MASON AMERICAN LEADING COMPANIES TRUST, A PORTFOLIO OF LEGG MASON INVESTORS
TRUST INC.
Primary Share Prospectus dated July 31, 1997 Revised September 9, 1997, as
amended November 19, 1997
Navigator Share Prospectus dated July 31, 1997, as amended November 19, 1997
Statement of Additional Information dated July 31, 1997
LEGG MASON BALANCED TRUST, A PORTFOLIO OF LEGG MASON INVESTORS TRUST, INC.
Primary Share Prospectus dated July 31, 1997 Revised September 9, 1997, as
amended November 19, 1997
Navigator Share Prospectus dated July 31, 1997, as amended November 19, 1997
Statement of Additional Information dated July 31, 1997
LEGG MASON GLOBAL GOVERNMENT TRUST, A PORTFOLIO OF LEGG MASON GLOBAL TRUST, INC.
Prospectuses dated May 1, 1997
<PAGE>
Statement of Additional Information dated May 1, 1997
LEGG MASON INTERNATIONAL EQUITY TRUST, A PORTFOLIO OF LEGG MASON GLOBAL TRUST,
INC.
Prospectuses dated May 1, 1997
Statement of Additional Information dated May 1, 1997
LEGG MASON EMERGING MARKETS TRUST, A PORTFOLIO OF LEGG MASON GLOBAL TRUST, INC.
Prospectuses dated May 1, 1997
Statement of Additional Information dated May 1, 1997
LEGG MASON MARYLAND TAX-FREE INCOME TRUST, A PORTFOLIO OF LEGG MASON TAX-FREE
INCOME FUND
Prospectuses dated July 31, 1997, as amended November 3, 1997
Statement of Additional Information dated July 31, 1997, as amended November 3,
1997
LEGG MASON PENNSYLVANIA TAX-FREE INCOME TRUST, A PORTFOLIO OF LEGG MASON
TAX-FREE INCOME
Prospectuses dated July 31, 1997, as amended November 3, 1997
Statement of Additional Information dated July 31, 1997, as amended November 3,
1997
LEGG MASON TAX-FREE INTERMEDIATE-TERM INCOME TRUST, A PORTFOLIO OF LEGG MASON
TAX-FREE INCOME FUND
Prospectuses dated July 31, 1997, as amended November 3, 1997
Statement of Additional Information dated July 31, 1997, as amended November 3,
1997
LEGG MASON U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO, A PORTFOLIO OF LEGG
MASON INCOME TRUST, INC.
Primary Share Prospectus dated May 1, 1997 Revised December 31, 1997
Navigator Share Prospectus dated May 1, 1997, as amended August 4, 1997, August
22, 1997, October 17, 1997 and December 31, 1997
Statement of Additional Information dated May 1, 1997
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO, A PORTFOLIO OF LEGG MASON INCOME
TRUST, INC.
Primary Share Prospectus dated May 1, 1997 Revised December 31, 1997
Navigator Share Prospectus dated May 1, 1997, as amended August 4, 1997, August
22, 1997, October 17, 1997 and December 31, 1997
Statement of Additional Information dated May 1, 1997
G-2
<PAGE>
LEGG MASON HIGH YIELD PORTFOLIO, A PORTFOLIO OF LEGG MASON INCOME TRUST, INC.
Primary Share Prospectus dated May 1, 1997 Revised December 31, 1997
Navigator Share Prospectus dated May 1, 1997, as amended August 4, 1997, August
22, 1997, October 17, 1997 and December 31, 1997
Statement of Additional Information dated May 1, 1997
BARTLETT VALUE INTERNATIONAL FUND, A PORTFOLIO OF BARTLETT CAPITAL TRUST
Prospectuses dated July 21, 1997, as amended November 3, 1997
Statement of Additional Information dated July 21, 1997, as amended November 3,
1997
BARTLETT EUROPE FUND, A PORTFOLIO OF BARTLETT CAPITAL TRUST
Prospectuses dated July 21, 1997, as amended November 3, 1997
Statement of Additional Information dated July 21, 1997, as amended November 3,
1997
BARTLETT BASIC VALUE FUND, A PORTFOLIO OF BARTLETT CAPITAL TRUST
Prospectuses dated July 21, 1997, as amended November 3, 1997
Statement of Additional Information dated July 21, 1997, as amended November 3,
1997
The foregoing items have been separately delivered on behalf of the Funds and
Portfolios to the Banks
G-3
<PAGE>
EXHIBIT H
CONSENT LETTER
[Date]
Bank of America National
Trust and Savings Association, as Agent
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Mr. John Hayes
Re: Credit Agreement dated as of February 20, 1998 (the "Credit Agreement")
Ladies and Gentlemen:
Reference is made to Section 7.18 of the Credit Agreement. Capitalized
terms used herein but not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement.
Said Section 7.18 prohibits the payment to the undersigned of any
management and advisory fees of any type by a Fund or Portfolio under the Credit
Agreement for any period during which any Event of Default or Unmatured Event of
Default shall have occurred and be continuing with respect to such Fund or
Portfolio.
Please be advised Legg Mason Fund Adviser, Inc. and Legg Mason Capital
Management, Inc. (each an "Adviser") hereby acknowledge the terms of Section
7.18 of the Credit Agreement and consent to its provisions. At any time that any
Event of Default or Unmatured Event of Default under the Credit Agreement shall
have occurred and be continuing with respect to a Fund or Portfolio and any
Loans are outstanding with respect to such Fund or Portfolio, each Adviser will
neither demand nor accept payment of any management and advisory fees of any
type from such Fund or Portfolio during the continuance of such Event of Default
or Unmatured Event of Default, whether pursuant to the terms of any management
fee agreement with the Fund, the Portfolio or otherwise. Any fees received under
circumstances contrary to those contemplated by the terms of the Credit
Agreement and this letter shall be deemed to be held in trust for the benefit of
the Banks and shall be paid over to the Banks promptly upon receipt thereof.
<PAGE>
The terms of this consent shall extend to all other Funds and/or
Portfolios of a Fund to which either of the Advisers may serve as investment
adviser and which may at any future date become borrowers under the terms of the
Credit Agreement.
Very truly yours,
LEGG MASON FUND ADVISER, INC.
By:_________________________
Title:______________________
LEGG MASON CAPITAL MANAGEMENT, INC.
By:__________________________
Title:_______________________
<PAGE>
EXHIBIT I
FORM OF OPINION
<PAGE>
EXHIBIT J
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement dated as of February 20, 1998
(as amended, modified or supplemented from time to time, the "Credit Agreement")
among various funds and portfolios party thereto, the banks party thereto as
lenders and Bank of America National Trust and Savings Association, as agent
(the "Agent"). Terms defined in the Credit Agreement are used herein with the
same meaning, unless otherwise defined herein.
The "Assignor" and the "Assignee" referred to on the signature page
hereto agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, an interest in and to
the Assignor's rights and obligations under the Credit Agreement as of the date
hereof equal to the percentage interest specified on Annex 1 of all outstanding
rights and obligations under the Credit Agreement. After giving effect to such
sale and assignment, the Assignee's and the Assignor's Commitments will be as
set forth on Annex 1.
2. The Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Credit Documents
by a Fund or Portfolio or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Credit Documents or any other
instrument or document furnished pursuant thereto; (iii) makes no representation
or warranty and assumes no responsibility with respect to the financial
condition of any Fund or Portfolio or the performance or observance by any Fund
or Portfolio of any of its obligations under the Credit Documents or any other
instrument or document furnished pursuant thereto; and (iv) attaches the Notes
held by the Assignor and requests that the Agent exchange such Notes for a new
Notes payable to the order of the Assignee in an amount equal to the Commitment
assumed by the Assignee pursuant hereto or new Notes payable to the order of the
Assignee in an amount equal to the Commitment assumed by the Assignee pursuant
hereto and the Assignor in an amount equal to the Commitment retained by the
Assignor under the Credit Agreement, respectively, as specified on Annex 1.
3. The Assignee (i) confirms that it has received a copy of the Credit
Agreement and such other documents and information as it has deemed appropriate
to make its own credit analysis and decision to enter into this Assignment and
Acceptance; (ii) agrees that it will, independently and without reliance upon
any Agent, the Assignor or any other Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement;
(iii) represents and warrants to each Fund and
<PAGE>
Portfolio that it is an Eligible Lender; (iv) appoints and authorizes the Agent
to take such action on its behalf and to exercise such powers and discretion
under the Credit Agreement as are delegated to such Agent by the terms thereof,
together with such powers and discretion as are reasonably incidental thereto;
and (v) agrees that it will be bound by the terms of the Credit Agreement and
that it will perform in accordance with such terms all of the obligations that
by such terms are required to be performed by it as a Bank.
4. Following the execution of this Assignment and Acceptance, it will
be delivered to the Agent for acceptance and recording by the Agent. The
effective date for this Assignment and Acceptance (the "Effective Date") shall
be the date of acceptance hereof by the Agent, unless otherwise specified on
Annex 1.
5. Upon such acceptance and recording by the Agent, as of the Effective
Date, (i) the Assignee shall be a party to the Credit Agreement and, to the
extent provided in this Assignment and Acceptance, have the rights and
obligations of a Bank thereunder and (ii) the Assignor shall, if it has assigned
and delegated all its rights and duties under the Credit Documents, relinquish
its rights and be released from its obligations under the Credit Agreement.
6. Upon such acceptance and recording by the Agent, from and after the
Effective Date, the Agent shall make all payments under the Credit Agreement and
the Notes in respect of the interest assigned hereby (including, without
limitation, all payments of principal, interest and commitment fees with respect
thereto) to the Assignee. The Assignor and Assignee shall make all appropriate
adjustments in payments under the Credit Agreement and the Notes for periods
prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed
in accordance with, the internal laws of the State of Illinois.
8. This Assignment and Acceptance may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of Annex 1 to this Assignment and Acceptance by telecopier shall be
effective as delivery of a manually executed counterpart of this Assignment and
Acceptance.
<PAGE>
IN WITNESS WHEREOF, the Assignor and the Assignee have caused Annex 1
to this Assignment and Acceptance to be executed by their officers thereunto
duly authorized as of the date specified thereon.
Dated: ___________, 19__ [NAME OF ASSIGNOR], as Assignor
By:_________________________________
Title:
[NAME OF ASSIGNEE], as Assignee
By:_________________________________
Title:
The foregoing Assignment is accepted this ____ day of _____________, 19__, and,
in connection therewith, the undersigned acknowledges that the foregoing
assignment has been consented to by the Funds and Portfolios.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Agent
By:___________________________
Title:
<PAGE>
ANNEX 1
to
ASSIGNMENT AND ACCEPTANCE
1. Information Concerning Assignment
(A) Percentage interest assigned: _______________
(B) Assignee's Commitment (after giving effect to
assignment): $______________
(C) Assignor's Commitment (after giving effect to
assignment): $______________
(D) Aggregate outstanding principal
amount of Loans assigned: $______________
(E) Principal amount of Notes payable to Assignee
(after giving effect to assignment): $______________
(F) Principal amount of Notes payable to Assignor
(after giving effect to assignment): $______________
(G) Effective Date (if other than date of acceptance
by Administrative Agent): ****__________,
199_
- --------
*** This date should be no earlier than five Business Days after the
delivery of this Assignment and Acceptance to the Agent.
<PAGE>
2. Administrative details for the Assignee:
(A) Notice Address:
Assignee name:
Address:
Attention:
Telephone: (___) ___-____
Telecopier: (___) ___-____
(B) Payment Instructions:
_________________________
_________________________
_________________________
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. 13 to the Registration Statement of Legg Mason Global Trust, Inc.
(the "Corporation") on Form N-1A (File No. 33-56672) of our report dated January
30, 1998, 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, the three portfolios of the Corporation,
which report is included in the Corporation's Annual Report to Shareholders for
the year ended December 31, 1997, 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 Prospectuses and "the Corporation's
Independent Accountants" in the Statement of Additional Information.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 30, 1998
LEGG MASON GLOBAL GOVERNMENT TRUST
December 31, 1996 - December 31, 1997 (one year)
Cumulative Total Return:
ERV = (9.60 x 1.409230777) - (10.41 x 1.321956475) x 1000 + 1000 = 983.06
--------------------------------------------
(10.32 x 1.232199094)
P = 1000
C = 983.06 - 1 = -0.0169446 = -1.69%
------ -----
1000
Average Annual Return: Same
April 15, 1993 - December 31, 1997 (life of fund)
Cumulative Total Return:
ERV = (9.60 x 1.409230777) - (10.00 x 1.0) x 1000 + 1000 = 1352.86
-----------------------------------
(10.00 x 1.0)
P = 1000
P = 1352.86 - 1 = 0.35286 = 35.29%
------- -----
1000
Average Annual Return:
1
---------
(0.35286 + 1) (4.71506) - 1 = 0.0662 = 6.62%
----
<PAGE>
LEGG MASON INTERNATIONAL EQUITY TRUST
December 31, 1996 - December 31, 1997 (one year)
Cumulative Total Return:
ERV = (11.78 x 1.0879050) - (12.09 x 1.041687) x 1000 + 1000 = 1017.59
----------------------------------------
(10.70 x 1.010386)
P = 1000
C = 1017.59 - 1 = 0.017590 = 1.76%
------- ----
1000
Average Annual Return: Same
February 17, 1995 - December 31, 1997 (life of fund)
Cumulative Total Return:
ERV = (11.78 x 1.0879050) - (10.00 x 1.0) x 1000 + 1000 = 1281.55
----------------------------------
(10.00 x 1.0)
P = 1000
P = 1281.55 - 1 = 0.28155 = 28.16%
------- -----
1000
Average Annual Return:
1
--------
(0.28155 + 1) (2.871233) - 1 = 0.0902 = 9.02%
----
<PAGE>
LEGG MASON EMERGING MARKETS TRUST
December 31, 1995 - December 31, 1996 (one year)
Cumulative Total Return:
ERV = (9.85 x 1.0039480) - (10.51 x 1.0029010) x 1000 + 1000 = 938.12
-----------------------------------------
(10.70 x 1.010386)
P = 1000
C = 938.12 - 1 = -0.06188 = -6.18%
------ -----
1000
Average Annual Return: Same
May 28, 1996 - December 31, 1996 (life of fund)
Cumulative Total Return:
ERV = (9.85 x 1.0039480) - (10.00 x 1.0) x 1000 + 1000 = 988.88
---------------------------------
(10.00 x 1.0)
P = 1000
P = 988.88 - 1 = -0.01112 = -1.11%
------ -----
1000
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895662
<NAME> LEGG MASON GLOBAL TRUST, INC.
<SERIES>
<NUMBER> 1
<NAME> GLOBAL GOVERNMENT TRUST
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