TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 3
Performance Information 4
Investment Objective and Policies 4
How You Can Invest in the Fund 7
How Your Shareholder Account is Maintained 8
How You Can Redeem Your Primary Shares 8
How Net Asset Value is Determined 10
Dividends and Other Distributions 10
Tax Treatment of Dividends and Other Distributions 11
Shareholder Services 11
The Fund's Management and Investment Adviser 12
The Fund's Distributor 14
Description of the Corporation and its Shares 14
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
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
INDEPENDENT ACCOUNTANTS:
PricewaterhouseCoopers LLP
250 W. Pratt Street, Baltimore, Maryland 21201
Legg Mason
Market Neutral Trust
A Series of
LEGG MASON
LIGHT STREET
TRUST, INC.
Prospectus
FEBRUARY 8, 1999
Primary Shares
[Legg Mason's Logo appears here]
HOW TO INVEST(SM)
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 THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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LEGG MASON LIGHT STREET TRUST, INC. -- PRIMARY SHARES
LEGG MASON MARKET NEUTRAL TRUST
The Legg Mason Market Neutral Trust ("Market Neutral" or "Fund") is a
professionally managed portfolio seeking long-term capital appreciation while
minimizing exposure to general U.S. equity market volatility. Batterymarch
Financial Management, Inc. ("Batterymarch" or "Adviser"), the Fund's investment
adviser, will seek to achieve this objective primarily by purchasing equity
securities that it believes to be undervalued, selling short equity securities
that it believes to be overvalued, and coordinating the establishment of long
and short positions in an effort to keep the portfolio neutral to general U.S.
equity market volatility. There can be no assurance that the Fund will achieve
its objective.
This Prospectus sets forth concisely the information about the Fund 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
Fund dated , 1999 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 distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason") (address and telephone numbers listed below).
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED 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
February 8, 1999
Legg Mason Wood Walker, Incorporated
100 Light Street
P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000
800-822-5544
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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.
Market Neutral's objective is long-term capital appreciation while
minimizing exposure to general U.S. equity market volatility. Market Neutral is
a separate series of Legg Mason Light Street Trust, Inc. ("Corporation"), a
diversified, open-end management investment company. Batterymarch will seek to
achieve this objective primarily by purchasing equity securities that it
believes to be undervalued, selling short equity securities that it believes to
be overvalued, and coordinating the establishment of long and short positions in
an effort to keep the portfolio neutral to general U.S. equity market
volatility. There can be no assurance that the Fund will achieve its objective.
See "Investment Objective and Policies," which also includes a discussion of
risks.
Shares of the Fund may be appropriate for investments by Individual
Retirement Accounts, Simplified Employee Pension Plans, Savings Incentive Match
Plans for Employees and other tax-qualified retirement plans (collectively
referred to as "Retirement Plans").
DISTRIBUTOR :
Legg Mason Wood Walker, Incorporated
INVESTMENT MANAGER :
Legg Mason Fund Adviser, Inc. ("LMFA")
INVESTMENT ADVISER :
Batterymarch Financial Management, Inc.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. There is a $1,000 minimum,
generally, for initial purchases, and a $100 minimum, generally, for subsequent
purchases. Lower minimums for initial and subsequent purchases apply for
automatic investments. See "How You Can Invest in the Fund."
REDEMPTION METHODS:
Redeem by calling your financial advisor or service provider, or redeem by
mail. See "How You Can Redeem Your Primary Shares."
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege."
DIVIDENDS :
Declared and paid quarterly. See "Dividends and Other Distributions."
REINVESTMENT :
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
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EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary Shares
of the Fund will bear directly or indirectly. The expenses and fees set forth
below are based on estimates for the current fiscal year, and fees are adjusted
for current expense limits and fee waiver levels.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 1.20%A
12b-1 fees 1.00%
Other expenses 0.80%
-----
Total operating expenses 3.00%A
=====
- ---------------------
(A) After fee waivers. LMFA and Legg Mason have voluntarily agreed to waive
management and 12b-1 fees to the extent necessary to limit the Fund's total
operating expenses relating to Primary Shares (exclusive of taxes, brokerage
commissions, interest and extraordinary expenses) to 3.00% of the Fund's average
daily net assets attributable to Primary Shares until July 31, 1999. In the
absence of such waivers, the management fee and estimated total operating
expenses relating to Primary Shares would have been 1.90% and 3.70% of average
net assets.
Because the Fund pays 12b-1 fees with respect to Primary Shares, long-term
investors in Primary Shares 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 the Fund's expenses, please see "The Fund's Management
and Investment Adviser" and "The Fund's Distributor."
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) redemption at the end of each
time period. The Fund charges no redemption fees.
1 YEAR 3 YEARS
----------------------------
$30 $93
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same over the time periods shown. The above table 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 FUND. THE ABOVE TABLE 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 Legg Mason
waive their fees and the extent to which Primary Shares incur variable expenses,
such as transfer agency costs.
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PERFORMANCE INFORMATION
From time to time the Fund may quote the TOTAL RETURN of a 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 of an
investment in the fund, including changes in share price and assuming
reinvestment of dividends and other distributions. 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-to-year
results, tend to smooth out variations in a fund's returns. No adjustment has
been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in the Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
Performance figures reflect past performance only and are not intended to
and do not indicate future performance.
U.S. equity funds have grown significantly in recent years. The average
long-term growth of general equity funds as reported by Lipper Analytical
Services, Inc. over the last 25 years ending September 30, 1998 has been 12.64%,
although in some years there has been a negative total return. Because of its
market neutral strategy, the performance of this Fund may not be correlated to
that of other U.S. equity funds.
-----------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective may not be changed without shareholder
approval; however, except as otherwise noted, the investment policies of the
Fund described below may be changed by the Fund's Board of Directors without a
shareholder vote. There can be no assurance that the Fund will achieve its
investment objective.
MARKET NEUTRAL'S objective is long-term capital appreciation while
minimizing exposure to general U.S. equity market volatility. Batterymarch will
seek to achieve this objective primarily by purchasing equity securities that it
believes to be undervalued, selling short equity securities that it believes to
be overvalued, and coordinating the establishment of long and short positions in
an effort to keep the portfolio neutral to general U.S. equity market
volatility. The portfolio will be diversified and represent a broad sector of
the market. Certain characteristics of the long positions as a whole (e.g.,
industry sector weighting, market capitalization, and dollar amounts) are
expected to match the characteristics of the short positions as a whole.
Accordingly, when the overall U.S. equity market declines, the value of the Fund
would not be expected to decline unless its long and short positions behaved in
a manner inconsistent with the expectation Batterymarch had for the relative
movement of each. Similarly, the value of the Fund would not be expected to
advance solely because the overall U.S. equity market advances; the Fund will
advance if the stocks it holds long outperform the stocks it has sold short. For
these purposes, the U.S. equity market consists of those equity securities
listed on the New York Stock Exchange, the American Stock Exchange or NASDAQ.
To meet margin requirements or redemptions, or pending investment, the Fund
may also hold a portion of its assets in cash or short-term investments,
including money market instruments.
Proceeds from the Fund's short sales of equity securities will earn
interest at a rate approximately equal to that of a 3-month U.S. Treasury bill
("T-bill"). The interest will contribute to the Fund's return. Although the Fund
uses the T-bill as a benchmark, an investment in the Fund differs in most
respects from an investment in a T-bill because T-bills, unlike the Fund, are
backed by the full faith and credit of the United States, have a fixed rate of
return and a short duration, and have no risk of losing capital and little or no
potential for appreciation.
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TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
STOCK SELECTION
In an attempt to neutralize market risk, the Fund's portfolio will contain
both long and short equity positions, with long positions generally matched to
short positions within the same industry sector, in approximately equal dollar
balance. Batterymarch will select portfolio securities based upon Batterymarch's
multifactor stock selection model, which encompasses both quantitative and
qualitative approaches and includes analysis of cash flow, earnings growth
expectations, value and corporate signals. The stock selection model will be run
frequently, ranking each stock in the investable universe of approximately 2,000
liquid stocks, in order to re-evaluate the long and short components of the
portfolio, each of which will consist of approximately 150 stocks.
INVESTMENT RISKS
The Fund is newly organized and has no operating history prior to the date
of this Prospectus. An investment in the Fund is subject to the risk that the
stock selection model will fail to consider appropriately those factors that
influence the Fund's exposure to market risk. In addition, even if the stock
selection model properly considers the appropriate factors, Batterymarch may
fail to establish or maintain long and short positions that have matching market
characteristics (e.g., industry sector weighting, market capitalization and
dollar amounts). To the extent that the market characteristics of the long and
short positions do not match, the Fund will not be neutral to general U.S.
equity market volatility, the Fund's positions will become more speculative in
nature, and the Fund's losses may exceed those of other mutual Funds. See "Short
Sales," below.
An investment in the Fund is also subject to the risk of poor stock
selection by Batterymarch. For example, the stocks that Batterymarch buys may
not outperform stocks that Batterymarch sells short, and thereby the Fund would
not be successful in achieving its objective. Further, since Batterymarch will
manage both long and short positions in approximately equal dollar balance, it
is possible that the Fund's equity securities held long may decline in value at
the same time the value of its equity securities sold short increases, thereby
increasing the Fund's potential for loss. In such a case, the Fund's losses may
exceed those of other mutual funds.
The Fund will be different from many other funds, and will bear different
risks, in that it will maintain substantial short positions in equity securities
and will have high turnover of both its long and short positions, as described
below.
SHORT SALES
The Fund, as noted above, expects to sell securities short in an attempt to
fulfill the Fund's objective. When Batterymarch concludes that a security is
overvalued, it may sell the security short and borrow the same security from a
broker or other institution to complete the sale. The Fund will incur a loss as
a result of a short sale if the price of the borrowed security increases between
the date of the short sale and the date on which the Fund terminates or closes
out its short position by buying the same security. The Fund will realize a gain
if the security declines in price between those dates. There can be no assurance
that the Fund will be able to close out a short position at an acceptable time
or price. The values of the Fund's short positions, in the aggregate, are
expected to equal the values of its long positions in equity securities. It will
not make a short sale if, after giving effect to such sale, the market value of
all securities sold short exceeds 100% of the Fund's net assets. However, the
Fund will generally sell short securities with a market value in excess of 90%
of the Fund's net assets.
There also is a risk that a borrowed security will need to be returned to
the broker or other institution on short notice. If the request for the return
of securities occurs at a time when other short sellers of the security are
receiving similar requests, a "short squeeze" can occur, meaning that the Fund
might be compelled, at the most disadvantageous time, to replace the borrowed
security with a security purchased on the open market, possibly at prices
significantly in excess of the proceeds received earlier. Further, because the
Fund will attempt to remain market neutral, if the Fund must close out a short
position at a time or price
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not of its choosing, it may also have to sell a corresponding long position at
an unfavorable time or price in order to maintain market neutrality.
Until the Fund replaces a borrowed security, it will maintain a segregated
account with its custodian containing cash and liquid securities such that the
amount deposited in the account plus any amount deposited with a broker as
collateral will at least equal the current market value of the security sold
short. Most collateral will be deposited with a single broker, designated as the
Fund's "prime broker." Depending on arrangements made with the broker or
custodian, the Fund might not receive any payments (including interest) on
collateral deposited with the broker or custodian.
Rule 10a-1 under the Securities Exchange Act of 1934 ("Rule 10a-1")
provides that exchange-traded shares can be sold short only at a price that is
higher than the last trade or the same as the last trade price if that price is
higher than the previous price. The requirements of Rule 10a-1 can delay, or in
some cases prevent, execution of short sales, resulting in opportunity costs and
increased exposure to market action. While it is Batterymarch's intention to
maintain approximately equal dollar investments in the long and short components
of its portfolio, market circumstances and Rule 10a-1 may prevent it from doing
so from time to time. Batterymarch will generally attempt to execute short sales
before taking offsetting long positions in order to reduce the risk of unequal
long and short exposure.
Possible losses from short sales differ from losses that could be incurred
from a purchase of securities; losses from short sales may be unlimited, whereas
losses from purchases of securities cannot exceed the total amount invested.
Until the Fund replaces a borrowed security, the Fund is required to repay
the lender any dividends or interest that accrue during the period of the loan.
To borrow the security, the Fund also may be required to pay a premium. The net
proceeds of the short sale will be retained by the broker (or by the Fund's
custodian in a special custody account) to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will incur
transaction costs in effecting short sales.
PORTFOLIO TURNOVER
The portfolio will likely experience very substantial turnover of
securities and Batterymarch will not consider turnover in making its investment
decisions. The rate of the Fund's portfolio turnover may vary significantly from
time to time depending on economic and market volatility. Although the rate of
portfolio turnover is difficult to predict, it is anticipated that under normal
circumstances the annual portfolio turnover rate of the long and short
components of the portfolio will each average from 500% to 700% per year but
will not exceed 700% per year. High portfolio turnover (100% or more) involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund. High turnover could also involve an
increased likelihood that the Fund will realize capital gains that are taxable
when distributed to shareholders. To the extent that high portfolio turnover
results in the realization of net short-term capital gains (that is, gains from
positions held for not more than one year), distributions of those gains are
taxed to shareholders at ordinary income tax rates rather than at more favorable
long-term capital gain tax rates. It is anticipated that the Fund's capital
gains, if any, will be short-term and therefore taxed at ordinary income tax
rates when distributed to shareholders.
ADRS
The Fund may invest in U.S. dollar-denominated American Depositary Receipts
("ADRs"), which are bought and sold in the United States and are issued by
domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. By investing in
ADRs rather than directly in a foreign issuer's stock, the Fund may avoid
currency risks during the settlement period for either purchases or sales. In
general, there is a large, liquid market in the United States for ADRs. The Fund
has no current intention to invest in unsponsored ADRs.
OTHER
For temporary defensive purposes, the Fund may invest without limit in
repurchase agreements and money market instruments, including high-
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quality short-term debt securities. The Fund may also invest in these
instruments when cash is temporarily available.
INVESTMENT LIMITATIONS
The Fund has adopted certain fundamental investment limitations that, like
its investment objective, can be changed only by a vote of the holders of a
majority of the outstanding voting securities of the Fund. For these purposes a
"vote of the holders of a majority of the outstanding voting securities" of the
Fund means 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 present at a
shareholders' meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy. These investment limitations are set forth
in the Statement of Additional Information under "Additional Information About
Investment Limitations and Policies." Fund policies, unless described as
fundamental, can be changed by action of its Board of Directors.
The fundamental restrictions applicable to the Fund include a prohibition
on investing 25% or more of its 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).
HOW YOU CAN INVEST IN THE FUND
You may purchase Primary Shares of the Fund 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 Fund 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
Fund through a Retirement Plan.
Investors who are considering establishing a Retirement Plan may wish to
consult their attorneys or tax advisers with respect to individual tax
questions. Your Financial Advisor or Service Provider can make available to you
forms of plans. The option of investing in these plans through regular payroll
deductions may be arranged with Legg Mason and your employer. Additional
information with respect to these plans is available upon request from a
Financial Advisor or Service Provider.
Clients of certain institutions that maintain omnibus accounts with the
Fund's transfer agent may obtain shares through those institutions. Such
institutions may receive payments from the Fund's 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 a 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. For those
investing through the 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. The Fund may
change these minimum amount requirements at its discretion.
The Fund and Legg Mason may reject purchase orders from investors who have
purchased and redeemed or exchanged Fund shares four or more times in any twelve
month period. The Fund will use the "last-in, first-out" method to determine the
twelve month holding period. Under this method, the date of each redemption or
exchange will be compared with the most recent purchase date of shares held in
the account. If this holding period is less than twelve months, and if the
shareholder has purchased and redeemed or exchanged shares four or more times
during this holding period, the Fund and Legg Mason may
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reject future purchase orders from that shareholder.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Fund:
1. THROUGH A 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 Fund 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
Fund's transfer agent, to transfer funds each month from your Legg Mason account
or from your checking account. Please contact a 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
Fund through a 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." The 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
Fund does 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 redemption of your
shares in person or by telephone. 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: Legg Mason Market Neutral Trust, c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
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Requests for redemption received by your Financial Advisor or Service
Provider before the close of the Exchange on any day when the Exchange is open,
will be transmitted to BFDS, transfer agent for the Fund, 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, 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 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.
Written requests for redemption must be in "good
order." 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 shares, contact your Financial Advisor or Service
Provider.
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 reserves the right to impose a redemption
fee on the proceeds of shares redeemed or exchanged within one year of purchase,
if that should become necessary in the judgment of the Board of Directors.
The Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable procedures to
identify the caller. The Fund may request identifying information from callers
or employ identification numbers. The 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 should call their Financial Advisor or
Service Provider for further instructions.
Because of the relatively high cost of maintaining small accounts, the 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 Fund will not redeem accounts that fall below $500 solely as a
result of a reduction in net asset value per share. If the 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 to make an additional investment to avoid having
your account closed.
To the extent permitted by law, the Fund reserves the right to take up to
seven days to
9
<PAGE>
make payment upon redemption if, in the judgment of the Adviser, it 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.) 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 the 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. Securities owned by the Fund or sold short by the Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities are
valued at fair value as determined by the Fund's Board of Directors. 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 the Adviser to
be the primary market. Securities with remaining maturities of 60 days or less
are valued at amortized cost.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund declares dividends to holders of Primary Shares out of its
investment company taxable income (which generally consists of net investment
income and any net short-term capital gain) quarterly. Dividends from any net
short-term capital gains are paid annually. The Fund also distributes
substantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss) 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 Primary Shares held
in a Retirement Plan and by shareholders maintaining a Systematic Withdrawal
Plan generally are reinvested in Primary Shares of the Fund on the payment
dates. Other shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares of the
Fund;
2. Receive dividends in cash and other distributions in Primary Shares of
the Fund;
3. Receive dividends in Primary Shares of the Fund and other distributions
in cash; or
4. Receive both dividends and other distributions in cash.
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.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of 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 Fund account in Primary Shares 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. Shareholders electing to
receive dividends and/or other distributions in cash will be sent a check or
will have their Legg Mason account credited after the payment date. You may
elect at any time to change your option by notifying the Fund in writing at:
Legg Mason Market Neutral Trust, c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland
10
<PAGE>
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 to
shareholders as of that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to qualify for treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended, so that it will be relieved
of federal income tax on that part of its investment company taxable income and
net capital gain that it distributes to its shareholders.
Dividends from the 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-deferred or tax-exempt investors) as
ordinary income to the extent of the Fund's earnings and profits. Distributions
of the 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. The
maximum tax rate applicable to a noncorporate taxpayer's net capital gain
recognized on capital assets held for more than one year is 20% (10% for
taxpayers in the 15% marginal tax bracket). In the case of a regulated
investment company such as the Fund, the relevant holding period is determined
by how long the Fund has held the portfolio security on which the gain was
realized, not by how long you have held your Fund shares. See the discussion of
portfolio turnover and tax consequences on page 6.
The Fund will send 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 that year. The notice will tell
you what portion of the capital gain distributions falls into each of the
different tax rate categories mentioned above.
The 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 the Fund with a certified
taxpayer identification number.
The Fund also is required to withhold 31% of all dividends and capital gain
distributions payable to such shareholders who otherwise are subject to backup
withholding.
A redemption of Primary Shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares. An exchange
of Primary Shares for shares of any other Legg Mason fund generally will have
similar tax consequences. See "Shareholder Services -- Exchange Privilege." 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.
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 tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition to
federal income tax, you may also be subject to state, local or foreign taxes on
distributions from the Fund, depending on the laws of your home state and
locality. 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 shares purchased through
11
<PAGE>
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 only 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 semiannually showing its portfolio and other information;
the annual report for the Fund will contain financial statements audited by its
independent accountants.
Shareholder inquiries should be addressed to: Legg Mason Market Neutral
Trust, c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis if you are purchasing or already own shares
with a net asset value of $5,000 or more. Shareholders should not purchase
shares of the Fund while they are participating in the Systematic Withdrawal
Plan. 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 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 the Fund reserves the
right to terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the Fund in one calendar year. In addition, the
Fund and Legg Mason may reject purchase orders from investors who have purchased
and sold Fund shares (including purchases and sales through exchange) four or
more times in any twelve month period. See page 7. 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." 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. The Fund reserves
the right to modify or terminate the exchange privilege upon 60 days' notice to
shareholders. Some Service Providers may not offer all of the Legg Mason funds
for exchange.
THE FUND'S MANAGEMENT AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of the Fund are managed under the direction of its
Board of Directors.
MANAGEMENT AGREEMENT
The Fund has a management agreement with LMFA which was approved by the
Fund's Board of Directors ("Management Agreement"). Under the Management
Agreement, LMFA is obligated to provide the Fund with investment management and
administrative services, and to oversee the Fund's relationships with outside
service providers, such as the custodian, transfer agent, accountants, and
lawyers.
12
<PAGE>
For services under the Management Agreement, LMFA receives a fee from the
Fund, calculated daily and payable monthly, at an annual rate of 1.90% of its
average daily net assets.
ADVISORY AGREEMENT
LMFA has entered into an investment advisory agreement with Batterymarch to
provide investment advisory services to the Fund. Battery- march has the
responsibility for making all investment decisions and placing all orders to buy
or sell a particular security.
Under its Advisory Agreement, Batterymarch receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 78.9% of the
fee received by LMFA, or 1.50% of the Fund's average daily net assets, adjusted
for any fee waivers, as discussed below.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent the Fund's
expenses related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during that month an annual rate of 3.00% of
average daily net assets attributable to Primary Shares until July 31, 1999.
This agreement is voluntary and may be terminated by LMFA at any time. The
Fund pays all its other expenses which are not assumed by LMFA.
PRIMARY SHARES EXPENSE RATIO
As of the date of this Prospectus, the Fund has not yet begun operations.
In addition to management and distribution fees, the Fund will be responsible
for interest, taxes, brokerage fees and commissions, expenses of preparing and
printing prospectuses, statements of additional information, proxy statements
and reports to shareholders and of distributing them to existing shareholders,
custodian charges, transfer agency fees, organizational expenses, 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, governmental fees
and expenses incurred in connection with industry organizations.
LMFA
LMFA acts as adviser or manager to nineteen investment company portfolios
which had aggregate assets under management of approximately $14.8 billion as of
December 31, 1998. LMFA's address is 100 Light Street, Baltimore, Maryland
21202.
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. Batterymarch's aggregate assets under management totalled
approximately $ billion as of December 31, 1998. Batterymarch's address is 200
Clarendon Street, Boston, Massachusetts 02116.
LMFA and Batterymarch are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
PORTFOLIO MANAGEMENT
A Batterymarch investment team is responsible for the day-to-day management
of the Fund.
BROKERAGE
The Fund 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.
YEAR 2000
Like other mutual funds and other financial and business organizations
around the world, the Fund could be adversely affected if the computer systems
used by LMFA, other service providers and entities with computer systems that
are linked to Fund records do not accurately process and calculate date
sensitive information after January 1, 2000. This is commonly referred to as the
"Year 2000 Issue." Calculating net asset value, redeeming shares, delivering
account statements and providing other information to shareholders are all
functions that are performed by computer. LMFA is taking steps that it believes
are reasonably designed to address the Year 2000 Issue with respect to the
computer systems it uses and to obtain satisfactory assurances that the Fund's
other
13
<PAGE>
major service providers will continue to provide services without interruption.
However, there can be no certainty that these steps will be sufficient to avoid
any adverse impact on the Fund.
The companies in which the Fund invests also could be adversely affected by
the Year 2000 Issue. While many companies are taking steps to address the Year
2000 Issue, there can be no assurance that these steps will be sufficient to
avoid adverse impact. LMFA endeavors to obtain information on this problem, but
it is difficult to assess accuracy or completeness, or potential impact on
portfolio companies if their suppliers suffer from the problem.
THE FUND'S DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of the Fund's shares pursuant to an Underwriting Agreement with the
Fund. The Underwriting Agreement obligates Legg Mason to pay certain expenses in
connection with the offering of shares, 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 the Fund's expense, and for any supplementary sales literature
and advertising costs.
Legg Mason has an agreement with the Fund's transfer agent to assist it
with some of its duties. Legg Mason will be paid by the transfer agent for this
service.
The Board of Directors of the Fund has adopted a Distribution and
Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 ("1940 Act"). The Plan provides that as compensation for its
ongoing services to investors in Primary Shares and its activities and expenses
related to the sale and distribution of Primary Shares, Legg Mason receives from
the Fund an annual distribution fee payable from the assets attributable to
Primary Shares, of up to 0.75% of the average daily net assets attributable to
Primary Shares; and an annual service fee equal to 0.25% of the average daily
net assets attributable to Primary Shares of the Fund. The distribution fee and
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. Legg Mason has agreed
to waive distribution fees in any month to the extent the Fund's expenses
related to Primary Shares (exclusive of taxes, interest, brokerage costs and
extraordinary expenses) exceed an annual rate of 3.00% of its average daily net
assets attributable to Primary Shares with July 31, 1999.
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. The Fund's Plan complies with those rules.
Legg Mason may enter into agreements with unaffiliated dealers to sell
Primary Shares of the Fund. Legg Mason pays such dealers up to 90% of the
distribution and shareholder service fees that it receives from the Fund with
respect to shares sold by the dealers.
The President and Treasurer of the Fund are employed by Legg Mason.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
The Corporation was established as a Maryland corporation on August 5,
1998. The Articles of Incorporation of the Corporation authorize issuance of 450
million shares of par value $.001 per share of the Fund. The Corporation may
issue additional series of shares. The 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 the Fund if a matter affects just
that Class of Shares. Each Class of Shares may bear certain differing
Class-specific expenses and sales charges, which may affect performance.
Investors may obtain more information concerning the Navigator Class from
their financial advisor or any person making available to them
14
<PAGE>
shares of the Primary Class, or by calling 1-800-822-5544.
The Board of Directors of the Fund 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 Fund are entitled to one vote per share and fractional
votes for fractional shares held. Voting rights are not cumulative. All shares
of the Fund 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 Fund will call a special meeting of the
shareholders at the request of 25% or more of the shares entitled to vote;
shareholders wishing to call such a meeting should submit a written request to
the Fund at 100 Light Street, Baltimore, Maryland 21202, stating the purpose of
the proposed meeting and the matters to be acted upon.
15
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
MARKET NEUTRAL
TRUST,
A SERIES OF
LEGG MASON
LIGHT STREET
TRUST, INC.
----------
PROSPECTUS
FEBRUARY 8, 1999
THIS WRAPPER IS NOT PART OF THE PROSPECTUS.
ADDRESS
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410.539.0000 800.822.5544
AUTHORIZED DEALER:
Fairfield Group , Inc.
721 Dresher Road
Horsham, PA 19044
215.657.9400 800.441.3885
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:
PricewaterhouseCoopers LLP
250 W. Pratt Street
Baltimore, Maryland 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 THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
(LEGG MASON LOGO HERE)
HOW TO INVEST(sm)
<PAGE>
Navigator Market Neutral Trust
Prospectus dated February 8, 1999
Legg Mason Light Street Trust, Inc.: Legg Mason Market Neutral Trust
Shares of Navigator Market Neutral Trust ("Navigator Shares") represent a
separate class ("Navigator Class") of common stock in Legg Mason Market Neutral
Trust ("Market Neutral" or "Fund").
The Navigator Class of Shares, described in this Prospectus, is 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 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.
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 Fund 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
Fund dated February 8, 1999 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 distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed on the
following 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.
Navigator Shares are sold and redeemed without any purchase or redemption
charge imposed by the Funds, although 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." The Fund will pay
management fees to Legg Mason Fund Adviser, Inc., but Navigator Shares pay no
distribution fees.
Market Neutral is a professionally managed portfolio seeking long-term capital
appreciation while minimizing exposure to general U.S. equity market volatility.
Market Neutral is a separate series of Legg Mason Light Street Trust, Inc.
("Corporation"), a diversified, open-end management investment company.
Batterymarch Financial Management, Inc. ("Batterymarch" or "Adviser"), the
Fund's investment adviser, will seek to achieve this objective primarily by
purchasing equity securities that it believes to be undervalued, selling short
equity securities that it believes to be overvalued, and coordinating the
establishment of long and short positions in an effort to keep the portfolio
neutral to general U.S. equity market volatility. There can be no assurance that
the Fund will achieve its objective. See "Investment Objective and Policies,"
which also includes a discussion of risks.
Table of Contents
Expenses 2
Performance Information 2
Investment Objectives and Policies 3
How To Purchase and Redeem Shares 5
How Shareholder Accounts are
Maintained 7
How Net Asset Value is Determined 7
Dividends and Other Distributions 7
Tax Treatment of Dividends and
Other Distributions 8
Shareholder Services 8
The Fund's Management and Investment
Advisers 9
The Fund's Distributor 10
Description of The Corporation
and its Shares 10
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
<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 the Fund will bear directly or indirectly. The expenses and fees set
forth below are based on estimates for the initial period of operations of the
Fund's Navigator Shares.
Annual Fund Operating Expenses -- Navigator Shares (as a percentage of average
net assets)
Management fees 1.20%^
12b-1 fees None
Other expenses 0.80%
Total operating expenses 2.00%^
-------------------------------
^ After fee waivers. LMFA has voluntarily agreed to waive management fees
to the extent necessary to limit total operating expenses relating to
Navigator Shares (exclusive of taxes, brokerage commissions, interest and
extraordinary expenses) to 2.00% of average daily net assets attributable
to Navigator Shares until July 31, 1999. In the absence of such waivers,
the management fee and estimated total operating expenses relating to
Navigator Shares would have been 1.90% and 2.70% of average net assets.
For further information concerning the Fund's expenses, please see
"The Fund's Management and Investment Adviser."
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) redemption at the end of each time period. The
Fund charges no redemption fees.
1 Year 3 Years
------------------
$20 $63
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same over the time periods shown. The above table 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 Fund. The above table 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 Navigator
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 waives
its fees and the extent to which Navigator Shares incur variable expenses, such
as transfer agency costs.
PERFORMANCE INFORMATION
From time to time the Fund may quote the total return of a 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 of an
investment in the fund, including changes in share price and assuming
reinvestment of dividends and other distributions. 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-to-year
results, tend to smooth out variations in a fund's returns. No adjustment is
made for any income taxes payable by shareholders.
The investment return and principal value of an investment in the Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
Performance figures reflect past performance only and are not intended to
and do not indicate future performance.
U.S. equity funds have grown significantly in recent years. The average
long-term total return of general equity funds as reported by Lipper Analytical
Services, Inc. over the last 25 years ending September 30, 1998 has been 12.64%,
although in some years there has been a negative total return.
Because of its market neutral strategy, the performance of this Fund may
not be correlated to that of other U.S. equity funds.
2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective may not be changed without shareholder
approval; however, except as otherwise noted, the investment policies of the
Fund described below may be changed by the Fund's Board of Directors without a
shareholder vote. There can be no assurance that the Fund will achieve its
investment objective.
Market Neutral's objective is long-term capital appreciation while
minimizing exposure to general U.S. equity market volatility. Batterymarch will
seek to achieve this objective primarily by purchasing equity securities that it
believes to be undervalued, selling short equity securities that it believes to
be overvalued, and coordinating the establishment of long and short positions in
an effort to keep the portfolio neutral to general U.S. equity market
volatility. The portfolio will be diversified and represent a broad sector of
the market. Certain characteristics of the long positions as a whole (e.g.,
industry sector weighting, market capitalization, and dollar amounts) are
expected to match the characteristics of the short positions as a whole.
Accordingly, when the overall U.S. equity market declines, the value of the Fund
would not be expected to decline unless its long and short positions behaved in
a manner inconsistent with the expectation Batterymarch had for the relative
movement of each. Similarly, the value of the Fund would not be expected to
advance solely because the overall U.S. equity market advances; the Fund will
advance if the stocks it holds long outperform the stocks it has sold short. For
these purposes, the U.S. equity market consists of those equity securities
listed on the New York Stock Exchange, the American Stock Exchange or NASDAQ.
To meet margin requirements or redemptions, or pending investment, the Fund
may also hold a portion of its assets in cash or short-term investments,
including money market instruments.
Proceeds from the Fund's short sales of equity securities will earn
interest at a rate approximately equal to that of a 3-month U.S. Treasury bill
("T-bill"). The interest will contribute to the Fund's return. Although the Fund
uses the T-bill as a benchmark, an investment in the Fund differs in most
respects from an investment in a T-bill because T-bills, unlike the Fund, are
backed by the full faith and credit of the United States, have a fixed rate of
return and a short duration, and have no risk of losing capital and little or no
potential for appreciation.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
Stock Selection
In an attempt to neutralize market risk, the Fund's portfolio will contain
both long and short equity positions, with long positions generally matched to
short positions within the same industry sector, in approximately equal dollar
balance. Batterymarch will select portfolio securities based upon Batterymarch's
multifactor stock selection model, which encompasses both quantitative and
qualitative approaches and includes analysis of cash flow, earnings growth
expectations, value and corporate signals. The stock selection model will be run
frequently, ranking each stock in the investable universe of approximately 2,000
liquid stocks, in order to re-evaluate the long and short components of the
portfolio, each of which will consist of approximately 150 stocks.
INVESTMENT RISKS
The Fund is newly organized and has no operating history prior to the date
of this Prospectus. An investment in the Fund is subject to the risk that the
stock selection model will fail to consider appropriately those factors that
influence the Fund's exposure to market risk. In addition, even if the stock
selection model properly considers the appropriate factors, Batterymarch may
fail to establish or maintain long and short positions that have matching market
characteristics (e.g., industry sector weighting, market capitalization and
dollar amounts). To the extent that the market characteristics of the long and
short positions do not match, the Fund will not be neutral to general U.S.
equity market volatility, the Fund's positions will become more speculative in
nature, and the Fund's losses may exceed those of other mutual Funds. See "Short
Sales," below.
An investment in the Fund is also subject to the risk of poor stock
selection by Batterymarch. For example, the stocks that Batterymarch buys may
not outperform stocks that Batterymarch sells short, and thereby the Fund would
not be successful in achieving its objective. Further, since Batterymarch will
manage both long and short positions in approximately equal dollar balance, it
is possible that the Fund's equity securities held long may decline in value at
the same time the value of its equity securities sold short increases, thereby
increasing the Fund's potential for loss. In such a case, the Fund's losses may
exceed those of other mutual funds.
The Fund will be different from many other funds, and will bear different
risks, in that it will maintain substantial short positions in equity securities
and will have high turnover of both its long and short positions, as described
below.
SHORT SALES
The Fund, as noted above, expects to sell securities short in an attempt to
fulfill the Fund's objective. When Batterymarch concludes that a security is
overvalued, it may sell the security short and
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borrow the same security from a broker or other institution to complete the
sale. The Fund will incur a loss as a result of a short sale if the price of the
borrowed security increases between the date of the short sale and the date on
which the Fund terminates or closes out its short position by buying the same
security. The Fund will realize a gain if the security declines in price between
those dates. There can be no assurance that the Fund will be able to close out a
short position at an acceptable time or price. The values of the Fund's short
positions, in the aggregate, are expected to equal the values of its long
positions in equity securities. It will not make a short sale if, after giving
effect to such sale, the market value of all securities sold short exceeds 100%
of the Fund's net assets. However, the Fund will generally sell short securities
with a market value in excess of 90% of the Fund's net assets.
There also is a risk that a borrowed security will need to be returned to
the broker or other institution on short notice. If the request for the return
of securities occurs at a time when other short sellers of the security are
receiving similar requests, a "short squeeze" can occur, meaning that the Fund
might be compelled, at the most disadvantageous time, to replace the borrowed
security with a security purchased on the open market, possibly at prices
significantly in excess of the proceeds received earlier. Further, because the
Fund will attempt to remain market neutral, if the Fund must close out a short
position at a time or price not of its choosing, it may also have to sell a
corresponding long position at an unfavorable time or price in order to maintain
market neutrality.
Until the Fund replaces a borrowed security, it will maintain a segregated
account with its custodian containing cash and liquid securities such that the
amount deposited in the account plus any amount deposited with a broker as
collateral will at least equal the current market value of the security sold
short. Most collateral will be deposited with a single broker, designated as the
Fund's "prime broker." Depending on arrangements made with the broker or
custodian, the Fund might not receive any payments (including interest) on
collateral deposited with the broker or custodian.
Rule 10a-1 under the Securities Exchange Act of 1934 ("Rule 10a-1")
provides that exchange-traded shares can be sold short only at a price that is
higher than the last trade or the same as the last trade price if that price is
higher than the previous price. The requirements of Rule 10a-1 can delay, or in
some cases prevent, execution of short sales, resulting in opportunity costs and
increased exposure to market action. While it is Batterymarch's intention to
maintain approximately equal dollar investments in the long and short components
of its portfolio, market circumstances and Rule 10a-1 may prevent it from doing
so from time to time. Batterymarch will generally attempt to execute short sales
before taking offsetting long positions in order to reduce the risk of unequal
long and short exposure.
Possible losses from short sales differ from losses that could be incurred
from a purchase of securities; losses from short sales may be unlimited, whereas
losses from purchases of securities cannot exceed the total amount invested.
Until the Fund replaces a borrowed security, the Fund is required to repay
the lender any dividends or interest that accrue during the period of the loan.
To borrow the security, the Fund also may be required to pay a premium. The net
proceeds of the short sale will be retained by the broker (or by the Fund's
custodian in a special custody account) to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will incur
transaction costs in effecting short sales.
PORTFOLIO TURNOVER
The portfolio will likely experience very substantial turnover of
securities and Batterymarch will not consider turnover in making its investment
decisions. The rate of the Fund's portfolio turnover may vary significantly from
time to time depending on economic and market volatility. Although the rate of
portfolio turnover is difficult to predict, it is anticipated that under normal
circumstances the annual portfolio turnover rate of the long and short
components of the portfolio will each average from 500% to 700% per year but
will not exceed 700% per year. High portfolio turnover (100% or more) involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund. High turnover could also involve an
increased likelihood that the Fund will realize capital gains that are taxable
when distributed to shareholders. To the extent that high portfolio turnover
results in the realization of net short-term capital gains (that is, gains from
positions held for not more than one year), distributions of those gains are
taxed to shareholders at ordinary income tax rates rather than at more favorable
long-term capital gain tax rates. It is anticipated that the Fund's capital
gains, if any, will be short-term and therefore taxed at ordinary income tax
rates when distributed to shareholders.
ADRS
The Fund may invest in U.S. dollar-denominated American Depositary Receipts
("ADRs"), which are bought and sold in the United States and are issued by
domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a
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correspondent bank. By investing in ADRs rather than directly in a foreign
issuer's stock, the Fund may avoid currency risks during the settlement period
for either purchases or sales. In general, there is a large, liquid market in
the United States for ADRs. The Fund has no current intention to invest in
unsponsored ADRs.
OTHER
For temporary defensive purposes, the Fund may invest without limit in
repurchase agreements and money market instruments, including high-quality
short-term debt securities. The Fund may also invest in these instruments when
cash is temporarily available.
INVESTMENT LIMITATIONS
The Fund has adopted certain fundamental investment limitations that, like
its investment objective, can be changed only by a vote of the holders of a
majority of the outstanding voting securities of the Fund. For these purposes a
"vote of the holders of a majority of the outstanding voting securities" of the
Fund means 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 present at a
shareholders' meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy. These investment limitations are set forth
in the Statement of Additional Information under "Additional Information About
Investment Limitations and Policies." Fund policies, unless described as
fundamental, can be changed by action of its respective Board of Directors.
The fundamental restrictions applicable to the Fund include a prohibition
on investing 25% or more of its 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).
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 721 Dresher 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 Fund's transfer agent may obtain shares through those Institutions.
Such Institutional Clients may receive payments from the Fund's 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 the Fund on a timely basis.
PURCHASE OF SHARES
The minimum investment is $50,000 for the initial purchase of Navigator
Shares of the Fund and $100 for each subsequent investment. The 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."
Certain institutions that have agreements with Legg Mason or the Fund may
be authorized to accept purchase and redemption orders on their behalf. In that
case, the Fund will be deemed to have received your purchase or redemption order
when the authorized institution accepts the order, and your order will receive
the next price calculated after the order has been accepted by the institution.
You should consult with your institution to determine the time by which it must
receive your order for you to purchase or redeem Fund shares at that day's
price. It is the institution's responsibility to transmit your order to the Fund
in a timely fashion.
The Fund reserves the right to reject any order for its shares or 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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The Fund and Legg Mason may reject purchase orders from investors who have
purchased and redeemed or exchanged Fund shares four or more times in any twelve
month period. The Fund will use the "last-in, first-out" method to determine the
twelve month holding period. Under this method, the date of each redemption or
exchange will be compared with the most recent purchase date of shares held in
the account. If this holding period is less than twelve months, and if the
shareholder has purchased and redeemed or exchanged shares four or more times
during this holding period, the Fund and Legg Mason may reject future purchase
orders from that shareholder.
No sales charge is imposed by the Fund 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 the 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
advisor 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 Fund, 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. See above for information on pricing of redemptions made through
certain institutions having agreements with Legg Mason or the Fund.
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. 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 the Fund can be reasonably
assured that the check has been collected.
To the extent permitted by law, the Fund reserves the right to take up to
seven days to make payment upon redemption if, in the judgment of the adviser,
the 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.)
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 reserves the right to impose a redemption
fee on the proceeds of shares redeemed or exchanged within one year of purchase,
if that should become necessary in the judgment of the Board of Directors.
The Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable procedures to
identify the caller. The Fund may request identifying information from callers
or employ identification numbers. The 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 should call their financial advisor for
further instructions.
Because of the relatively high cost of maintaining small accounts, the 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 Fund will not redeem accounts that fall below $500
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solely as a result of a reduction in net asset value per share. If the Fund
elects to redeem the shares in an account, the investor 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. Each
Institutional Client may establish its own minimum account size for investors
using its services.
HOW SHAREHOLDER ACCOUNTS ARE MAINTAINED
A shareholder account is established automatically for each investor. Any
shares the investor purchases or receives as a dividend or other distribution
will be credited directly to the 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 or Fairfield. The Fund does 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 the 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. Securities owned by the Fund or sold short by the
Fund for which market quotations are readily available are valued at current
market value. In the absence of readily available market quotations, securities
are valued at fair value as determined by the Fund's Board of Directors. 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 the Fund's
adviser to be the primary market. Securities with remaining maturities of 60
days or less are valued at amortized cost. The Fund will value its foreign
securities in U.S. dollars on the basis of the then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund declares dividends to holders of Navigator Shares out of its
investment company taxable income (which generally consists of net investment
income and any net short-term capital gain) quarterly. Dividends from any net
short-term capital gains are paid annually. The Fund also distributes
substantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss) 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. Navigator Shares held by qualified retirement plans generally
receive dividends and other distributions in additional shares. Other
shareholders may elect to:
1. Receive both dividends and other distributions in Navigator Shares;
2. Receive dividends in cash and other distributions in Navigator Shares;
3. Receive dividends in Navigator Shares and other distributions in cash;
or
4. Receive both dividends and other distributions in cash.
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 Navigator Shares. No interest will
accrue on amounts represented by uncashed distribution or redemption checks.
In certain cases, shareholders may reinvest dividends and other
distributions in shares of another Navigator fund. Please contact a financial
advisor for additional information about this option.
If no election is made, both dividends and other distributions are credited
to the Institutional Client's account in Navigator Shares 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 an
investor elects to receive dividends and/or other distributions in cash, a check
will be sent. Investors purchasing through Fairfield may elect at any time to
change the distribution option by notifying the Fund in writing at: Navigator
Market Neutral Trust, c/o Fairfield Group, Inc., 721 Dresher Road, Horsham,
Pennsylvania 19044. Those purchasing through Legg Mason should write to:
Navigator Market Neutral Trust, 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 divi-
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dends and other distributions paid to shareholders as of that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to qualify for treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended ("Code"), so that it will be
relieved of federal income tax on that part of its investment company taxable
income and net capital gain that it distributes to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid
in cash or reinvested in Navigator Shares) are taxable to their shareholders
(other than qualified retirement plans and other tax-exempt investors) as
ordinary income to the extent of the Fund's earnings and profits. Distributions
of the Fund's net capital gain (whether paid in cash or reinvested in Navigator
Shares), when designated as such, are taxable to those shareholders as long-term
capital gain, regardless of how long they have held their Fund shares. The
maximum tax rate applicable to a noncorporate taxpayer's net capital gain
recognized on capital assets held for more than one year is 20% (10% for
taxpayers in the 15% marginal tax bracket). In the case of a regulated
investment company such as the Fund, the relevant holding period is determined
by how long the Fund has held the portfolio security on which the gain was
realized, not by how long you have held your Fund shares. See the discussion of
portfolio turnover and tax consequences on page 4.
The Fund will send 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 that year. The notice will tell
you what portion of the capital gain falls into each of the different tax rate
categories mentioned above.
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 for shares of any other Navigator fund generally will have
similar tax consequences. See "Shareholder Services -- Exchange Privilege,"
below. If Fund shares are purchased within 30 days before or after redeeming 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.
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
Navigator 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 tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition to
federal income tax, an investor may also be subject to state, local or foreign
taxes on distributions from the Fund, depending on the laws of its home state
and locality. 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 the Fund. In addition, Legg Mason clients will receive a
monthly statement, 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 other 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 the Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for the Fund will
contain financial statements audited by its independent accountants.
Shareholder inquiries should be addressed to "Navigator Market Neutral
Trust, c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476," or "Navigator Market Neutral Trust, c/o Fairfield Group, Inc., 721
Dresher 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, provided the
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shares to be acquired are eligible for sale under applicable state securities
laws.
Investments by exchange into other Navigator funds are made at the per
share net asset value next 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." 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. The Fund reserves the right to modify or terminate the
exchange privilege upon 60 days' notice to shareholders. In addition, the Fund
and Legg Mason may reject purchase orders from investors who have purchased and
sold Fund shares (including purchases and sales through exchange) four or more
times in any twelve month period. See page 5. Some Institutional Clients may not
offer all of the Navigator Funds for exchange.
THE FUND'S MANAGEMENT AND
INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of the Fund are managed under the direction
of its Board of Directors.
MANAGEMENT AGREEMENT
The Fund has a management agreement with LMFA which was approved by the
Fund's Board of Directors ("Management Agreement"). Under the Management
Agreement, LMFA is obligated to provide the Fund with investment management and
administrative services, and to oversee the Fund's relationships with outside
service providers, such as the custodian, transfer agent, accountants, and
lawyers.
For services under the Management Agreement, LMFA receives a fee from the
Fund, calculated daily and payable monthly, at an annual rate of 1.90% of its
average daily net assets.
ADVISORY AGREEMENT
LMFA has entered into an investment advisory agreement with Batterymarch to
provide investment advisory services to the Fund. Batterymarch has the
responsibility for making all investment decisions and placing all orders to buy
or sell a particular security.
Under its Advisory Agreement, Batterymarch receives an advisory fee from
LMFA, computed daily and paid monthly, at an annual rate equal to 78.9% of the
fee received by LMFA, or 1.50% of the Fund's average daily net assets, adjusted
for any fee waivers, as discussed below.
FEE WAIVERS
LMFA has agreed to waive its fees in any month to the extent the Fund's
expenses related to Navigator Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) exceed during that month an annual rate of 2.00% of
average daily net assets attributable to Navigator Shares until July 31, 1999.
This agreement is voluntary and may be terminated by LMFA at any time. The
Fund pays all its other expenses which are not assumed by LMFA.
NAVIGATOR SHARES EXPENSE RATIO
As of the date of this Prospectus, the Fund has not yet begun operations.
In addition to management and distribution fees, the 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,
governmental fees and expenses incurred in connection with industry
organizations.
LMFA
LMFA acts as adviser or manager to nineteen investment company
portfolios which had aggregate assets under management of approximately $14.8
billion as of December 31, 1998. LMFA's address is 100 Light Street, Baltimore,
Maryland 21202.
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. Batterymarch's aggregate assets under management totalled
approximately $4.3 billion as of December 31, 1998. Batterymarch's address is
200 Clarendon Street, Boston, Massachusetts 02116.
LMFA and Batterymarch are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
PORTFOLIO MANAGEMENT
A Batterymarch investment team is responsible for the day-to-day
management of the Fund.
BROKERAGE
The Fund may use Legg Mason, among others, as broker for agency
transactions in listed and
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over-the-counter securities at commission rates and under circumstances
consistent with the policy of best execution.
YEAR 2000
Like other mutual funds and other financial and business organizations
around the world, the Fund could be adversely affected if the computer systems
used by LMFA, other service providers and entities with computer systems that
are linked to Fund records do not accurately process and calculate date
sensitive information after January 1, 2000. This is commonly referred to as the
"Year 2000 Issue." Calculating net asset value, redeeming shares, delivering
account statements and providing other information to shareholders are all
functions that are performed by computer. LMFA is taking steps that it believes
are reasonably designed to address the Year 2000 Issue with respect to the
computer systems it uses and to obtain satisfactory assurances that the Fund's
other major service providers will continue to provide services without
interruption. However, there can be no certainty that these steps will be
sufficient to avoid any adverse impact on the Fund.
The companies in which the Fund invests also could be adversely affected by
the Year 2000 Issue. While many companies are taking steps to address the Year
2000 Issue, there can be no assurance that these steps will be sufficient to
avoid adverse impact. LMFA endeavors to obtain information on this problem, but
it is difficult to assess accuracy or completeness, or potential impact on
portfolio companies if their suppliers suffer from the problem.
THE FUND'S DISTRIBUTOR
Legg Mason, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of the Fund's shares pursuant to an Underwriting Agreement. The
Underwriting Agreement obligates Legg Mason to pay certain expenses in
connection with the offering of shares, 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 the Fund's expense, and for any supplementary sales literature
and advertising costs. Legg Mason also assists BFDS with certain of its duties
as transfer agent and will be paid by BFDS for this service.
Fairfield, a wholly owned subsidiary of Legg Mason, Inc., is a registered
broker-dealer with principal offices located at 721 Dresher Road, Horsham,
Pennsylvania 19044. Fairfield may sell Navigator Shares pursuant to a Dealer
Agreement with the Fund's Distributor, 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 Fund are employed by Legg Mason.
DESCRIPTION OF THE CORPORATION AND ITS SHARES
The Corporation was established as a Maryland corporation on August 5,
1998. The Articles of Incorporation of the Corporation authorize issuance of 450
million shares of par value $.001 per share of the Fund. The Corporation may
issue additional series of shares. The 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 the Fund if a matter affects just
that Class of Shares. Each Class of Shares may bear certain differing
Class-specific expenses and sales charges, which may affect performance.
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 Fund 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 Fund are entitled to one vote per share and fractional
votes for fractional shares held. Voting rights are not cumulative. All shares
of the Fund are fully paid and nonassessable and have no preemptive or
conversion rights.
Shareholders' meetings will not be held except where the Investment Company
Act of 1940 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 Fund will call a special meeting of
the shareholders at the request of 25% or more of the shares entitled to vote;
shareholders wishing to call such a meeting should submit a written request to
the Fund at 100 Light Street, Baltimore, Maryland 21202, stating the purpose of
the proposed meeting and the matters to be acted upon. The address of BFDS is
P.O. Box 953, Boston, Massachusetts 02103.
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LEGG MASON LIGHT STREET TRUST, INC.:
LEGG MASON MARKET NEUTRAL TRUST
PRIMARY SHARES AND NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 8, 1999
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus for Primary Shares or for Navigator
Shares (both dated February 8, 1999), as appropriate, which have been filed with
the Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Fund's distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason"), at (410) 539-0000.
The LEGG MASON MARKET NEUTRAL TRUST ("Market Neutral" or "Fund"), a
separate series of the Legg Mason Light Street Trust, Inc., an open-end
investment company ("Trust"), is a mutual fund seeking long-term capital
appreciation while minimizing exposure to general U.S. equity market volatility.
It seeks to achieve its objective primarily by investing in a diversified
portfolio of long and short positions in U.S. equity securities. It establishes
long positions in equity securities that its adviser, Batterymarch Financial
Management, Inc. ("Batterymarch" or "Adviser"), has identified as undervalued
and establishes short positions in equity securities that Batterymarch has
identified as overvalued.
Shares of Navigator Market Neutral ("Navigator Shares") represent
interests in Market Neutral that 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 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 plans 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 Market Neutral ("Primary Shares") is
offered for sale to all other investors and may be purchased directly by
individuals.
Navigator and Primary Shares of Market Neutral are sold and redeemed
without any purchase or redemption charge, although institutions may charge
their Customer Accounts for services provided in connection with the purchase or
redemption of Navigator Shares. The Fund pays management fees to LMFA. Primary
Shares pay a 12b-1 distribution fee, but Navigator Shares pay no distribution
fees. See "The Fund's Distributor."
LEGG MASON WOOD WALKER, INCORPORATED
100 LIGHT STREET, P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410) 539-0000 (800) 822-5544
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of the Fund described in the
Prospectus, the Fund has
<PAGE>
adopted certain fundamental investment limitations that cannot be changed except
by vote of its shareholders. The Fund may not:
1. Borrow money, except from banks for temporary purposes, in an aggregate
amount not to exceed 10% of the value of the total assets of the Fund at the
time of borrowing; short sales and related borrowings of securities are not
subject to this restriction (although not a fundamental policy subject to
shareholder approval, the Fund will not purchase securities if borrowings exceed
5% of its total assets);
2. With respect to 75% of 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,
securities of the U.S. Government, its agencies and instrumentalities, and
securities issued by other investment companies);
3. Invest 25% or more of its total assets (taken at market value) in
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;
4. Purchase or sell commodities and commodity contracts, but this
limitation shall not prevent the Fund from purchasing or selling options and
futures contracts;
5. 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;
6. Make loans, except loans of portfolio securities and except to the
extent that the purchase of notes, bonds or other evidences of indebtedness or
deposits with banks and other financial institutions may be considered loans;
7. Purchase or sell real estate, except that the Fund may invest in
securities collateralized by real estate or interests therein or in securities
issued by companies that invest in real estate or interests therein (as a
non-fundamental policy changeable without a shareholder vote, the Fund will not
purchase or sell interests in real estate limited partnerships);
8. Make short sales of securities or maintain a short position if, when
added together, more than 100% of the value of the Fund's net assets would be
(a) deposited as collateral for the obligation to replace securities borrowed to
effect short sales, and (b) allocated to segregated accounts in connection with
short sales. Short sales "against the box" are not subject to this limitation;
or
9. Issue senior securities, except as permitted under the Investment
Company Act of 1940 ("1940 Act").
The foregoing limitations may be changed by "the vote of a majority of the
outstanding voting securities" of the Fund, a term defined in the 1940 Act to
mean the vote (a) of 67% or more of the voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present, or (b) of more than 50% of the outstanding voting securities of the
Fund, whichever is less.
Except as otherwise stated, if a fundamental or non-fundamental percentage
limitation set forth above is complied with at the time an investment is made, a
later increase or decrease in percentage resulting from a change in value of
portfolio securities, in the net asset value of the Fund, or in the number of
securities an issuer has outstanding, will not be considered to be outside the
limitation.
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Unless otherwise stated, the investment policies and limitations contained
in this Statement of Additional Information are not fundamental, and can be
changed without shareholder approval.
Illiquid Securities
The Fund may invest up to 10% of its net assets in illiquid securities.
For this purpose, "illiquid securities" are those that cannot be disposed of
within seven days for approximately the price at which the Fund values the
security. Illiquid securities include repurchase agreements with terms of
greater than seven days and restricted securities other than those the adviser
has determined are liquid pursuant to guidelines established by the Fund's Board
of Directors.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the Securities
Act of 1933, or pursuant to an exemption from registration. The Fund may be
required to pay part or all of the costs of such registration, and a
considerable period may elapse between the time a decision is made to sell a
restricted security and the time the registration statement becomes effective.
Judgment plays a greater role in valuing illiquid securities than those for
which a more active market exists.
SEC regulations permit the sale of certain restricted securities to
qualified institutional buyers. The investment adviser to the Fund, acting
pursuant to guidelines established by the Fund's Board of Directors, may
determine that certain restricted securities qualified for trading on this newly
developing market are liquid. If the market does not develop as anticipated,
restricted securities in the Fund's portfolio may adversely affect the Fund's
liquidity.
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 of non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
nonconvertible securities but rank senior to common stock in a corporation's
capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. The price of a convertible
security often reflects variations in the price of the underlying common stock
in a way that non-convertible debt does not. 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, which may be less than the ultimate
conversion value.
Many convertible securities are rated below investment grade or, if
unrated, are considered of comparable quality. Moody's describes securities
rated Ba as having "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."
If an investment grade security purchased by the Fund is subsequently
given a rating below investment grade, Batterymarch will consider that fact in
determining whether to retain that security in the Fund's portfolio, but is not
required to dispose of it.
Portfolio Lending
3
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The 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 the Fund. During the time portfolio 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. The 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. The Fund does not have the right
to vote securities on loan, but would terminate the loan and regain the right to
vote if that were considered important with respect to the investment. The risks
of securities lending are similar to those of repurchase agreements. The Fund
presently does not intend to lend more than 5% of its portfolio securities at
any given time.
Repurchase Agreements
A repurchase agreement is an agreement under which either U.S. government
obligations or 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 Fund 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. The Fund bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Fund is delayed or
prevented from exercising its rights to dispose of the collateral securities,
which may decline in value in the interim. The Fund will enter into repurchase
agreements only with financial institutions determined by the adviser to present
minimal risk of default during the term of the agreement based on guidelines
established by the Fund's Board of Directors.
Repurchase agreements are usually for periods of one week or less, but may
be for longer periods. The Fund will not enter into repurchase agreements of
more than seven days' duration if more than 10% of net assets would be invested
in such agreements and other illiquid investments. To the extent that proceeds
from any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Fund might suffer a loss. If bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon the
collateral by the Fund could be delayed or limited. However, the Fund has
adopted standards for the parties with whom it may enter into repurchase
agreements, including monitoring by the Fund's adviser of the creditworthiness
of such parties which the Fund's Board of Directors believes are reasonably
designed to assure that each party presents no serious risk of becoming involved
in bankruptcy proceedings within the time frame contemplated by the repurchase
agreement.
When the Fund enters into a repurchase agreement, it will obtain as
collateral from the other party 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 by a custodian
bank or an approved securities depository or book-entry system.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax considerations
affecting the Fund and its shareholders. Investors are urged to consult their
own tax advisers for more detailed information and for information regarding any
federal, state or local taxes that might be applicable to them.
General
The Fund intends to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"). In
order to do so, the Fund must distribute annually to its shareholders at least
90% of its investment company taxable income (generally, net investment
4
<PAGE>
income plus any net short-term capital gain) ("Distribution Requirement") and
must meet several additional requirements. These requirements include the
following: (1) at least 90% of the Fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities, or other income derived
with respect to its business of investing in securities ("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 that 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.
The 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.
Dividends and Other Distributions
Dividends and other distributions declared by the Fund in December of any
year and payable to its 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.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in 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 for the taxable year
from domestic 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. Distributions of net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) made by the Fund do not qualify for the dividends-received
deduction.
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.
Other
If the Fund has an "appreciated financial position" - generally, an
interest (including an interest through a 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 the gain
will be recognized at that time. A constructive sale generally consists of a
short sale entered into by the 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, acquisition of the underlying property or
substantially similar property will be deemed a constructive sale.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason, certain of its
affiliates and unaffiliated entities having an agreement 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
5
<PAGE>
maintained for individuals. Primary Shares are available to all other investors.
Future First Systematic Investment Plan and Transfer of Funds from Financial
Institutions
If you invest in Primary Shares, the Prospectus for those shares explains
that you may buy 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 Fund's transfer agent, to transfer funds each month from your Legg
Mason account or from your checking account to be used to buy Primary Shares at
the per share net asset value determined on the day the funds are sent from 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.
Investors in Primary Shares may also buy Primary Shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of the Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is drawn on, the
investor may be subject to extra charges in order to cover collection costs.
These charges may be deducted from the investor's shareholder account.
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 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 per share
determined as of the close of regular trading of the New York Stock Exchange
("Exchange") (normally 4:00 p.m., eastern time) ("close 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 per share 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. The 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 distributions, the
amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund if you
maintain a Systematic Withdrawal Plan, because you may incur tax liabilities in
connection with such purchases and withdrawals.
6
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The 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.
Other Information Regarding Redemption
The date of payment for redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, by the Fund or its
distributor except (i) for any period during which the Exchange is closed (other
than for customary weekend and holiday closings), (ii) when trading in markets
the Fund normally utilizes is restricted, or an emergency, as defined by rules
and regulations of the SEC, exists, making disposal of the Fund's investments or
determination of its net asset value not reasonably practicable, or (iii) for
such other periods as the SEC by regulation or order may permit for protection
of the Fund's shareholders. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.
The 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 in securities valued in
the same way as they would be valued for purposes of computing the Fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to 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. The Fund does not redeem "in kind" under normal circumstances,
but would do so where the adviser determines that it would be in the best
interests of the Fund's shareholders as a whole.
The Fund reserves the right to impose a redemption fee on the proceeds of
shares redeemed within one year of purchase. The redemption fee would be paid to
the Fund to reimburse the Fund for transaction costs it incurs in entering into
coordinated long and short positions and liquidating them in order to fund
redemptions. The fee would not be paid to either LMFA or Legg Mason.
VALUATION OF FUND SHARES
Net asset value of the Fund share is determined daily for each Class as of
the close of the Exchange, on every day the Exchange is open, by dividing the
value of the total assets attributable to that Class, less liabilities
attributable to that Class, by the number of shares of that Class outstanding.
Pricing will not be done on days when the Exchange is closed. The Exchange
currently observes the following holidays: New Year's Day, Presidents' Day,
Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, and Christmas. As described in the Prospectuses, securities
for which market quotations are readily available are valued at current market
value. Securities traded on an exchange or the NASDAQ Stock Market securities
are normally valued at last sale prices. Other over-the-counter securities, and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), are valued at the mean of latest closing bid and
asked prices. Securities with remaining maturities of 60 days or less are valued
at amortized cost. Securities and other assets quoted in foreign currencies will
be valued in U.S. dollars based on the currency exchange rates prevailing at the
time of the valuation. All other securities are valued at fair value as
determined by or under the direction of the Fund's Board of Directors. Premiums
received on the sale of call options are included in the net asset value of each
Class, and the current market value of options sold by the Fund will be
subtracted from net assets of each Class.
PERFORMANCE INFORMATION
General
From time to time each Fund may compare the performance of a Class of to
the performance of
7
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other investment companies, groups of investment companies, various market
indices, the features or performance of alternative investments, in
advertisements, sales literature and reports to shareholders. The Fund may also
include calculations, such as hypothetical compounding examples or tax-free
compounding examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an express set of
assumptions are not indicative of the performance of the Fund.
From time to time, the total return of the fund may be quoted in
advertisements, shareholder reports or other communications to shareholders.
Total Return Calculations
Average annual total return quotes used in the Fund's advertising and
other promotional materials ("Performance Advertisements") are calculated
separately for each Class 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 the Fund are assumed to have been
reinvested at net asset value on the reinvestment dates during the period.
The Fund may also cite rankings and ratings, and compare the return of a
Class with data published by Lipper Analytical Services, Inc. ("Lipper"), CDA
Investment Technologies, Inc., Wiesenberger Investment Company Services, Value
Line, Morningstar, and other services or publications that monitor, compare
and/or rank the performance of investment companies. The Fund may also refer in
such materials to mutual fund performance rankings, ratings, comparisons with
funds having similar investment objectives, and other mutual funds reported in
independent periodicals, including, but not limited to, FINANCIAL WORLD, MONEY
Magazine, FORBES, BUSINESS WEEK, BARRON'S, FORTUNE, THE KIPLINGER LETTERS, THE
WALL STREET JOURNAL, and THE NEW YORK TIMES.
The Fund may compare the investment return of a Class to the return on
certificates of deposit and other forms of bank deposits, and may quote from
organizations that track the rates offered on such deposits. Bank deposits are
insured by an agency of the federal government up to specified limits. In
contrast, Fund shares are not insured, the value of Fund shares may fluctuate,
and an investor's shares, when redeemed, may be worth more or less than the
investor originally paid for them. Unlike the interest paid on many certificates
of deposit, which remains at a specified rate for a specified period of time,
the return of each Class of Shares will vary.
Fund advertisements may reference the history of the distributor and its
affiliates, the education and experience of the portfolio manager, and the fact
that the portfolio manager engages in market neutral investing. With market
neutral investing, the Adviser establishes long positions in those securities it
believes to be undervalued in relation to the long-term earning power or asset
value of their issuers and establishes a similar dollar amount of short
positions in equity securities that it believes to be overvalued. 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. The Adviser
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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, the 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. The Fund may use other recognized
sources as they become available.
The 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.
The 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.
The Fund may also include in advertising biographical information on key
investment and managerial personnel.
The 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 price levels.
The Fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors meet their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisers for private accounts and mutual
funds with assets of more than $82.1 billion as of December 31, 1998.
In advertising, the Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of such plans until the
income is distributed to them. Primary Share investors who are considering
establishing an IRA, SEP, SIMPLE or other qualified retirement plan should
consult their attorneys or other tax advisers with respect to individual tax
questions. The option of investing in these plans with respect to Primary Shares
through regular payroll deductions may be arranged with a Legg Mason or
affiliated financial advisor and your employer. Additional information with
respect to these plans is available upon request from Financial Advisor or
Service Provider.
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<PAGE>
TRADITIONAL IRA. Certain Primary Share investors may obtain tax advantages
by establishing IRAs. 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 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 Fund 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, an
Education IRA provides 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, 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 makes available to corporate and other employers a SEP 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 instead may establish a SIMPLE either as separate IRAs or as
part of a Code section 401(k) plan. A SIMPLE, which is not subject to the
complicated nondiscrimination rules that generally apply to qualified retirement
plans, will allow certain employees to make elective contributions of up to
$6,000 per year and
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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 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 Fund's officers are responsible for the operation of the Fund under
the direction of the Board of Directors. The officers and directors of the Fund
and their principal occupations during the past five years are set forth below.
An asterisk (*) indicates officers and/or directors who are "interested persons"
of the Fund as defined by the 1940 Act. The business address of each officer and
director is 100 Light Street, Baltimore, Maryland 21202, unless otherwise
indicated.
JOHN F. CURLEY, JR.* [7/24/39], Chairman of the Board and Director;
Retired Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood
Walker, Incorporated; Chairman of the Board and Director of three Legg Mason
funds; Chairman of the Board, President and Trustee of one Legg Mason fund;
Chairman of the Board and Trustee of one Legg Mason fund. Formerly: Director of
Legg Mason Fund Adviser, Inc. and Western Asset Management Company (each a
registered investment adviser); Officer and/or Director of various other
affiliates of Legg Mason, Inc.
RICHARD G. GILMORE [6/9/27], Director; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are 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/Trustee of five other 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; and Director of
Finance, City of Philadelphia.
ARNOLD L. LEHMAN [7/18/44], Director; Director of the Brooklyn Museum of
Art; Director/Trustee of five other Legg Mason funds. Formerly: Director of the
Baltimore Museum of Art.
JILL E. McGOVERN [8/29/44], Director; 400 Seventh Street NW, Washington,
DC. Chief Executive Officer of the Marrow Foundation. Director/Trustee of five
other Legg Mason funds. Formerly: Executive Director of the Baltimore
International Festival (January 1991 - March 1993); and 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/Trustee of five other Legg Mason funds. Formerly: Director and Vice
President of Corporate Development, Polk Audio, Inc. (manufacturer of audio
components).
EDWARD A. TABER, III* [8/25/43], 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.; President and/or
Director/Trustee of four Legg Mason funds.
The executive officers of the Funds, other than those who also serve as
directors, are:
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<PAGE>
MARIE K. KARPINSKI* [1/1/49], Vice President and Treasurer; Treasurer of
the Adviser; Vice President and Treasurer of six other Legg Mason funds; Vice
President of Legg Mason.
KATHI D. BAIR* [12/15/64], Secretary; Secretary/Assistant Treasurer of
five other Legg Mason funds.
SUSAN L. SILVA* [3/29/67], Assistant Secretary; Assistant Secretary of one
other Legg Mason fund; employee of Legg Mason since January 1994.
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, Lehman, Rodgers and Dr. McGovern.
Officers and directors of the Fund who are "interested persons" of the
Fund receive no salary or fees from the Fund. Each Director who is not an
interested person of the Fund ("Independent Directors") receives an annual
retainer and a per meeting fee based on the average net assets of the Fund at
December 31, of the previous year.
The following table provides certain information relating to the
compensation of the Fund's directors for the calendar year ended December 31,
1998. The Fund has no retirement plan for its directors.
- ---------------------------- -------------------------- ------------------------
Name of Person and Position Aggregate Compensation Total Compensation From
From Fund* Fund and Fund Complex
Paid to Directors*
- ---------------------------- -------------------------- ------------------------
John F. Curley, Jr. -
Chairman of the Board and None None
Director
- ---------------------------- -------------------------- ------------------------
Arnold L. Lehman - Director $0 $30,600
- ---------------------------- -------------------------- ------------------------
Jill E. McGovern - Director $0 $35,100
- ---------------------------- -------------------------- ------------------------
Richard G. Gilmore - $0 $35,100
Director
- ---------------------------- -------------------------- ------------------------
T.A. Rodgers - Director $0 $35,100
- ---------------------------- -------------------------- ------------------------
Edward A. Taber - None None
President and Director
- ---------------------------- -------------------------- ------------------------
* Represents aggregate compensation paid to each director during the calendar
year ended December 31, 1998. There are eleven open-end investment companies in
the Legg Mason Complex (with a total of twenty funds).
THE FUND'S INVESTMENT ADVISER/MANAGER
LMFA, a Maryland Corporation, is located at 100 Light Street, Baltimore,
Maryland 21202. LMFA is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of Legg Mason and Batterymarch. LMFA serves as manager to the
Fund under a management agreement ("Management Agreement"). The Management
Agreement was approved by the Fund's sole shareholder on January 19, 1999.
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<PAGE>
The Management Agreement provides that, subject to overall direction by
the Fund's Board of Directors, LMFA oversees the investment and other affairs of
the Fund. LMFA is obligated to (a) furnish the Fund with office space and
executive and other personnel necessary for the operation 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 Fund's officers and
directors. LMFA and its affiliates pay all compensation of directors and
officers of the Fund who are officers, directors or employees of LMFA. The Fund
pays all of its expenses which are not expressly assumed by LMFA. These expenses
include, among others, interest expense, 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, distribution fees to Legg Mason, each Fund's
distributor, compensation of the independent directors, organizational expenses,
legal and audit expenses, insurance expense, shareholder meetings, proxy
solicitations, expenses of registering and qualifying Fund shares for sale under
federal and state law, governmental fees and expenses incurred in connection
with membership in investment company organizations. The Fund also is liable for
such nonrecurring expenses as may arise, including litigation to which it may be
a party. The Fund may also have an obligation to indemnify its directors and
officers with respect to litigation.
LMFA receives for its services to the Fund a management fee, calculated
daily and payable monthly at an annual rate of 1.90% of the average daily net
assets of the Fund. LMFA has agreed to waive its fees for expenses related to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) in excess of 3.00% of average net assets attributable to Primary
Shares until July 31, 1999. LMFA has agreed to waive its fees for expenses
related to Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of 2.00% of average net assets attributable to
Navigator Shares until July 31, 1999.
Under the Management Agreement, the 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.
Batterymarch, 200 Clarendon Street, Boston, Massachusetts 02116, an
affiliate of Legg Mason, serves as investment adviser to the Fund pursuant to an
Investment Advisory Agreement dated December 28, 1998, between Batterymarch 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" (as that term is defined in the 1940 Act) of the Corporation,
Batterymarch or LMFA, on August 7, 1998. The Advisory Agreement was approved by
Legg Mason Fund Adviser, Inc., as the Fund's sole shareholder, on January 19,
1999.
Under the Advisory Agreement, Batterymarch is responsible, subject to the
general supervision of LMFA and the Corporation's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making all
decisions and placing all orders to buy, sell or hold a particular security. For
Batterymarch's services to the Fund, LMFA (not the Fund) pays Batterymarch a
fee, computed daily and payable monthly, at an annual rate equal to 1.50% of the
Fund's average daily net assets, or 78.9% of the fee received by LMFA from the
Fund, net of any waivers by LMFA.
Under the Advisory Agreement and Management Agreement, LMFA and
Batterymarch will not be liable for any error of judgment or mistake of law or
for any loss by the Fund in connection with the performance of the Advisory
Agreement or Management 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 of its
obligations or duties under the respective Agreement.
The Advisory Agreement and Management Agreement terminate automatically
upon assignment and are terminable at any time without penalty by vote of the
Fund's Board of Directors, by vote of a
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<PAGE>
majority of the Fund's outstanding voting securities, or by LMFA and
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
all parties to the Agreement.
To mitigate the possibility that the Fund will be affected by personal
trading of employees, the Corporation and LMFA 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.
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.
Most of the Fund's brokerage transactions are carried out through a single
broker, designated as the Fund's "prime broker." The Fund may place its trades
with any one of a number of executing brokers. However, the prime broker
maintains an account with each executing broker, through which the Fund's trades
are processed. When the Fund sells a security short, the prime broker borrows
the security on the Fund's behalf, and the Fund posts collateral for the benefit
of the prime broker.
Under the Advisory Agreement with the Fund, the Adviser is responsible for
the execution of the Fund's portfolio transactions and must seek the most
favorable price and execution for such transactions, subject to the possible
payment, as described below, of higher brokerage commissions to brokers who
provide research and analysis. The Fund may not always pay the lowest commission
or spread available. Rather, in placing orders for the Fund the 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, the
Adviser may give consideration to research, statistical and other services
furnished by brokers or dealers to the Adviser for its use, may place orders
with brokers who provide supplemental investment and market research and
securities and economic analysis and may pay to these brokers a higher brokerage
commission than may be charged by other brokers. Such services include, without
limitation, advice as to the value of securities; the advisability of investing
in, purchasing, or selling securities; advice as to the availability of
securities or of purchasers or sellers of securities; and furnishing analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts. Such research and
analysis may be useful to the Adviser in connection with services to clients
other than the Fund whose brokerage generated the service. LMFA's and/or
Batterymarch's fee is not reduced by reason of its receiving such brokerage and
research services.
From time to time the Fund may use Legg Mason 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. 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 the over-the-counter
market, the Fund generally deals with responsible primary market-makers unless a
more favorable execution can otherwise be obtained.
Except as permitted by SEC rules or orders, the Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. The Fund's Board of Directors has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that
are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant.
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<PAGE>
These procedures, among other things, limit the Fund's investment in the amount
of securities of any class of securities offered in an underwriting in which
Legg Mason or any of its affiliated persons is a participant so that: the Fund
together with all other registered investment companies having the same adviser,
may not purchase more than 25% of the principal amount of the offering of such
class . In addition, the Fund may not purchase securities during the existence
of an underwriting if Legg Mason is the sole underwriter for those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg Mason
from executing transactions on an exchange for its affiliates, such as the Fund,
unless the affiliate expressly consents by written contract. The Fund's Advisory
Agreement expressly provides such consent.
Investment decisions for the Fund are made independently from those of
other funds and accounts advised by LMFA or Batterymarch. 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 FUND'S DISTRIBUTOR
Legg Mason acts as distributor of the Fund's shares pursuant to an
Underwriting Agreement with the Fund. The Underwriting Agreement obligates Legg
Mason to promote the sale of Fund shares and to pay certain expenses in
connection with its distribution efforts, including expenses for the printing
and distribution of prospectuses and periodic reports used in connection with
the offering to prospective investors (after the prospectuses and reports have
been prepared, set in type and mailed to existing shareholders at the Fund's
expense), and for supplementary sales literature and advertising costs.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc., with
principal offices at 721 Dresher Road, Horsham, Pennsylvania, may act as a
dealer for 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 Fund has adopted a Distribution and Shareholder Services Plan ("Plan")
which, among other things, permits the 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. Payments are made only from
assets attributable to Primary Shares. Under the Plans, the aggregate fees may
not exceed an annual rate of 1.00% of the Fund's average daily net assets
attributable to Primary Shares Distribution activities for which such payments
may be made include, but are not limited to, compensation to persons who engage
in or support distribution and redemption of Shares, printing of prospectuses
and reports for persons other than existing shareholders, advertising,
preparation and distribution of sales literature, overhead, travel and telephone
expenses, all with respect to Primary Shares only.
The Plan was approved by the Board of Directors of the Fund including a
majority of the directors who are not "interested persons" of the Fund 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") on August 7, 1998. Legg Mason may pay all or a portion of the fee to
its financial advisors.
With respect to Primary Shares, Legg Mason has also agreed to waive its
fees for the Fund as described under "The Funds' Investment Adviser/Manager."
In approving the establishment or continuation 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 the Fund and its Primary Class
shareholders. The directors considered, among other things, the extent to which
the potential benefits of the Plan to the Fund's Primary Class shareholders
could offset the costs of
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<PAGE>
the Plan; the likelihood that the Plan would succeed in producing such potential
benefits; the merits of certain possible alternatives to the Plan; and the
extent to which the retention of assets and additional sales of the Fund's
Primary Shares would be likely to maintain or increase the amount of
compensation paid by the Fund to the Adviser/LMFA.
In considering the costs of the Plan, the directors gave particular
attention to the fact that any payments made by the Fund to Legg Mason under the
Plan would increase the Fund's level of expenses in the amount of such payments.
Further, the directors recognized that the Adviser/LMFA would earn greater
investment advisory/management fees if the Fund's assets were increased, because
such fees are calculated as a percentage of the Fund's assets and thus would
increase if net assets increase. The directors further recognized that there can
be no assurance that any of the potential benefits described below would be
achieved if the Plan was implemented.
Among the potential benefits of the Plan, the directors noted that the
payment of commissions and service fees to Legg Mason and its investment
executives could motivate them to improve their sales efforts with respect to
the Fund's Primary Shares and to maintain and enhance the level of services they
provide to the Fund's Primary Class shareholders. These efforts, in turn, could
lead to increased sales and reduced redemptions, eventually enabling the Fund to
achieve economies of scale and lower per share operating expenses. Any reduction
in such expenses would serve to offset, at least in part, the additional
expenses incurred by the Fund in connection with the Plan. Furthermore, the
investment management of the Fund could be enhanced, as net inflows of cash from
new sales might enable its portfolio manager to take advantage of attractive
investment opportunities, and reduced redemptions could eliminate the potential
need to liquidate attractive securities positions in order to raise the funds
necessary to meet the redemption requests.
The Plan will continue in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated by a vote of a
majority of the 12b-1 Directors or by a vote of a majority of the outstanding
voting Primary Shares. Any change in the Plan that would materially increase the
distribution cost to the Fund requires shareholder approval; otherwise the Plan
may be amended by the directors, including a majority of the 12b-1 Directors, as
previously described.
In accordance with Rule 12b-1, the Plan provides that Legg Mason will
submit to the Fund's Board of Directors, and the directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.
THE FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts
02105, serves as custodian of the 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 assists BFDS with certain of its duties as transfer agent and
receives compensation from BFDS for its services. Shareholders who request an
historical transcript of their account will be charged a fee based upon the
number of years researched. The Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative costs.
THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036, serves as counsel to the Fund.
THE FUND'S INDEPENDENT ACCOUNTANTS
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<PAGE>
PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, MD 21201, has
been selected by the Directors to serve as independent accountants for the Fund.
FINANCIAL STATEMENTS
Audited financial statements reflecting the initial seed capital of the
Fund are included on the following page.
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LEGG MASON LIGHT STREET TRUST, INC.:
LEGG MASON MARKET NEUTRAL TRUST
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 15, 1999
Cash $100,000
Receivable from Legg Mason Fund
Adviser, Inc. $ 90,000
Deferred offering costs $ 33,000
---------
Total Assets $223,000
========
Payable to Legg Mason Fund Adviser,
Inc. $123,000
---------
Total Liabilities $123,000
========
NetAssets - Offering and redemption price of $10.00 per share with 10,000
shares outstanding (450,000,000
shares par value $.001 per share authorized) $100,000
========
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JANUARY 15, 1999
Expenses $90,000
Expenses in excess of the expense limit ($90,000)
---------
Net Income $ 0
=============
NOTES TO FINANCIAL STATEMENTS
A. Legg Mason Light Street Trust, Inc. ("Corporation") was organized on August
5, 1998. Legg Mason Market Neutral Trust ("Fund") has had no operations other
than those matters related to their organization and registration as an
investment company under the Investment Company Act of 1940 and the sale of its
shares. The Fund has two classes of shares, Primary Shares which are subject to
a Rule 12b-1 distribution fee and Navigator Shares which are offered only to
certain institutional investors and are not subject to a Rule 12b-1 distribution
fee. Legg Mason Fund Adviser, Inc. ("LMFA"), a wholly owned subsidiary of Legg
Mason, Inc. (a financial services holding company), has provided the initial
capital for the Fund by purchasing 10,000 shares of the Primary Class at $10.00
per share. Such shares were acquired for investment and can be disposed of only
by redemption. Legg Mason Wood Walker, Incorporated ("LMWW"), a wholly owned
subsidiary of Legg Mason, Inc. and a member of the New York Stock Exchange, acts
as the distributor of the Fund's shares.
B. Organization costs of the Fund have been expensed as incurred. Offering costs
have been deferred and will be expensed over a twelve-month period beginning the
day operations commence. Under the terms of the investment management agreement,
LMFA is required to bear any expenses through July 31, 1999, including
organization costs, which would cause the Fund's ratio of expenses to average
net assets to exceed a certain set percentage (the "percentage"). Thereafter,
through July 31, 2002, the Fund is required to reimburse LMFA for these
expenses, provided that average net assets have grown or
18
<PAGE>
expenses have declined sufficiently to allow reimbursement without causing the
Fund's ratio of expenses to average net assets to exceed the percentage. At
January 15, 1999, organization costs of $90,000 of the Fund have been borne by
LMFA and under the arrangement, are subject to reimbursement by the Fund through
January 15, 2002.
19
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Legg Mason Light Street Trust, Inc.
In our opinion, the accompanying statement of assets and liabilities and
the statement of operations present fairly, in all material respect, the
financial position of Legg Mason Light Street Trust, Inc. (which includes Legg
Mason Market Neutral Trust, hereafter referred to as the "Fund") at January 15,
1999, and the results of its operations for the fiscal period presented, in
conformity with generally accepted accounting principles. Theses financial
statements are the responsibility of the Fund's management, our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statements presentation. We believe that our
audit provided a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 19, 1999
20
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TABLE OF CONTENTS
PAGE
Additional Information About
Investment Limitations and Policies 2
Additional Tax Information 5
Additional Purchase and Redemption
Information 6
Valuation of Fund Shares 7
Performance Information 8
Tax-Deferred Retirement Plans - Primary Shares 10
The Corporation's Directors and Officers 11
The Fund's Investment Adviser/Manager 13
Portfolio Transactions and Brokerage 14
The Fund's Distributor 16
The Fund's Custodian and Transfer and
Dividend-Disbursing Agent 17
The Fund's Legal Counsel 17
The Fund's Independent Accountants 17
Financial Statements 17
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 the Fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by the
Fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
LEGG MASON WOOD WALKER,
INCORPORATED
100 LIGHT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410)539-0000 (800)822-5544
