As filed with the Securities and Exchange Commission on October 27, 1999.
1933 Act File No. 33-61525
1940 Act File No. 811-8943
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: ___ [ ]
Post-Effective Amendment No: 3 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 4
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LEGG MASON LIGHT STREET TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
MARIE K. KARPINSKI ARTHUR J. BROWN, ESQ.
100 Light Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on NOVEMBER 1, 1999 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on __________ pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on __________, 1999 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[___] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason Light Street Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Contents of Registration Statement
Legg Mason Classic Valuation Fund
- --------------------------------------------------
Part A - Prospectus
Legg Mason Classic Valuation Fund
- --------------------------------------------------
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Light Street Trust, Inc.
Legg Mason Classic Valuation Fund
PRIMARY SHARES PROSPECTUS November 1, 1999
logo
HOW TO INVEST SM
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
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T A B L E O F C O N T E N T S
A b o u t t h e f u n d:
xx Investment objective
xx Principal risks
xx Fees and expenses of the fund
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Distributions and taxes
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[icon] I N V E S T M E N T O B J E C T I V E
LEGG MASON CLASSIC VALUATION FUND:
INVESTMENT OBJECTIVE: long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities, such as common stock, that, in
the adviser's opinion, offer the potential for capital growth. The adviser seeks
to identify undervalued or out-of-favor companies that are likely to return to
their normal value. The adviser considers normal value to be a stock's
historical average price-to-current earnings, price-to-book, price-to-cash-flow,
or price-to-sales ratios. The adviser considers stocks trading at a discount to
these historical averages and at a discount to the market to be undervalued. In
order to identify such securities, the adviser combines two investment
techniques: it quantitatively screens characteristics to identify stocks that
are undervalued, then it fundamentally analyzes stocks to identify those that it
believes have the ability to return to their normal value. From a universe of
about 8,000 publicly traded companies, the adviser uses quantitative screens to
identify a sub-universe of about 400 to 500 stocks of companies that typically
have market capitalizations of greater than $750 million and have low
price-to-current earnings, low price-to-book, low price-to-cash-flow, or low
price-to-sales ratios. The adviser continues the initial screening to identify
those companies that it believes are priced well below their historic values or
the current values of similar companies in the same industry. From that group of
approximately 150 stocks, the adviser applies a fundamental analysis in order to
select approximately 70 to 90 securities for the portfolio. The adviser's
fundamental analysis focuses on understanding the risks of a company's business
and identifying companies that have the best potential of returning to their
normal value or a normal value relative to their industries.
The adviser typically sells a security when, in the adviser's assessment, it is
no longer undervalued compared to its normal market value or its ability to
return to that level of value has deteriorated.
The fund may invest in money market securities for temporary defensive purposes,
or when cash is temporarily available. The fund may not achieve its investment
objective when so invested.
3
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[icon] P R I N C I P A L R I S K S
IN GENERAL
Investors could lose money by investing in the fund. There is no assurance that
the fund will meet its investment objective. As with all mutual funds, an
investment in this fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
MARKET RISK -
Prices of equity securities generally fluctuate more than those of other
securities, such as debt securities. The fund may experience a substantial or
complete loss on an individual stock. Market risk, the risk that stock prices
will go down, may affect a single issuer, an industry or sector of the economy
or may affect the market as a whole.
STYLE RISK -
The value approach to investing involves the risk that those stocks may remain
undervalued. Value stocks as a group may be out of favor for a long period of
time, while the market concentrates on "growth" stocks. Moreover, at different
times, the value approach may favor certain industries or sectors over others,
making fund performance especially subject to the performance of the specific
industries and sectors that are selected by the adviser.
INVESTMENT MODELS -
The proprietary model used by the adviser to evaluate securities and securities
markets is based on the adviser's understanding of the interplay of market
factors and does not assure successful investment. The markets, or the prices of
individual securities, will, at times, be affected by factors not accounted for
by the model.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the fund
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the fund, its adviser, distributor and other
outside service providers and could impact companies in which the fund invests.
While no one knows if these problems will have any impact on the fund or on
financial markets in general, the adviser and its affiliates and the other
service providers to the fund have reported that they are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain after
December 31, 1999.
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[icon] F E E S A N D E X P E N S E S O F T H E F U N D
The tables below describe the fees and expenses you will incur directly or
indirectly as an investor in the fund. The fund pays operating expenses directly
out of its assets so they lower the fund's share price and dividends. Other
expenses include transfer agency, custody, professional and registration fees.
The fees shown are current fees. The fees and expenses are shown as a percentage
of average net assets.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- -------------------------------------------------
CLASSIC VALUATION
FUND
- -------------------------------------------------
Management fees(b) 0.75%
- -------------------------------------------------
Distribution and Service 1.00%
(12b-1) fees
- -------------------------------------------------
Other expenses(a) 0.92%
- -------------------------------------------------
Total Annual Fund Operating 2.67%
Expenses
- -------------------------------------------------
Fee Waivers and Expense 0.67%
Reimbursement(b)
- -------------------------------------------------
Net Annual Fund Operating 2.00%
Expenses
- -------------------------------------------------
(a) "Other expenses" are based on estimated expenses for the fiscal year
ending October 31, 2000.
(b) The manager has contractually agreed to waive fees so that Primary Share
expenses (exclusive of taxes, interest, brokerage and extraordinary expenses)
do not exceed an annual rate of 2.00% of average daily net assets until
December 31, 2000.
EXAMPLE:
This example helps you compare the cost of investing in the fund with the cost
of investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in the fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
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1 YEAR 3 YEARS
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Classic Valuation Fund $203 $766
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5
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[icon] M A N A G E M E N T
MANAGEMENT AND ADVISERS:
Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202 provides the fund with investment management and administrative services
and oversees the fund's relationships with outside service providers, such as
the sub-adviser, custodian, transfer agent, accountants, and lawyers.
LMFA acts as manager or adviser to investment companies with aggregate assets of
$18.9 billion as of September 30, 1999.
LMFA has delegated investment advisory responsibilities to Brandywine Asset
Management, Inc., 201 North Walnut Street, Wilmington, Delaware 19801.
Brandywine is responsible for the actual investment management of this fund,
which includes making investment decisions and placing orders to buy or sell
particular securities. LMFA pays Brandywine a monthly fee of 60% of the fee it
receives from the fund. Fees paid to Brandywine are net of any waivers.
Brandywine acts as investment adviser to 6 investment companies with aggregate
assets of $772 million as of September 30, 1999.
PORTFOLIO MANAGEMENT:
The portfolio is managed by a team of analysts and managers at Brandywine led by
W. Anthony Hitschler, Stephen Smith and Alexander Cutler. Mr. Hitschler has been
President and Chief Investment Officer of Brandywine since 1986. Prior to
founding Brandywine, Mr. Hitschler was with Provident Capital Management, and
served as President and Chief Executive Officer of that company for nine years.
Mr. Smith, Executive Vice President of Brandywine, is responsible for equity and
fixed income management at Brandywine. Prior to joining Brandywine in 1991, Mr.
Smith was with Mitchell Hutchins as Managing Director of Taxable Fixed Income.
Mr. Cutler is currently a Managing Director of Brandywine. Since joining
Brandywine in 1994, Mr. Cutler has shared responsibility for portfolio
management and research for all of Brandywine's equity products.
DISTRIBUTOR OF THE FUND'S SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of the fund's shares. The fund has adopted a plan that
allows it to pay distribution fees and shareholder service fees for the sale of
its shares and for services provided to shareholders. Under the plan, the fund
may pay the distributor an annual distribution fee equal to 0.75% of the fund's
average daily net assets and an annual service fee equal to 0.25% of its average
daily net assets attributable to Primary Shares.
Because these fees are paid out of the fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell Primary
Shares of the fund. The distributor pays these brokers up to 90% of the
distribution and service fee that it receives from the fund for those sales.
The adviser and distributor are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
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[icon] H O W T O I N V E S T
To open a regular account or a retirement account with the fund, contact a Legg
Mason financial adviser or other entity that has entered into an agreement with
the fund's distributor to sell shares of the Legg Mason family of funds. A Legg
Mason financial adviser will explain the shareholder services available from the
fund and answer any questions you may have. The minimum initial investment is
$1,000 and the minimum for each purchase of additional shares is $100, except as
noted below.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs, Roth
IRAs, simplified employee pension plans, savings incentive match plans for
employees and other qualified retirement plans. Contact your Legg Mason
financial adviser or other entity offering the funds to discuss which one might
be appropriate for you.
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
------------------------------------------------------------------------
IN PERSON Give your FINANCIAL adviser a check for $100 or more
payable to the fund
------------------------------------------------------------------------
MAIL Mail your check, payable to the fund, for $100 or more
to your financial adviser
------------------------------------------------------------------------
TELEPHONE OR Call your financial adviser to transfer available cash
WIRE balances in your brokerage account or to transfer
money from your bank directly to Legg Mason. Wire
transfers may be subject to a service charge by your
bank.
------------------------------------------------------------------------
FUTURE FIRST Contact your Legg Mason financial adviser to enroll in
SYSTEMATIC Legg Mason's Future First Systematic Investment Plan.
INVESTMENT PLAN Under this plan, you may arrange for automatic monthly
investments in the fund of $50 or more. The fund's
transfer agent will transfer funds monthly from your
Legg Mason account or from your checking account to purchase
shares of that fund.
------------------------------------------------------------------------
AUTOMATIC Arrangements may be made with some employers and
INVESTMENTS financial institutions for regular automatic monthly
investments of $50 or more in shares of the fund. YOU may
also reinvest dividends from certain unit investment trusts
in shares of the fund.
------------------------------------------------------------------------
Call your financial adviser or another entity offering the fund for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
7
<PAGE>
Purchase orders received by your financial adviser or the entity offering the
fund before the close of the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) will be processed at the fund's net asset value as of the close of
the exchange on that day. Orders received after the close of the exchange will
be processed at the fund's net asset value as of the close of the exchange on
the next day the exchange is open. Payment must be made within three business
days to Legg Mason.
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[icon] H O W T O S E L L Y O U R S H A R E S
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. You should
consult their program literature for further information.
Any of the following methods may be used to sell your shares:
-----------------------------------------------------------------------------
TELEPHONE Call your Legg Mason financial adviser or entity offering the
fund and request a redemption. 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.
Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you.
Wire requests will be subject to a fee of $18. Be sure that
your financial adviser has your bank account information on
file.
The fund will follow REASONABLE procedures to ensure the
validity of any telephone redemption request, such as requesting
identifying information from callers or employing identification
numbers. Unless you specify that you do not wish to have
telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
- -----------------------------------------------------------------------------
MAIL Send a letter to the fund requesting redemption of your
shares. The letter should be signed by all of the owners of
the account and their signatures guaranteed without
qualification. You may obtain a signature guarantee from most
banks or securities dealers.
- -----------------------------------------------------------------------------
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial adviser or another entity.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of distributions on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
The fund has reserved the right under certain conditions to redeem its shares in
kind by distributing portfolio securities in payment for redemptions.
9
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Primary Share is determined daily as of the close of the New
York Stock Exchange, on every day the exchange is open. To calculate the fund's
Primary Share price, the fund's assets attributable to Primary Shares are valued
and totaled, liabilities attributable to Primary Shares are subtracted, and the
resulting net assets are divided by the number of Primary Shares outstanding.
The fund's securities are valued on the basis of market quotations or, lacking
such quotations, at fair value as determined under procedures established by the
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. The fund will value its foreign
securities in U.S. dollars on the basis of the then-prevailing exchange rates.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds. The fund will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
The fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The fund may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
10
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
For further information regarding any of the services below, please contact your
financial adviser or other entity offering the fund for sale.
CONFIRMATIONS AND ACCOUNT STATEMENTS:
You will receive from Legg Mason a confirmation after each transaction involving
Primary Shares (except a reinvestment of dividends, capital gain distributions
and purchases made through the Future First Systematic Investment Plan or
through automatic investments). Legg Mason or the entity through which you
invest will send you account statements monthly unless there has been no
activity in the account, in which case a statement will be sent to you
quarterly. Legg Mason will send you statements quarterly if you participate in
the Future First Systematic Investment Plan or if you purchase shares through
automatic investments.
SYSTEMATIC WITHDRAWAL PLAN:
If you are purchasing or already own shares with a net asset value of $5,000 or
more, you may elect to make systematic withdrawals from the fund. The minimum
amount for each withdrawal is $50. If you are making withdrawals from the fund
pursuant to the systematic withdrawal plan, then you should not purchase shares
of the fund.
EXCHANGE PRIVILEGE:
Primary fund shares may be exchanged for Primary Shares of any of the other Legg
Mason funds, provided these funds are eligible for sale in your state of
residence. You can request an exchange in writing or by phone. Be sure to read
the current prospectus for any fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. In addition, an exchange of a
fund's shares will be treated as a sale of the shares and any gain on the
transaction may be subject to tax.
The fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' written notice
to shareholders
11
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[icon] D I S T R I B U T I O N S A N D T A X E S
The fund declares dividends and distributions of net capital gains to holders of
Primary Shares following the end of each taxable year.
Your dividends and other distributions will be automatically reinvested in
additional Primary Shares of the fund. If you wish to begin receiving dividends
and/or other distributions in cash, you must notify the fund at least 10 days
before the next dividend and/or other distribution is to be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and other distributions are taxable to investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional shares of the fund. Dividends from investment company
taxable income (which includes net investment income and net short-term capital
gains) are taxable as ordinary income. Distributions of the fund's net capital
gain are taxable as long-term capital gain, regardless of how long you have held
your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to you after the end of each year detailing the tax
status of your distributions.
The fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. The fund will also withhold 31% of all dividends and capital gain
distributions payable to such shareholders who are otherwise subject to backup
withholding.
Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.
12
<PAGE>
L e g g M a s o n C l a s s i c V a l u a t i o n F u n d
The following additional information about the fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
the fund and its policies.
ANNUAL AND SEMI-ANNUAL REPORTS - Additional information about the Fund's
investments will be available in the Fund's annual and semi-annual reports to
shareholders. These reports will provide detailed information about the Fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the fund, including the SAI, can be reviewed and copied at the
SEC's public reference room in Washington, DC (phone 1-800-SEC-0330). Reports
and other information about each fund are available on the SEC's Internet site
at http://www.sec.gov. Investors may also write to: SEC, Public Reference
Section, Washington, DC 20549-6009. A fee will be charged for making copies.
LMF- SEC file number:811-8943
<PAGE>
LEGG MASON LIGHT STREET TRUST, INC.
LEGG MASON CLASSIC VALUATION FUND
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Primary Shares Prospectus for the Fund (dated
November 1, 1999), which has been filed with the Securities and Exchange
Commission ("SEC"). A copy of the Prospectus may be obtained without charge from
the Fund's distributor, Legg Mason Wood Walker, Incorporated, at 1-800-822-5544.
Legg Mason Wood Walker,
Incorporated
100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410)539-0000 (800)822-5544
<PAGE>
TABLE OF CONTENTS
Page
DESCRIPTION OF THE FUND......................................................3
FUND POLICIES................................................................3
INVESTMENT STRATEGIES AND RISKS..............................................4
ADDITIONAL TAX INFORMATION..................................................17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................20
VALUATION OF FUND SHARES....................................................21
PERFORMANCE INFORMATION.....................................................22
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES..............................23
MANAGEMENT OF THE FUND......................................................25
THE FUND'S INVESTMENT ADVISER/MANAGER.......................................27
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................28
THE FUND'S DISTRIBUTOR......................................................29
CAPITAL STOCK INFORMATION...................................................30
THE FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT.............31
THE FUND'S LEGAL COUNSEL....................................................31
THE FUND'S INDEPENDENT ACCOUNTANTS..........................................31
Appendix A..................................................................32
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or this Statement of Additional
Information in connection with the offerings 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 and this
Statement of Additional Information do not constitute offerings by any fund or
by the distributor in any jurisdiction in which such offerings may not lawfully
be made.
2
<PAGE>
DESCRIPTION OF THE FUND
Legg Mason Light Street Trust, Inc. ("Light Street Trust") is a diversified
open-end investment company that was established as a Maryland corporation on
August 5, 1998. Legg Mason Classic Valuation Fund ("Classic Valuation Fund") is
a separate series of Light Street Trust.
FUND POLICIES
CLASSIC VALUATION FUND's investment objective is to seek long-term growth
of capital.
In addition to the investment objective described in the Prospectus, the
Fund has adopted certain fundamental investment limitations that cannot be
changed except by vote of its shareholders.
Classic Valuation Fund may not:
1. Borrow money, except that the Fund may borrow money in an amount
not exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings);
2. Issue senior securities, except as permitted under the 1940 Act;
3. Underwrite the securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended, in
disposing of a portfolio security;
4. Purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
5. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;
6. Purchase or sell physical commodities; however, this policy shall not
prevent the Fund from purchasing and selling foreign currency, futures
contracts, options, forward contracts, swaps, caps, floors, collars and other
financial instruments;
7. Lend any security or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does not
apply to the purchase of debt securities or to repurchase agreements;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
The foregoing limitations may be changed with respect to the Fund 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.
3
<PAGE>
The following are some of the non-fundamental limitations that the Fund
currently observes. The Fund may not:
1. Sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short) or
purchase securities on margin, except that (i) this policy does not prevent the
Fund from entering into short positions in foreign currency, futures contracts,
options, forward contracts, swaps, caps, floors, collars and other financial
instruments, (ii) the Fund may obtain such short-term credits as are necessary
for the clearance of transactions, and (iii) the Fund may make margin payments
in connection with futures contracts, options, forward contracts, swaps, caps,
floors, collars and other financial instruments; or
2. Acquire additional securities if its borrowings exceed 5% of its total
assets.
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.
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.
INVESTMENT STRATEGIES AND RISKS
This section supplements the information in the Prospectus concerning the
investments the Fund may make and the techniques the Fund may use. The Fund,
unless otherwise stated, may employ several investment strategies, including but
not limited to:
FOREIGN SECURITIES
The Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from fluctuations
in currency exchange rates, revaluation of currencies, future political and
economic developments and the possible imposition of currency exchange blockages
or other foreign governmental laws or restrictions, reduced availability of
public information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or other regulatory practices and requirements comparable to those
applicable to domestic issuers. These risks are intensified when investing in
countries with developing economies and securities markets, also known as
"emerging markets." Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation, confiscatory taxation, withholding taxes and limitations on
the use or removal of funds or other assets.
The costs associated with investment in foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, are higher than
those associated with investment in domestic issuers. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in liability to the purchaser.
Since the Fund may invest in securities denominated in currencies other
than the U.S. dollar and since the Fund may hold foreign currencies, the Fund
may be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rates between such currencies and the U.S. dollar.
Changes in the currency exchange rates may influence the value of the Fund's
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shares, and also may affect the value of dividends and interest earned by the
Fund and gains and losses realized by the Fund. Exchange rates are determined by
the forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments, other economic and
financial conditions, government intervention, speculation and other factors.
In addition to purchasing foreign securities, the Fund may invest in ADRs.
Generally, ADRs, in registered form, are denominated in U.S. dollars and are
designed for use in the domestic market. Usually issued by a U.S. bank or trust
company, ADRs are receipts that demonstrate ownership of the underlying
securities. For purposes of the Fund's investment policies and limitations, ADRs
are considered to have the same classification as the securities underlying
them. ADRs may be sponsored or unsponsored; issuers of securities underlying
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. Accordingly, there may be less information available
about such issuers than there is with respect to domestic companies and issuers
of securities underlying sponsored ADRs. The Fund may also invest in GDRs, which
are receipts, often denominated in U.S. dollars, issued by either a U.S. or
non-U.S. bank evidencing its ownership of the underlying foreign securities.
Although not a fundamental policy subject to shareholder vote, the adviser
currently anticipates the Fund will invest no more than 15% of its total assets
in foreign securities either directly or through ADRs or GDRs.
ILLIQUID SECURITIES
The Fund may invest up to 15% 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
to the Fund has determined are liquid pursuant to guidelines established by the
Fund's Board of Directors. Due to the absence of an active trading market, the
Fund may have difficulty valuing or disposing of illiquid securities promptly.
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.
DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of the
issuer's creditworthiness and also tend to vary inversely with market interest
rates. The value of such securities is likely to decline in times of rising
interest rates. Conversely, when rates fall, the value of these investments is
likely to rise. The longer the time to maturity the greater are such variations.
Generally, debt securities rated below BBB by Standard & Poor's ("S&P"),
or below Baa by Moody's Investors Service, Inc. ("Moody's"), and unrated
securities of comparable quality, offer a higher current yield than that
provided by higher grade issues, but also involve higher risks. Debt securities
rated C by Moody's and S&P are bonds on which no interest is being paid and
which can be regarded as having extremely poor prospects of ever attaining any
real investment standing. However, debt securities, regardless of their ratings,
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generally have a higher priority in the issuer's capital structure than do
equity securities.
Lower-rated debt securities are especially affected by adverse changes in
the industries in which the issuers are engaged and by changes in the financial
condition of the issuers. Highly leveraged issuers may also experience financial
stress during period of rising interest rates. Lower-rated debt securities are
also sometimes referred to as "junk bonds."
The market for lower-rated debt securities has expanded rapidly in recent
years. This growth has paralleled a long economic expansion. At certain times in
the past, the prices of many lower-rated debt securities declined, indicating
concerns that issuers of such securities might experience financial
difficulties. At those time, the yields on lower-rated debt securities rose
dramatically reflecting the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuer's financial
restructuring or default. There can be no assurance that such declines will not
recur.
The market for lower-rated debt securities is generally thinner and less
active than that for higher quality debt securities, which may limit the Fund's
ability to sell such securities at fair value. Judgment plays a greater role in
pricing such securities than is the case for securities having more active
markets. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market.
The ratings of S&P and Moody's represent the opinions of those agencies.
Such ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as many buyers. A description of
the ratings assigned to corporate debt obligations by Moody's and S&P is
included in Appendix A.
In addition to ratings assigned to individual bond issues, the adviser
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which the Fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial conditions of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
may be a wide variation in the quality of bonds, both within a particular
classification and between classifications. A bond issuer's obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of bond holders or other creditors of an issuer; litigation
or other conditions may also adversely affect the power or ability of bond
issuers to meet their obligations for the payment of principal and interest.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Fund's adviser to determine, to
the extent possible, that the planned investment is sound.
PREFERRED STOCK (The Fund does not currently intend to invest in preferred
stock)
The Fund may purchase preferred stock as a substitute for debt securities
of the same issuer when, in the opinion of the adviser, the preferred stock is
more attractively priced in light of the risks involved. Preferred stock pays
dividends at a specified rate and generally has preference over common stock in
the payment of dividends and the liquidation of the issuer's assets but is
junior to the debt securities of the issuer in those same respects. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors. Shareholders may
suffer a loss of value if dividends are not paid. The market prices of preferred
stocks are subject to changes in interest rates and are more sensitive to
changes in the issuer's creditworthiness than are the prices of debt securities.
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CONVERTIBLE SECURITIES (The Fund does not currently intend to invest in
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.
If an investment grade security purchased by the Fund is subsequently
given a rating below investment grade, the adviser will consider that fact in
determining whether to retain that security in the Fund's portfolio, but is not
required to dispose of it.
CORPORATE DEBT SECURITIES (The Fund does not currently intend to invest in
corporate debt securities)
Corporate debt securities may pay fixed or variable rates of interest, or
interest at a rate contingent upon some other factor, such as the price of some
commodity. These securities may be convertible into preferred or common equity,
or may be bought as part of a unit containing common stock. In selecting
corporate debt securities for the Fund, the adviser reviews and monitors the
creditworthiness of each issuer and issue. The adviser also analyzes interest
rate trends and specific developments which it believes may affect individual
issuers.
WHEN-ISSUED SECURITIES (The Fund does not currently intend to invest in
when-issued securities)
The Fund may enter into commitments to purchase securities on a
when-issued basis. Such securities are often the most efficiently priced and
have the best liquidity in the bond market. When the Fund purchases securities
on a when-issued basis, it assumes the risks of ownership at the time of the
purchase, not at the time of receipt. However, the Fund does not have to pay for
the obligations until they are delivered to it. This is normally seven to 15
days later, but could be longer. Use of this practice would have a leveraging
effect on the Fund. Typically, no interest accrues to the purchaser until the
security is delivered.
To meet its payment obligation under a when-issued commitment, the Fund
will establish a segregated account with its custodian and maintain cash or
appropriate liquid securities, in an amount at least equal in value to the
Fund's commitments to purchase when-issued securities.
The Fund may sell the securities underlying a when-issued purchase, which
may result in capital gains or losses.
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COVERED CALL OPTIONS (The Fund does not currently intend to invest in covered
call options)
The Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, the Fund might write covered call options on
securities generally when the adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by the Fund declines, the amount of such decline will be offset wholly or in
part by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. The Fund would give up the ability to sell the portfolio
securities used to cover the call option while the call option was outstanding.
In addition, the Fund could lose the ability to participate in an increase in
the value of such securities above the exercise price of the call option because
such an increase would likely be offset by an increase in the cost of closing
out the call option.
If the Fund desires to close out its obligation under a call option it has
sold, it will have to purchase an offsetting option. The value of an option
position will reflect, among other things, the current market price of the
underlying security, futures contract or currency, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, and general market
conditions. Accordingly, when the price of the security rises toward the strike
price of the option, the cost of offsetting the option will negate to some
extent the benefit to the Fund of the price increase of the underlying security.
For this reason, the successful use of options as an income strategy depends
upon the adviser's ability to forecast the direction of price fluctuations in
the underlying market or market sector.
The Fund may write exchange-traded options. The ability to establish and
close out positions on the exchange is subject to the maintenance of a liquid
secondary market. Although the Fund intends to write only those exchange-traded
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any specific time. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, because the Fund must maintain a covered position with respect to any
call option it writes on a security, the Fund may not sell the underlying
security during the period it is obligated under such option. This requirement
may impair the Fund's ability to sell a portfolio security or make an investment
at a time when such a sale or investment might be advantageous.
The Fund will not enter into an options position that exposes it to an
obligation to another party unless it owns an offsetting ("covering") position
in securities or other options. The Fund will comply with guidelines established
by the SEC with respect to coverage of these strategies by mutual funds, and, if
the guidelines so require, will set aside cash and/or appropriate liquid
securities in a segregated account with its custodian in the amount prescribed,
as marked-to-market daily. Securities positions used for cover and securities
held in a segregated account cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
INDEXED SECURITIES (The Fund does not currently intend to invest in indexed
securities)
Indexed securities are securities whose prices are indexed to the prices
of securities indexes, currencies or other financial statistics. Indexed
securities typically are debt securities or deposits whose value at maturity
and/or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities fluctuates (either directly or
inversely, depending upon the instrument) with the performance of the index,
security, currency or other instrument to which they are indexed and may also be
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influenced by interest rate changes in the U.S. and abroad. At the same time,
indexed securities are subject to the credit risks associated with the issuer of
the security, and their value may substantially decline if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations and certain U.S. government agencies. The U.S.
Treasury recently began issuing securities whose principal value is indexed to
the Consumer Price Index (also known as "Treasury Inflation-Protection
Securities"). The Fund will only purchase indexed securities of issuers which
its adviser determines present minimal credit risks and will monitor the
issuer's creditworthiness during the time the indexed security is held. The
adviser will use its judgment in determining whether indexed securities should
be treated as short-term instruments, bonds, stock or as a separate asset class
for purposes of the fund's investment allocations, depending on the individual
characteristics of the securities. The Fund currently does not intend to invest
more than 5% of its net assets in indexed securities. Indexed securities may
fluctuate according to a multiple of changes in the underlying instrument and,
in that respect, have a leverage-like effect on the Fund.
STRIPPED SECURITIES (The Fund does not currently intend to invest in stripped
securities)
Stripped securities are created by separating bonds into their principal
and interest components and selling each piece separately (commonly referred to
as IOs and POs). Stripped securities are more volatile than other fixed income
securities in their response to changes in market interest rates. The value of
some stripped securities moves in the same direction as interest rates, further
increasing their volatility.
ZERO COUPON BONDS (The Fund does not currently intend to invest in zero coupon
bonds)
Zero coupon bonds do not provide for cash interest payments but instead
are issued at a significant discount from face value. Each year, a holder of
such bonds must accrue a portion of the discount as income. Because the Fund is
required to pay out substantially all of its income each year, including income
accrued on zero coupon bonds, the Fund may have to sell other holdings to raise
cash necessary to make the payout. Because issuers of zero coupon bonds do not
make periodic interest payments, their prices can be very volatile when market
interest rates change.
CLOSED-END INVESTMENT COMPANIES (The Fund does not currently intend to invest in
closed-end investment companies)
The Fund may invest in the securities of closed-end investment companies.
Such investments may involve the payment of substantial premiums above the net
asset value of such issuers' portfolio securities, and the total return on such
investments will be reduced by the operating expenses and fees of such
investment companies, including advisory fees. The Fund will invest in such
funds, when, in the adviser's judgment, the potential benefits of such
investment justify the payment of any applicable premium or sales charge.
FUTURES AND OPTIONS (The Fund does not currently intend to invest in futures
and options)
The Fund can invest in futures and options transactions, including puts
and calls. Because such investments "derive" their value from the value of the
underlying security, index, or interest rate on which they are based, they are
sometimes referred to as "derivative" securities. Such investments involve risks
that are different from those presented by investing directly in the securities
themselves. While utilization of options, futures contracts and similar
instruments may be advantageous to the fund, if the adviser is not successful in
employing such instruments in managing the Fund's investments, the Fund's
performance will be worse than if the Fund did not make such investments.
The Fund may engage in futures strategies to attempt to reduce the overall
investment risk that would normally be expected to be associated with ownership
of the securities in which each invests. For example, the Fund may sell a stock
index futures contract in anticipation of a general market or market sector
decline that could adversely affect the market value of the Fund's portfolio. To
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the extent that the Fund's portfolio correlates with a given stock index, the
sale of futures contracts on that index would reduce the risks associated with a
market decline and thus provide an alternative to the liquidation of securities
positions. The Fund may sell an interest rate futures contract to offset price
changes of debt securities it already owns. This strategy is intended to
minimize any price changes in the debt securities the Fund owns (whether
increases or decreases) caused by interest rate changes, because the value of
the futures contact would be expected to move in the opposite direction from the
value of the securities owned by the Fund.
The Fund may purchase call options on interest rate futures contracts to
hedge against a market advance in debt securities that the Fund plans to advance
in debt securities that the Fund plans to acquire at a future date. The purchase
of such options is analogous to the purchase of call options on an individual
debt security that can be used as a temporary substitute for a position in the
security itself. The Fund may purchase put options on stock index futures
contracts. This is analogous to the purchase of protective put options on
individual stocks were a level of protection is sought below which no additional
economic loss would be incurred by the Fund. The Fund may purchase and write
options in combination with each other to adjust the risk and return of the
overall position. For example, the Fund may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract.
The Fund may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the value of
the put option would be expected to rise and off-set all or a portion of the
Fund's resulting losses in its stock holdings. However, option premiums tend to
decrease over time as the expiration date nears. Therefore, because of the costs
of the option (in the form of premium and transaction costs), the Fund would
expect to suffer a loss in the put option if prices do not decline sufficiently
to offset the deterioration in the value of the option premium.
The Fund may write put options as an alternative to purchasing actual
securities. If stock prices rise, the Fund would expect to profit from a written
put option, although its gain would be limited to the amount of the premium it
received. If stock prices remain the same over time, it is likely that the Fund
will also profit, because it should be able to close out the option at a lower
price. If stock prices fall, the Fund would expect to suffer a loss.
By purchasing a call option, the Fund would attempt to participate in
potential price increases of the underlying stock, with results similar to those
obtainable from purchasing a futures contract, but with risk limited to the cost
of the option if stock prices fell. At the same time, the Fund can expect to
suffer a loss if stock prices do not rise sufficiently to offset the cost of the
option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, the Fund would seek to mitigate the
effects of a price decline. At the same time, when writing call options the Fund
would give up some ability to participate in security price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and also
require different skills from the advisers in managing the Fund's portfolio.
While utilization of options, futures contracts and similar instruments may be
advantageous to the Fund, if the adviser is not successful in employing such
instruments in managing the Fund's investments or in predicting interest rate
changes, the Fund's performance will be worse than if the Fund did not make such
investments. It is possible that there will be imperfect correlation, or even no
correlation, between price movements of the investments being hedged and the
options or futures used. It is also possible that the Fund may be unable to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or that the Fund may need to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate securities in connection with hedging transactions and
that the Fund may be unable to close out or liquidate its hedge position. In
addition, the Fund will pay commissions and other costs in connection with such
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investments, which may increase the Fund's expenses and reduce its yield. The
Fund's current policy is to limit options and futures transactions to those
described above. The Fund may purchase and write both over-the-counter and
exchange-traded options.
The Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related options
and premiums paid for related options the Fund has purchased would exceed 5% of
the Fund's total assets. The Fund will not purchase futures contracts or related
options if, as a result, more than 20% of the Fund's total assets would be so
invested.
FUTURES CONTRACTS
The Fund may from time to time purchase or sell futures contracts. In the
purchase of a futures contract, the purchaser agrees to buy a specified
underlying instrument at a specified future date. In the sale of a futures
contract, the seller agrees to sell the underlying instrument at a specified
future date. The price at which the purchase or sale will take place is fixed at
the time the contract is entered into. Some currently available contracts are
based on specific securities, such as U.S. Treasury bonds or notes, and some are
based on indexes of securities such as S&P 500. Futures contracts can be held
until their delivery dates, or can be closed out before then, if a liquid
secondary market is available. A futures contract is closed out by entering into
an opposite position in an identical futures contract (for example, by
purchasing a contract on the same instrument and with the same delivery date as
a contract the party had sold) at the current price as determined on the futures
exchange.
As the purchaser or seller of a futures contract, the Fund would not be
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, the Fund would be required to deposit
with its custodian, in the name of the futures broker (known as a futures
commission merchant, or "FCM"), a percentage of the contract's value. This
amount, which is known as initial margin, generally equals 10% or less of the
value of the futures contract. Unlike margin in securities transactions, initial
margin on futures contracts does not involve borrowing to finance the futures
transactions. Rather, initial margin is in the nature of a good faith deposit or
performance bond, and would be returned to the Fund when the futures position is
terminated, after all contractual obligations have been satisfied. Initial
margin may be maintained either in cash or appropriate liquid securities.
The value of a futures contract tends to increase and decrease with the
value of the underlying instrument. The purchase of a futures contract will tend
to increase exposure to positive and negative price fluctuations in the
underlying instrument in the same manner as if the underlying instrument had
been purchased directly. By contrast, the sale of a futures contract will tend
to offset both positive and negative market price changes.
As the contract's value fluctuates, payments known as variation margin or
maintenance margin are made to or received from the FCM. If the contract's value
moves against the Fund, (i.e., the Fund's futures position declines in value),
the Fund may be required to make payments to the FCM, and, conversely, the Fund
may be entitled to receive payments from the FCM if the value of the Fund's
futures position increases. This process is known as "marking-to-market" and
takes place on a daily basis. Variation margin does not involve borrowing to
finance the futures transactions, but rather represents a daily settlement of
the Fund's obligations to or from a clearing organization.
OPTIONS ON SECURITIES, INDEXED SECURITIES AND FUTURES CONTRACTS
PURCHASING PUT OR CALL OPTIONS By purchasing a put (or call) option, the
Fund obtains the right (but not the obligation) to sell (or buy) the underlying
instrument at a fixed strike price. The option's underlying instrument may be a
specific security, an indexed security or a futures contract. The option may
give the Fund the right to sell (or buy) only on the option's expiration date,
or may be exercisable at any time up to and including that date. In return for
this right, the Fund pays the current market price for the option (known as the
option premium).
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The Fund may terminate its position in an option it has purchased by
allowing the option to expire, closing it out in the secondary market at its
current price, if a liquid secondary market exists, or by exercising it. If the
option is allowed to expire, the Fund will lose the entire premium paid.
WRITING PUT OR CALL OPTIONS By writing a put (or call) option, the Fund
takes the opposite side of the transaction from the option's purchaser (or
seller). In return for receipt of the premium, the Fund assumes the obligation
to pay the strike price for the option's underlying instrument (or to sell or
deliver the option's underlying instrument) if the other party to the option
chooses to exercise it. When writing an option on a futures contract, the Fund
will be required to make margin payments to an FCM as described above for
futures contracts.
Before exercise, the Fund may seek to terminate its position in an option
it has written by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
OVER-THE-COUNTER AND EXCHANGE-TRADED OPTIONS
The Fund may purchase and write both over-the-counter ("OTC") and
exchange-traded options. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between the Fund and its
contra-party with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make/take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund, as well as the loss of the expected benefit of the transaction.
Currently, options on debt securities are primarily traded on the OTC market.
Exchange markets for options on debt securities exist, but the ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market.
The Fund may invest up to 15% of its assets in illiquid securities. The
term "illiquid securities" includes purchased OTC options. Assets used as cover
for OTC options written by the Fund also will be deemed illiquid securities,
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option agreement. The cover for an OTC option subject
to this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.
COVER FOR OPTIONS AND FUTURES STRATEGIES
The Fund will not use leverage in its hedging strategies involving options
and futures contracts. The Fund will hold securities, options or futures
positions whose values are expected to offset ("cover") its obligations under
the transactions. The Fund will not enter into hedging strategies involving
options and futures contracts that expose the Fund to an obligation to another
party unless it owns either (i) an offsetting ("covered") position in
securities, options or futures contracts or (ii) has cash, receivables and
liquid debt securities with a value sufficient at all times to cover its
potential obligations. The Fund will comply with guidelines established by the
SEC with respect to coverage of these strategies by mutual funds and, if the
guidelines so require, will set aside cash and/or appropriate liquid securities
in a segregated account with its custodian in the amount prescribed. Securities,
options or futures contracts used for cover and securities held in a segregated
account cannot be sold or closed out while the strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of the Fund's
assets could impede the portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
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RISKS OF FUTURES AND RELATED OPTIONS TRADING
Successful use of futures contracts and related options depends upon the
ability of the adviser to assess movements in the direction of overall
securities and interest rates, which requires different skills and techniques
than assessing the value of individual securities. Moreover, futures contracts
relate not to the current price level of the underlying instrument, but to the
anticipated price level at some point in the future; trading of stock index
futures may not reflect the trading of the securities that are used to formulate
the index or even actual fluctuations in the index itself. There is, in
addition, the risk that movements in the price of the futures contract will not
correlate with the movements in the prices of the securities being hedged. Price
distortions in the marketplace, such as result from increased participation by
speculators in the futures market, may also impair the correlation between
movements in the prices of futures contracts and movements in the prices of the
hedged securities. If the price of the futures contract moves less than the
price of securities that are subject to the hedge, the hedge will not be fully
effective; however, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund normally would be in a better position than if
it had not hedged at all. If the price of securities being hedged has moved in a
favorable direction, this advantage may be partially offset by losses on the
futures position.
Options have a limited life and thus can be disposed of only within a
specific time period. Positions in futures contracts may be closed out only on
an exchange or board of trade that provides a secondary market for such futures
contracts. Although the Fund intends to purchase and sell futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market, there is no assurance that such a market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures position and, in the event of adverse price movements, the Fund would
continue to be required to make variation margin payments.
Purchasers of options on futures contracts pay a premium in cash at the
time of purchase which, in the event of adverse price movements, could be lost.
Sellers of options on futures contracts must post initial margin and are subject
to additional margin calls that could be substantial in the event of adverse
price movements. In addition, the Fund's activities in the futures markets may
result in a higher portfolio turnover rate and additional transaction costs in
the form of added brokerage commissions. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The exchanges may impose limits on the amount by which the price of a
futures contract or related option is permitted to change in a single day. If
the price of a contract moves to the limit for several consecutive days, the
Fund may be unable during that time to close its position in that contract and
may have to continue making payments of variation margin. The Fund may also be
unable to dispose of securities or other instruments being used as "cover"
during such a period.
RISKS OF OPTIONS TRADING
The success of the Fund's option strategies depends on many factors, the
most significant of which is the adviser's ability to assess movements in the
overall securities and interest rate markets.
The exercise price of the options may be below, equal to or above the
current market value of the underlying securities or indexes. Purchased options
that expire unexercised have no value. Unless an option purchased by the Fund is
exercised or unless a closing transaction is effected with respect to that
position, the Fund will realize a loss in the amount of the premium paid and any
transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Although the
Fund intends to purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any specific
time. Closing transactions with respect to OTC options may be effected only by
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negotiating directly with the other party to the option contract. Although the
Fund will enter into OTC options with dealers capable of entering into closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
In the event of insolvency of the contra-party, the Fund may be unable to
liquidate or exercise an OTC option, and could suffer a loss of its premium.
Also, the contra-party, although solvent, may refuse to enter into closing
transactions with respect to certain options, with the result that the Fund
would have to exercise those options which it has purchased in order to realize
any profit. With respect to options written by the Fund, the inability to enter
into a closing transaction may result in material losses to the Fund. For
example, because the Fund must maintain a covered position with respect to any
call option it writes on a security or index, the Fund may not sell the
underlying security or currency (or invest any cash, government securities or
short-term debt securities used to cover an index option) during the period it
is obligated under the option. This requirement may impair the Fund's ability to
sell a portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Options on indexes are settled exclusively in cash. If the Fund writes a
call option on an index, the Fund will not know in advance the difference, if
any, between the closing value of the index on the exercise date and the
exercise price of the call option itself, and thus will not know the amount of
cash payable upon settlement. In addition, a holder of an index option who
exercises it before the closing index value for that day is available runs the
risk that the level of the underlying index may subsequently change.
The Fund's activities in the options markets may result in higher
portfolio turnover rates and additional brokerage costs.
ADDITIONAL LIMITATIONS ON FUTURES AND OPTIONS
As a non-fundamental policy, the Fund will write a put or call on a
security only if (a) the security underlying the put or call is permitted by the
investment policies of the Fund, and (b) the aggregate value of the securities
underlying the calls or obligations underlying the puts determined as of the
date the options are sold does not exceed 25% of the Fund's net assets.
Under regulations adopted by the Commodity Futures Trading Commission
("CFTC"), futures contracts and related options may be used by the Fund (a) for
hedging purposes, without quantitative limits, and (b) for other purposes to the
extent that the amount of margin deposit on all such non-hedging futures
contacts owned by the Fund, together with the amount of premiums paid by the
Fund on all such non-hedging options held on futures contracts, does not exceed
5% of the market value of the Fund's net assets.
The foregoing limitations, as well as those set forth in the prospectus
regarding the Fund's use of futures and related options transactions, do not
apply to options attached to, or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options, such as rights, certain debt securities and indexed
securities.
The above limitations on the Fund's investments in futures contracts and
options may be changed as regulatory agencies permit. However, the Fund will not
modify the above limitations to increase its permissible futures and options
activities without supplying additional information, as appropriate, in a
current Prospectus or Statement of Additional Information.
FORWARD CURRENCY CONTRACTS
The Fund may use forward currency contracts to protect against uncertainty
in the level of future exchange rates. The Fund will not speculate with forward
currency contracts or foreign currencies.
The Fund may enter into forward currency contracts with respect to
specific transactions. For example, when the Fund enters into a contract for the
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purchase or sale of a security denominated in a foreign currency, or when the
Fund anticipates the receipt in a foreign currency of dividend or interest
payments on a security that it holds, the Fund may desire to "lock-in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such payment, as
the case may be, by entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. The Fund will thereby be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
The Fund also may use forward currency contracts in connection with
portfolio positions to lock-in the U.S. dollar value of those positions or to
shift the Fund's exposure to foreign currency fluctuations from one country to
another. For example, when the adviser believes that the currency of a
particular foreign country may suffer a substantial decline relative to the U.S.
dollar or another currency, it may enter into a forward currency contract to
sell the amount of the former foreign currency approximating the value of some
or all of the Fund's securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used.
At or before the maturity date of a forward currency contract requiring
the Fund to sell a currency, the Fund may either sell a portfolio security and
use the sale proceeds to make delivery of the currency or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency that it is obligated to deliver.
Similarly, the Fund may close out a forward currency contract requiring it to
purchase a specified currency by entering into a second contract entitling it to
sell the same amount of the same currency on the maturity date of the first
contract. The Fund would realize a gain or loss as a result of entering into
such an offsetting forward currency contract under either circumstance to the
extent the exchange rate or rates between the currencies involved moved between
the execution dates of the first contract and the offsetting contract.
The precise matching of the forward contract amount and the value of the
securities involved will not generally be possible because the future value of
such securities in a foreign currency will change as a consequence of market
movements in the value of those securities between the date the forward currency
contract is entered into and the date it matures. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot
(i.e., cash) market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency the Fund is
obligated to deliver under the forward contract and the decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver under the forward contract.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward currency contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. The Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency or (2) the Fund maintains cash, U.S.
government securities or other appropriate liquid securities in a segregated
account in an amount not less than the value of the Fund's total assets
committed to the consummation of the contract.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
The Fund will deal only with banks, broker/dealers or other financial
institutions which the adviser deems to be of high quality and to present
minimum credit risk. The use of forward currency contracts does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. In addition, although
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forward currency contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies increase.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
PORTFOLIO LENDING
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
When cash is temporarily available, or for temporary defensive purposes,
the Fund may invest without limit in repurchase agreement and money market
instruments, including high-quality short-term debt securities. 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 Fund's 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 15% 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.
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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 apply to them.
GENERAL
For federal tax purposes, the Fund is treated as a separate corporation.
To qualify for treatment as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended ("Code"), the Fund must distribute
annually to its shareholders at least 90% of its investment company taxable
income (generally, net investment income plus any net short-term capital gain
and any net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. These requirements
include the following: (1) the Fund must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
currency contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and 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. If the Fund failed to
qualify for treatment as a RIC for any taxable year, (i) it would be taxed at
corporate rates on the full amount of its taxable income for that year without
being able to deduct the distributions it makes to its shareholders and (ii) the
shareholders would treat all those distributions, including distributions of net
capital gain (I.E., the excess of net long-term capital gain over net short-term
capital loss), as dividends (that is, ordinary income) to the extent of the
Fund's earnings and profits. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest and make
substantial distributions before requalifying for RIC treatment.
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 interest received by the Fund, and gains realized thereby,
may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the total return on its
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors.
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.
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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 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.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances, the
Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition of
that stock (collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its PRO
RATA share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund probably would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if the QEF did not
distribute those earnings and gain to the Fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
The Fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over the
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included in income by the
Fund for prior taxable years thereunder. The Fund's adjusted basis in each
PFIC's stock subject to the election would be adjusted to reflect the amounts of
income included and deductions taken thereunder.
OPTIONS, FUTURES, FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCIES
The use of hedging instruments, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations) -- and gains from
options, futures and forward currency contracts derived by the Fund with respect
to its business of investing in securities or foreign currencies -- will qualify
as permissible income under the Income Requirement.
Certain futures and foreign currency contracts in which the Fund may
invest will be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts the Fund holds at the end of each taxable year, other
than contracts with respect to which the Fund has made a "mixed straddle
election," must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value), with the result that unrealized gains or
losses will be treated as though they were realized. Sixty percent of any net
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gain or loss recognized on these deemed sales, and 60% of any net realized gain
or loss on section 1256 contracts actually sold by the Fund during the year will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be marked-to
market for purposes of the Excise Tax. These rules may operate to increase the
amount that the Fund must distribute to satisfy the Distribution Requirement
(I.E., with respect to the portion treated as short-term capital gain), which
will be taxable to the shareholders as ordinary income, and to increase the net
capital gain the Fund recognizes, without in either case increasing the cash
available to the Fund. The Fund may elect to exclude certain transactions from
the operation of section 1256, although doing so may have the effect of
increasing the relative proportion of net short-term capital gain (taxable as
ordinary income) and thus increasing the amount of dividends that must be
distributed.
When a covered call option written (sold) by the Fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When the Fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less than (or exceeds) the premium received when the option was written. When
a covered call option written by the Fund is exercised, it will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when the option was written exceeds or is less than the basis of the
underlying security.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092 defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options, futures and forward currency contracts are personal
property. Under section 1092, any loss from the disposition of a position in a
straddle generally may be deducted only to the extent the loss exceeds the
unrealized gain on the offsetting position(s) of the straddle; in addition,
these rules may apply to postpone the recognition of loss that otherwise would
be recognized under the mark-to-market rules discussed above. The regulations
under section 1092 also provide certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and "short sale" rules applicable to
straddles. If the Fund makes certain elections, the amount, character and timing
of recognition of gains and losses from the affected straddle positions would be
determined under rules that vary according to the elections made. Because only a
few of the regulations implementing the straddle rules have been promulgated,
the tax consequences to the Fund of straddle transactions are not entirely
clear.
OTHER
If the Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or a futures or forward
currency contract entered into by the Fund or a related person with respect to
the same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction of
the Fund during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end of
that year and the Fund holds the appreciated financial position unhedged for 60
days after that closing (I.E., at no time during that 60-day period is the
Fund's risk of loss regarding that position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).
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To the extent the Fund recognizes income from a "conversion transaction,"
as defined in section 1258 of the Code, all or part of the gain from the
disposition or other termination of a position held as part of the conversion
transaction may be recharacterized as ordinary income. A conversion transaction
generally consists of two or more positions taken with regard to the same or
similar property, where (1) substantially all of the taxpayer's return is
attributable to the time value of its net investment in the transaction and (2)
the transaction satisfies any of the following criteria: (a) the transaction
consists of the acquisition of property by the taxpayer and a substantially
contemporaneous agreement to sell the same or substantially identical property
in the future; (b) the transaction is a straddle, within the meaning of section
1092 of the Code (see above); (c) the transaction is one that was marketed or
sold to the taxpayer on the basis that it would have the economic
characteristics of a loan but the interest-like return would be taxed as capital
gain; or (d) the transaction is described as a conversion transaction in future
regulations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Primary Shares are available from Legg Mason, certain of its
affiliates and unaffiliated entities having an agreement with Legg Mason.
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
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("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. 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.
VALUATION OF FUND SHARES
Net asset value of a Fund share is determined daily as of the close of the
Exchange, on every day the Exchange is open, by dividing the value of the total
assets, less liabilities, by the number of shares 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 Prospectus, 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
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<PAGE>
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 Primary Shares, and
the current market value of options sold by the Fund will be subtracted from net
assets of Primary Shares.
PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS
Average annual total return quotes used in the Fund's advertising and
other promotional materials ("Performance Advertisements") are calculated
according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by the Fund are assumed to have been
reinvested at net asset value on the reinvestment dates during the period.
From time to time the Fund may compare the performance of a Class of
Shares in advertising and sales literature to the performance of other
investment companies, groups of investment companies or various market indices.
One such market index is the S&P 500, a widely recognized, unmanaged index
composed of the capitalization-weighted average of the prices of 500 of the
largest publicly traded stocks in the U.S. The S&P 500 includes reinvestment of
all dividends. It takes no account of the costs of investing or the tax
consequences of distributions. The Fund invests in many securities that are not
included in the S&P 500.
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.
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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 value investing. With value investing, the
adviser invests in those securities it believes to be undervalued in relation to
the long-term earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor economic
conditions, tax-loss selling, or actual or anticipated unfavorable developments
affecting the issuer of the security. The adviser 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 approximately $87.3 billion as of September 30, 1999.
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 those plans until the
income is distributed to them. Primary Share investors who are considering
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<PAGE>
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 those 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 any Financial Advisor or
Service Provider.
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 SEP, permits voluntary
contributions and meets certain other requirements, you may make voluntary
contributions to that plan that are treated as deductible IRA contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your 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
(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.
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SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES -- SIMPLE
An employer with no more than 100 employees that does not maintain another
retirement plan may establish a SIMPLE either as separate IRAs or as part of a
Code section 401(k) plan. A SIMPLE, which is not subject to the complicated
nondiscrimination rules that generally apply to qualified retirement plans, will
allow certain employees to make elective contributions of up to $6,000 per year
and will require the employer to make either matching contributions up to 3% of
each such employee's salary or a 2% nonelective contribution.
Withholding at the rate of 20% is required for federal income tax purposes
on certain distributions (excluding, for example, certain periodic payments)
from the foregoing retirement plans (except IRAs and SEPs), unless the recipient
transfers the distribution directly to an "eligible retirement plan" (including
IRAs and other qualified plans) that accepts those distributions. Other
distributions generally are subject to regular wage withholding 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.
MANAGEMENT OF THE FUND
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;
President and/or Chairman of the Board and Director/Trustee of nine Legg Mason
funds; Retired Vice Chairman and Director of Legg Mason, Inc. and Legg Mason
Wood Walker, Inc.; Formerly: Director of Legg Mason Fund Adviser, Inc. ("LMFA")
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 all 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 all 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 all
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 all 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
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Chairman and Director of LMFA; President and/or Director/Trustee of seven other
Legg Mason funds. Formerly, Executive Vice President of T. Rowe Price-Fleming
International, Inc. (1986-1992) and Director of the Taxable Fixed Income
Division at T. Rowe Price Associates, Inc. (1973-1992).
G. PETER O'BRIEN [10/13/45], DIRECTOR; Trustee of Colgate University;
Director/Trustee of all Legg Mason funds except Legg Mason Income Trust, Inc.
and Legg Mason Tax-Exempt Trust, Inc. Formerly: Managing Director/Equity Capital
Markets Group of Merrill Lynch & Co. (1971-1999).
The executive officers of the Funds, other than those who also serve as
directors, are:
MARIE K. KARPINSKI* [1/1/49], VICE PRESIDENT AND TREASURER; Treasurer of
LMFA; Vice President and Treasurer of all Legg Mason funds; Vice President of
Legg Mason.
WM. SHANE HUGHES* [4/24/68], SECRETARY; employee of Legg Mason since May
1997. Formerly: Senior Associate of C.W. Amos and Co. (a regional public
accounting firm).
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 of the Fund 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.
On November 1, 1999, the directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's outstanding shares.
The following table provides certain estimated information relating to the
compensation of the Fund's directors for the fiscal year ending October 31,
2000. None of the Legg Mason funds has any retirement plan for its directors.
COMPENSATION TABLE
- ------------------------ ----------------------- -------------------------
TOTAL COMPENSATION FROM
NAME OF PERSON AND AGGREGATE FUND AND FUND COMPLEX
POSITION COMPENSATION FROM FUND PAID TO DIRECTORS*
- ------------------------ ----------------------- -------------------------
John F. Curley, Jr. -
Chairman of the Board
and Director None None
- ------------------------ ----------------------- -------------------------
Edward A. Taber, III -
President and Director None None
- ------------------------ ----------------------- -------------------------
Richard G. Gilmore -
Director $1,200 $35,100
- ------------------------ ----------------------- -------------------------
Arnold L. Lehman -
Director $1,200 $30,600
- ------------------------ ----------------------- -------------------------
Jill E. McGovern -
Director $1,200 $35,100
- ------------------------ ----------------------- -------------------------
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- ------------------------ ----------------------- -------------------------
TOTAL COMPENSATION FROM
NAME OF PERSON AND AGGREGATE FUND AND FUND COMPLEX
POSITION COMPENSATION FROM FUND PAID TO DIRECTORS*
- ------------------------ ----------------------- -------------------------
T. A. Rodgers -
Director $1,200 $35,100
- ------------------------ ----------------------- -------------------------
G. Peter O'Brien -
Director $1,200 N/A
- ------------------------ ----------------------- -------------------------
* 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 Fund Complex (with a total of
twenty-one funds).
THE FUND'S INVESTMENT ADVISER/MANAGER
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland corporation, is located
at 100 Light Street, Baltimore, Maryland 21202. LMFA is a wholly owned
subsidiary of Legg Mason, Inc., which is also the parent of Legg Mason Wood
Walker, Inc. ("Legg Mason"). LMFA serves as manager to the Fund under a
Management Agreement between Legg Mason Light Street Trust, Inc., on behalf of
the Fund, and LMFA ("Management Agreement").
The Management Agreement provides that, subject to overall direction by
the Fund's Board of Directors, LMFA manages or oversees the investment and other
affairs of the Fund. LMFA is responsible for managing the Fund consistent with
the Fund's investment objective and policies described in its Prospectus and
this Statement of Additional Information. LMFA also is obligated to (a) furnish
the Fund with office space and executive and other personnel necessary for the
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, the Fund's distributor, compensation of the independent directors, 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 the Fund
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. LMFA receives from the Fund a management fee at an
annual rate of 0.75% of the average daily net assets of the Fund. LMFA has
agreed to pay the Fund's expenses related to Primary Shares (exclusive of taxes,
interest, brokerage and extraordinary expenses), which exceed, in the aggregate,
an annual rate of 2% of the average net assets attributable to Primary Shares,
until December 31, 2000.
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.
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Brandywine Asset Management, Inc. ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware, an affiliate of Legg Mason, serves as investment adviser
to the Fund pursuant to an Investment Advisory Agreement between Brandywine and
LMFA ("Advisory Agreement").
Under the Advisory Agreement, Brandywine 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
decisions and placing orders to buy, sell or hold a particular security. For
Brandywine's services to the Fund, LMFA (not the Fund) pays Brandywine a fee,
computed daily and payable monthly of 60% of the fee received by LMFA from the
Fund, net of any waivers by LMFA.
Under the Advisory Agreement and Management Agreement, LMFA and Brandywine
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 each 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 majority of the Fund's
outstanding voting securities, or by LMFA or Brandywine, 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
Under the Advisory Agreement with the Fund, the Fund's 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
Fund's 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
Fund's adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to the Fund's 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 Fund's adviser in connection
with services to clients other than the Fund whose brokerage generated the
service. LMFA's and Brandywine'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
28
<PAGE>
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. 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 Brandywine. 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 a separate
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.
The Fund has adopted a Distribution 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 Plan, the aggregate fees may not exceed 1.00% of
the Fund's annual 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.
With respect to Primary Shares, if necessary to achieve the limits
described in "The Fund's Investment Adviser/Manager" above, Legg Mason has also
agreed to waive its fees for the Fund.
The Plan was adopted, as required by Rule 12b-1 under the 1940 Act, by a
vote of the Board of Directors, including a majority of the directors who are
not "interested persons" of the Corporation as that term is defined in the 1940
Act, and who have no direct or indirect financial interest in the operation of
29
<PAGE>
the Plan or the Underwriting Agreement ("12b-1 Directors"). In approving the
establishment 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 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 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 LMFA would earn greater 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 its 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.
CAPITAL STOCK INFORMATION
The Articles of Incorporation of the Corporation authorize issuance of 450
million shares of common stock, par value $0.001 per share of Legg Mason Market
Neutral Trust, 200 million shares of common stock, par value $0.001 per share of
Legg Mason Real Estate Trust, and 200 million shares of par value $0.001 per
share of Legg Mason Classic Valuation Fund. The corporation may issue additional
series of shares. The Fund currently offers one class of Shares - Primary
Shares.
Each share in the Fund is entitled to one vote for the election of
directors and any other matter submitted to a shareholder vote. Fractional
shares have fractional voting rights. Voting rights are not cumulative. All
shares in the Fund are fully paid and nonassessable and have no preemptive or
conversion rights.
30
<PAGE>
Shareholder 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 certain amendments
to the plan of distribution pursuant to Rule 12b-1), at the request of 25% or
more of the shares entitled to vote as set forth in the bylaws of Legg Mason
Light Street Trust, Inc.; or as the Board of Directors from time to time deems
appropriate.
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. 20036-1800, serves as counsel to the Fund.
THE FUND'S INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP has been selected by the Directors to serve as
independent accountants for the Corporation.
31
<PAGE>
Appendix A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS:
AAA-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
CAA-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
32
<PAGE>
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS:
AAA-This is the highest rating assigned by S&P to an obligation and
indicates an extremely strong capacity to pay principal and interest.
AA-Bonds vrated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
D-Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
33
<PAGE>
Legg Mason Light Street Trust, Inc.
Part C. OTHER INFORMATION
Item 23. EXHIBITS
(a) Articles of Incorporation (1)
(i) Articles of Amendment - (4)
(ii) Articles Supplementary - (4)
(iii) Articles of Amendment - filed herewith
(b) By-Laws (1)
(c) Specimen security -- not applicable
(d) (i) Investment Advisory Agreement - Market Neutral (2)
(ii) Form of Investment Advisory Agreement - Classic Valuation - filed
herewith
(iii) Management Agreement - Market Neutral (2)
(iv) Form of Management Agreement - Classic Valuation - filed herewith
(e) (i) Underwriting Agreement - Market Neutral (2)
(ii) Form of Underwriting Agreement - Classic Valuation - filed
herewith
(iii) Dealer Agreement with respect to Navigator Shares (3)
(i) Schedules A and B to Dealer Agreement (2)
(f) Bonus, profit sharing or pension plans - none
(g) Form of Custodian Agreement (2)
(h) (i) Form of Transfer Agency and Service Agreement (2)
(ii) Credit Agreement - none
(i) Opinion and Consent of Counsel
(i) Market Neutral (2)
(ii) Classic Valuation - filed herewith
(j) Other Opinions/Consents - none
(k) Financial statements omitted from Item 22 - none
(l) Agreement for providing initial capital with respect to the
Registrant (2)
(m) (i) Distribution Plan - Market Neutral (2)
(ii) Form of Distribution Plan - Classic Valuation - filed herewith
(n) Financial Data Schedules - not applicable
(o) (i) Plan Pursuant to Rule 18f-3 - Market Neutral (2)
(ii) Form of Plan Pursuant to Rule 18f-3 - Classic Valuation - filed
herewith
(1) Incorporated herein by reference to corresponding Exhibit of the initial
Registration Statement, SEC File No. 33-61525, filed August 14, 1998.
(2) Incorporated herein by reference to corresponding Exhibit of Pre-Effective
Amendment No. 1 to the Registration Statement, SEC File No. 33-61525, filed
January 22, 1999.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 5 to Legg Mason Investors Trust, Inc.'s Registration Statement,
SEC File No. 2-62174, filed July 31, 1996.
(4) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 1 to the Registration Statement, SEC File No. 33-61525, filed
August 13, 1999.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
<PAGE>
Item 25. INDEMNIFICATION
This item is incorporated by reference to Item 27 of Part C of Pre-Effective
Amendment No. 1, SEC File No. 33-61525, filed January 22, 1999.
Item 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER AND INVESTMENT ADVISER
Legg Mason Fund Adviser, Inc. ("LMFA"), the Registrant's investment manager,
is a registered investment adviser incorporated on January 20, 1982. LMFA is
engaged primarily in the investment advisory business. LMFA serves as investment
adviser or manager for eighteen open-end investment companies or portfolios.
Information as to the officers and directors of LMFA is included in its Form ADV
which was most recently amended on June 18, 1999 and is on file with the
Securities and Exchange Commission (registration number 801-16958) and is
incorporated herein by reference.
Batterymarch Financial Management, Inc. ("Batterymarch"), investment adviser
to Legg Mason Market Neutral Trust, is a registered investment adviser
incorporated on September 19, 1994. Batterymarch is engaged primarily in the
investment advisory business. Information as to the officers and directors of
Batterymarch is included in its Form ADV which was most recently amended on June
25, 1999 and is on file with the Securities and Exchange Commission
(registration number 801-48035) and is incorporated herein by reference.
Brandywine Asset Management, Inc. ("Brandywine"), investment adviser to Legg
Mason Classic Valuation Fund, is a registered investment adviser incorporated on
May 26, 1986. Information as to the officers and directors of Brandywine is
included in its Form ADV which was most recently amended on April 30, 1999 and
is on file with the Securities and Exchange Commission (registration number
801-27797) and is incorporated herein by reference.
Item 27. PRINCIPAL UNDERWRITERS
(a) Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Investors Trust, Inc.
Legg Mason Global Trust, Inc.
Legg Mason Cash Reserve Trust
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Focus Trust, Inc.
Legg Mason Tax-Free Income Fund
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
(b) The following table sets forth information concerning each director and
officer of the Registrant's principal underwriter, Legg Mason Wood
Walker, Incorporated ("LMWW").
Name and Principal Position and Offices with Positions and Offices
BUSINESS ADDRESS* UNDERWRITER - LMWW WITH REGISTRANT
Raymond A. Mason Chairman of the Board and None
Director
James W. Brinkley President, Chief Operating None
Officer and Director
<PAGE>
Name and Principal Position and Offices with Positions and Offices
BUSINESS ADDRESS* UNDERWRITER - LMWW WITH REGISTRANT
Edmund J. Cashman, Jr. Senior Executive Vice None
President and Director
Richard J. Himelfarb Senior Executive Vice None
President and Director
Edward A. Taber III Senior Executive Vice President and
President Director
Robert A. Frank Executive Vice President None
Robert G. Sabelhaus Executive Vice President None
Charles A. Bacigalupo Senior Vice President None
and Secretary
F. Barry Bilson Senior Vice President None
Thomas M. Daly, Jr. Senior Vice President None
Robert G. Donovan Executive Vice President None
Manoochehr Abbaei Senior Vice President None
Jeffrey W. Durkee Senior Vice President None
Thomas E. Hill Senior Vice President None
218 N. Washington Street
Suite 31
Easton, MD 21601
Arnold S. Hoffman Senior Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl Hohnbaum Senior Vice President None
2500 CNG Tower
625 Liberty Avenue
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice President None
1747 Pennsylvania
Avenue, N.W.
Washington, D.C. 20006
Theodore S. Kaplan Senior Vice President None
Laura L. Lange Senior Vice President None
<PAGE>
Name and Principal Position and Offices with Positions and Offices
BUSINESS ADDRESS* UNDERWRITER - LMWW WITH REGISTRANT
Marvin H. McIntyre Senior Vice President None
1747 Pennsylvania
Avenue, N.W.
Washington, D.C. 20006
Thomas P. Mulroy Senior Vice President None
Mark I. Preston Senior Vice President None
Thomas L. Souders Senior Vice President None
and Chief Financial
Officer
Joseph A. Sullivan Senior Vice President None
W. William Brab Senior Vice President None
Deepak Chowdhury Senior Vice President None
255 Alhambra Circle
Suite 810
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice President None
Dennis A. Green Senior Vice President None
Horace M. Lowman, Jr. Senior Vice President None
and Asst. Secretary
Jonathan M. Pearl Senior Vice President None
Robert F. Price Senior Vice President None
and General Counsel
Timothy C. Scheve Executive Vice President None
and Treasurer and
Director
Elisabeth N. Spector Senior Vice President None
Richard L. Baker Vice President None
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
<PAGE>
Name and Principal Position and Offices with Positions and Offices
BUSINESS ADDRESS* UNDERWRITER - LMWW WITH REGISTRANT
Andrew J. Bowden Vice President and None
Deputy General
Counsel
D. Stuart Bowers Senior Vice President None
Edwin J. Bradley, Jr. Vice President None
Carol A. Brown Vice President None
Scott R. Cousino Vice President None
Thomas W. Cullen Vice President None
Charles J. Daley, Jr. Vice President and
Controller None
Norman C. Frost, Jr. Vice President None
John R. Gilner Vice President None
Daniel R. Greller Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
56 West Main Street
Newark, DE 19702
Kurt A. Lalomia Vice President None
James E. Furletti Vice President None
Robert E. Patterson Vice President and None
Deputy General
Counsel
John A. Moag, Jr. Vice President None
Edward P. Meehan Vice President None
12021 Sunset Hills Road
Suite 100
Reston, VA 20190
Edward W. Lister, Jr. Vice President None
Theresa McGuire Vice President None
Julia A. McNeal Vice President None
<PAGE>
Name and Principal Position and Offices with Positions and Offices
BUSINESS ADDRESS* UNDERWRITER - LMWW WITH REGISTRANT
Gregory B. McShea Vice President None
Thomas C. Merchant Vice President and None
Assistant General
Counsel
Paul Metzger Vice President None
Mark C. Micklem Vice President None
1747 Pennsylvania
Ave., N.W.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Ann O'Shea Vice President None
Gerard F. Petrik, Jr. Vice President None
Douglas F. Pollard Vice President None
Judith L. Ritchie Vice President None
Thomas E. Robinson Vice President None
Theresa M. Romano Vice President None
James A. Rowan Vice President None
1747 Pennsylvania
Avenue, N.W.
Washington, D.C. 20006
Douglas M. Schmidt Vice President None
B. Andrew Schmucker Vice President None
1735 Market Street
Philadelphia, PA 19103
Robert W. Schnakenberg Vice President None
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris A. Scitti Vice President None
<PAGE>
Name and Principal Position and Offices with Positions and Offices
BUSINESS ADDRESS* UNDERWRITER - LMWW WITH REGISTRANT
Eugene B. Shepherd Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Jane Soybelman Vice President None
Alexsander M. Stewart Vice President None
L. Kay Strohecker Vice President None
Joseph E. Timmins III Vice President None
Joyce Ulrich Vice President None
William A. Verch Vice President None
Sheila M. Vidmar Vice President and None
Deputy General
Counsel
Lewis T. Yeager Vice President None
Carol Converso-Burton Assistant Vice President None
Diana L. Deems Assistant Vice President None
and Assistant Controller
Ronald N. McKenna Assistant Vice President None
Suzanne E. Peluso Assistant Vice President None
Lauri F. Smith Assistant Vice President None
Janet B. Straver Assistant Vice President None
Leslee Stahl Assistant Secretary None
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
<PAGE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS
State Street Bank and Trust Company and Legg Mason Fund Advisers, Inc.
P. O. Box 1713 100 Light Street
Boston, Massachusetts 02105 Baltimore, MD 21202
Item 29. MANAGEMENT SERVICES
None.
Item 30. UNDERTAKINGS
None.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Light Street Trust,
Inc., certifies that it meets all the requirements for effectiveness of this
Post-Effective Amendment to its Registration Statement pursuant to Rule 485(b)
under the Securities Act of 1933 and has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Baltimore and State of Maryland, on the 27th day of October, 1999.
Legg Mason Light Street Trust, Inc.
By: /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
/s/ John F. Curley, Jr.* Chairman of the Board
- ------------------------- and Director October 27, 1999
John F. Curley, Jr.*
/s/ Edward A. Taber, III* President and Director October 27, 1999
- -------------------------
Edward A. Taber, III*
/s/ Richard G. Gilmore* Director October 27, 1999
- -------------------------
Richard G. Gilmore*
/s/ Arnold L. Lehman* Director October 27, 1999
- -------------------------
Arnold L. Lehman*
/s/ Jill E. McGovern* Director October 27, 1999
- -------------------------
Jill E. McGovern*
/s/ T. A. Rodgers* Director October 27, 1999
- -------------------------
T. A. Rodgers*
Director
- -------------------------
G. Peter O'Brien
/s/ Marie K. Karpinski Vice President October 27, 1999
- ------------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to a power of attorney dated
August 7, 1998, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director of the following investment company:
LEGG MASON LIGHT STREET TRUST, INC.
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director hereby severally constitute and appoint each of MARIE K. KARPINSKI,
KATHI D. BAIR, ARTHUR J. BROWN and ARTHUR C. DELIBERT my true and lawful
attorney-in-fact, with full power of substitution, and with full power to sign
for me and in my name in the appropriate capacity, any Registration Statements
on Form N-1A, all Pre-Effective Amendments to any Registration Statements of the
Funds, any and all subsequent Post-Effective Amendments to said Registration
Statements, any supplements or other instruments in connection therewith, to
file the same with the Securities and Exchange Commission and the securities
regulators of appropriate states and territories, and generally to do all such
things in my name and behalf in connection therewith as said attorney-in-fact
deems necessary or appropriate, to comply with the provisions of the Securities
Act of 1933 and the Investment Company Act of 1940, all related requirements of
the Securities and Exchange Commission and all requirements of appropriate
states and territories. I hereby ratify and confirm all that said
attorney-in-fact or their substitutes may do or cause to be done by virtue
hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
/s/ Richard G. Gilmore August 7, 1998
- --------------------------
Richard G. Gilmore
/s/ T. A. Rodgers August 7, 1998
- --------------------------
T. A. Rodgers
/s/ Arnold L. Lehman August 7, 1998
- --------------------------
Arnold L. Lehman
/s/ Jill E. McGovern August 7, 1998
- --------------------------
Jill E. McGovern
/s/ Edward A. Taber, III August 7, 1998
- --------------------------
Edward A. Taber, III
/s/ Edmund J. Cashman, Jr. August 7, 1998
- --------------------------
Edmund J. Cashman, Jr.
/s/ John F. Curley, Jr. August 7, 1998
- --------------------------
John F. Curley, Jr.
<PAGE>
LEGG MASON LIGHT STREET TRUST, INC.
EXHIBITS
--------
(a) Articles of Incorporation (1)
(i) Articles of Amendment - (4)
(ii) Articles Supplementary - (4)
(iii) Articles of Amendment - filed herewith
(b) By-Laws (1)
(c) Specimen security -- not applicable
(d) (i) Investment Advisory Agreement - Market Neutral (2)
(ii) Form of Investment Advisory Agreement - Classic Valuation - filed
herewith
(iii) Management Agreement - Market Neutral (2)
(iv) Form of Management Agreement - Classic Valuation - filed herewith
(e) (i) Underwriting Agreement - Market Neutral (2)
(ii) Form of Underwriting Agreement - Classic Valuation - filed
herewith
(iii) Dealer Agreement with respect to Navigator Shares (3)
(i) Schedules A and B to Dealer Agreement (2)
(f) Bonus, profit sharing or pension plans - none
(g) Form of Custodian Agreement (2)
(h) (i) Form of Transfer Agency and Service Agreement (2)
(ii) Credit Agreement - none
(i) Opinion and Consent of Counsel
(i) Market Neutral (2)
(ii) Classic Valuation - filed herewith
(j) Other Opinions/Consents - none
(k) Financial statements omitted from Item 22 - none
(l) Agreement for providing initial capital with respect to the
Registrant (2)
(m) (i) Distribution Plan - Market Neutral (2)
(ii) Form of Distribution Plan - Classic Valuation - filed herewith
(n) Financial Data Schedules - not applicable
(o) (i) Plan Pursuant to Rule 18f-3 - Market Neutral (2)
(ii) Form of Plan Pursuant to Rule 18f-3 - Classic Valuation - filed
herewith
(1) Incorporated herein by reference to corresponding Exhibit of the initial
Registration Statement, SEC File No. 33-61525, filed August 14, 1998.
(2) Incorporated herein by reference to corresponding Exhibit of Pre-Effective
Amendment No. 1 to the Registration Statement, SEC File No. 33-61525, filed
January 22, 1999.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 5 to Legg Mason Investors Trust, Inc.'s Registration Statement,
SEC File No. 2-62174, filed July 31, 1996.
(4) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 1 to the Registration Statement, SEC File No. 33-61525, filed
August 13, 1999.
Exhibit 23(a)(iii)
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON LIGHT STREET TRUST, INC.
FIRST: The Board of Directors ("Board") of Legg Mason Light Street Trust,
Inc., a Maryland Corporation ("Corporation") organized on August 5, 1998, has,
by action effective on October 18, 1999, changed the name of the series of the
Corporation heretofore known as "Legg Mason Deep Value Fund" to "Legg Mason
Classic Valuation Fund", changed the name of the class of shares heretofore
known as "Legg Mason Deep Value Fund, Primary Class shares" to "Legg Mason
Classic Valuation Fund, Primary Class shares", and changed the name of the class
of shares heretofore known as "Legg Mason Deep Value Fund, Navigator Class
shares" to "Legg Mason Classic Valuation Fund, Navigator Class shares".
SECOND: The renamings described herein were approved by a majority of the
entire Board of Directors of the Corporation. The actions described herein are
limited to changes expressly permitted by Section 2-605 of the Corporations and
Associations Article to be made without action by the shareholders.
THIRD: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
FOURTH: These Articles of Amendment shall be effective as of
October 26, 1999.
<PAGE>
IN WITNESS WHEREOF, the undersigned Vice President of Legg Mason Light
Street Trust, Inc. hereby executes these Articles of Amendment on behalf of the
Corporation, and hereby acknowledges these Articles of Amendment to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of her knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: October 19, 1999 /s/ Marie K. Karpinski
------------------------------------
Marie K. Karpinski
Vice President
Attest: /s/ Wm. Shane Hughes
---------------------
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 19th day of October, 1999.
/s/ Laura V. Atwater
- --------------------
Notary Public
- 2 -
Exhibit 23(d)(ii)
FORM OF
INVESTMENT ADVISORY AGREEMENT
LEGG MASON LIGHT STREET TRUST, INC.:
LEGG MASON CLASSIC VALUATION FUND
AGREEMENT made this ___ day of ________, 1999 by and between Legg Mason
Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Brandywine Asset
Management, Inc. ("Adviser"), a Delaware corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Classic Valuation Fund
("Fund"), a series of Legg Mason Light Street Trust, Inc. (the "Corporation"),
an open-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and
WHEREAS, Manager wishes to retain Adviser to provide it with certain
investment advisory services in connection with Manager's management of the
Fund; and
WHEREAS, Adviser is willing to furnish such services on the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. Appointment. Manager hereby appoints Adviser as investment adviser
for the Fund for the period and on the terms set forth in this Agreement.
Adviser accepts such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
2. Delivery of Documents. Manager has furnished the Adviser with copies
properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on August 5, 1998 and all amendments thereto (such Articles of
Incorporation, as presently in effect and as they shall from time to
time be amended, are herein called the "Articles"):
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Adviser as investment adviser and
approving this Agreement;
(d) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, (File No. 33-61525) and
the 1940 Act as filed with the Securities and Exchange Commission on
August 13, 1999, including all exhibits thereto, relating to shares of
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common stock of the Fund, par value $.001 per share (herein called
"Shares") and all amendments thereto;
(e) The Fund's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto as
herein called the "prospectus"); and
(f) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
The Manager will furnish Adviser from time to time with copies of all amendments
of or supplements to the foregoing.
3. Investment Advisory Services.
(a) Subject to the supervision of the Corporation's Board of Directors
and the Manager, Adviser shall regularly provide the Fund with investment
research, advice, management and supervision and shall furnish a continuous
investment program for the Fund's portfolio of securities consistent with the
Fund's investment objective, policies and limitations as stated in the Fund's
current Prospectus and Statement of Additional Information. The Adviser shall
determine from time to time what securities will be purchased, retained or sold
by the Fund, and shall implement those decisions, all subject to the provisions
of the Corporation's Articles of Incorporation and By-Laws, the 1940 Act, the
applicable rules and regulations of the Securities and Exchange Commission, and
other applicable federal and state law, as well as the investment objective,
policies, and limitations of the Fund. The Adviser will place orders pursuant to
its investment determinations for the Fund either directly with the issuer or
with any broker or dealer. In placing orders with brokers and dealers, Adviser
will attempt to obtain the best net price and the most favorable execution of
its orders; however, the Adviser may, in its discretion, purchase and sell
portfolio securities from and to brokers and dealers who provide the Fund with
research, analysis, advice and similar services, and Adviser may pay to these
brokers, in return for research and analysis, a higher commission than may be
charged by other brokers. In no instance will portfolio securities be purchased
from or sold to the Adviser or any affiliated person thereof except in
accordance with the rules, regulations or orders promulgated by the Securities
and Exchange Commission pursuant to the 1940 Act. The Adviser shall also perform
such other functions of management and supervision as may be requested by the
Manager and agreed to by Adviser.
(b) The Adviser will oversee the maintenance of all books and records
with respect to the securities transactions of the Fund in accordance with all
applicable federal and state laws and regulations, and will furnish the Board of
Directors of the Corporation with such periodic and special reports as the Board
or the Manager reasonably may request.
(c) The Corporation hereby authorizes any entity or person associated
with the Adviser which is a member of a national securities exchange to effect
any transaction on the exchange for the account of the Corporation which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder, and the Corporation hereby consents to the retention by
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such person associated with the Adviser of compensation for such transactions in
accordance with Rule 11a2-2(T)(a)(2)(iv).
4. Services Not Exclusive. The Adviser's services hereunder are not
deemed to be exclusive, and Adviser shall be free to render similar services to
others. It is understood that persons employed by Adviser to assist in the
performance of its duties hereunder might not devote their full time to such
service. Nothing herein contained shall be deemed to limit or restrict the right
of the Adviser or any affiliate of Adviser to engage in and devote time and
attention to other business or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Adviser hereby agrees that all books and records which it
maintains for the Fund are property of the Fund and further agrees to surrender
promptly to the Fund or its agents any of such records upon the Fund's request.
The Adviser further agrees to preserve for the period prescribed by Rule 31a-2
under the 1940 Act, any such records required to be maintained by Rule 31a-1
under the 1940 Act.
6. Expenses. During the term of this Agreement, Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for the Fund.
7. Compensation. For the services which Adviser will render to Manager
and the Fund under this Agreement, Manager will pay Adviser a fee, computed
daily and paid monthly, at an annual rate equal to 60% of the fee received by
the Manager from the Fund, net of any waivers or reimbursements by the Manager
of its fee. Fees due to the Adviser hereunder shall be paid promptly to Adviser
by the Manager following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
8. Limitation of Liability. The Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by Manager or by
the Fund in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and the terms "assignment," "interested
person," and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
10. Duration and Termination. This Agreement will become effective
____________, 1999, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of the Fund in
accordance with the requirements of the 1940 Act and, unless sooner terminated
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<PAGE>
as provided for herein, shall continue in effect for two years from the
above-written date. Thereafter, if not terminated, this Agreement shall continue
in effect for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by the Corporation's Board of
Directors or (ii) by a vote of a majority of the outstanding voting securities
of the Fund, provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not interested persons of the
Corporation or of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable without penalty, by vote of the Corporation's Board of Directors, by
vote of a majority of the outstanding voting securities of the Fund, by the
Manager or by the Adviser, on not less than 60 days' notice to the Fund and/or
the other party(ies) and will be terminated immediately upon any termination
with respect to the Fund of the Management Agreement between Manager and the
Fund dated ___________, 1999 or upon the mutual written consent of the Adviser,
the Manager, and the Fund. Termination of this Agreement with respect to the
Fund shall in no way affect continued performance with regard to any other
portfolio of the Corporation. This Agreement will automatically and immediately
terminate in the event of its assignment.
11. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
12. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their constitution or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON FUND ADVISER, INC.
By: By:
Attest: BRANDYWINE ASSET MANAGEMENT, INC.
By: By:
4
Exhibit 23(d)(iv)
FORM OF
MANAGEMENT AGREEMENT
LEGG MASON LIGHT STREET TRUST, INC.:
LEGG MASON CLASSIC VALUATION FUND
This MANAGEMENT AGREEMENT ("Agreement") is made this ___ day of
________, 1999, by and between Legg Mason Light Street Trust, Inc., a Maryland
corporation (the "Corporation"), on behalf of Legg Mason Classic Valuation Fund
("Fund"), and Legg Mason Fund Adviser, Inc., a Maryland corporation (the
"Manager").
WHEREAS, the Corporation is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act") currently consisting of two portfolios; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund; and
WHEREAS, the Manager is willing to furnish such services on the terms
and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Corporation hereby appoints the Manager as manager of the Fund
for the period and on the terms set forth in this Agreement. The Manager accepts
such appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. The Fund shall at all times keep the Manager fully informed with
regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Manager with such other documents and information with regard
to its affairs as the Manager may from time to time reasonably request.
3. (a) Subject to the supervision of the Corporation's Board of
Directors, the Manager shall regularly provide the Fund with investment
research, advice, management and supervision and shall furnish a continuous
investment program for the Fund's portfolio of securities consistent with the
Fund's investment goals and policies. The Manager shall determine from time to
time what securities will be purchased, retained or sold by the Fund, and shall
implement those decisions, all subject to the provisions of the Corporation's
Articles of Incorporation and By-Laws, the 1940 Act, the applicable rules and
regulations of the Securities and Exchange Commission, and other applicable
federal and state law, as well as the investment goals and policies of the Fund.
The Manager will place orders pursuant to its investment determinations for the
Fund either directly with the issuer or with any broker or dealer. In placing
<PAGE>
orders with brokers and dealers the Manager will attempt to obtain the best net
price and the most favorable execution of its orders; however, the Manager may,
in its discretion, purchase and sell portfolio securities from and to brokers
and dealers who provide the Fund with research, analysis, advice and similar
services, and the Manager may pay to these brokers, in return for research and
analysis, a higher commission or spread than may be charged by other brokers.
The Manager shall also provide advice and recommendations with respect to other
aspects of the business and affairs of the Fund, and shall perform such other
functions of management and supervision as may be directed by the Board of
Directors of the Corporation;
(b) The Fund hereby authorizes any entity or person associated with the
Manager which is a member of a national securities exchange to effect any
transaction on the exchange for the account of the Corporation which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder, and the Fund hereby consents to the retention of
compensation for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Investment Advisory
Agreement") with an investment adviser in which the Manager delegates to such
investment adviser any or all its duties specified in Paragraph 3 hereunder,
provided that such Investment Advisory Agreement imposes on the investment
adviser bound thereby all duties and conditions to which the Manager is subject
hereunder, and further provided that such Investment Advisory Agreement meets
all requirements of the 1940 Act and rules thereunder.
5. (a) The Manager, at its expense, shall supply the Board of Directors
and officers of the Corporation with all statistical information and reports
reasonably required by them and reasonably available to the Manager and shall
furnish the Fund with office facilities, including space, furniture and
equipment and all personnel reasonably necessary for the operation of the Fund.
The Manager shall oversee the maintenance of all books and records with respect
to the Fund's securities transactions and the keeping of the Fund's books of
account in accordance with all applicable federal and state laws and
regulations. In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Manager hereby agrees that any records which it maintains for the Fund
are the property of the Fund, and further agrees to surrender promptly to the
Fund any of such records upon the Fund's request. The Manager further agrees to
arrange for the preservation of the records required to be maintained by Rule
31a-1 under the 1940 Act for the periods prescribed by Rule 31a-2 under the 1940
Act. The Manager shall authorize and permit any of its directors, officers and
employees, who may be elected as directors or officers of the Fund, to serve in
the capacities in which they are elected.
(b) Other than as herein specifically indicated, the Manager shall not
be responsible for the Fund's expenses. Specifically, the Manager will not be
responsible, except to the extent of the reasonable compensation of employees of
the Fund whose services may be used by the Manager hereunder, for any of the
following expenses of the Fund, which expenses shall be borne by the Fund:
advisory fees; distribution fees; interest, taxes, governmental fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; the cost (including brokerage commissions or
charges, if any) of securities purchased or sold by the Fund and any losses in
2
<PAGE>
connection therewith; fees of custodians, transfer agents, registrars or other
agents; legal expenses; expense of preparing share certificates; expenses
relating to the redemption or repurchase of the Fund's shares; expenses of
registering and qualifying the Fund's shares for sale under applicable federal
and state law; expenses of preparing, setting in print, printing and
distributing prospectuses, reports, notices and dividends to the Fund's
shareholders; costs of stationery; costs of stockholders and other meetings of
the Fund; directors' fees; audit fees; travel expenses of officers, directors
and employees of the Corporation, if any; and the Corporation's pro rata portion
of premiums on any fidelity bond and other insurance covering the Corporation
and its officers, directors and employees.
(c) For the period ending December 31, 2000, the Manager shall pay any
of the Fund's expenses, including organizational expenses (but excluding
interest, taxes, brokerage commissions and extraordinary expenses) of the Fund
which exceed, in the aggregate, an annual rate of 2.00% of the Fund's average
daily net assets attributable to the Primary Class of shares and an annual rate
of ____% of the Fund's average daily net assets attributable to the Navigator
Class of shares ("Expense Limit"); provided, however, that in order to determine
the Manager's liability for the Fund's expenses over the Expense Limit, the
amount of allowable year-to-date expenses shall be computed daily by pro-rating
the Expense Limit based on the number of days elapsed within the fiscal year of
the Fund ("Pro Rated Limitation"). The Pro Rated Limitation shall be compared to
the expenses of the Fund recorded through the prior day in order to produce the
allowable expenses to be recorded for the current day ("Allowable Expenses"). If
the Fund's management fee and other expenses for the current day exceed the
Allowable Expenses, the management fee for the current day shall be reduced by
such excess ("Unaccrued Fees"). In the event the excess exceeds the amount due
as the management fee, the Manager shall be responsible to the Fund for the
additional excess ("Other Expenses Exceeding Limit"). If at any time up through
and including December 31, 2000, the Fund's management fee and other expenses
for the current day are less than the Allowable Expenses, the differential shall
be due to the Manager as payment of cumulative Unaccrued Fees (if any) or as
payment for cumulative Other Expenses Exceeding Limit (if any). If cumulative
Unaccrued Fees or cumulative Other Expenses Exceeding Limit remain at December
31, 2000, these amounts shall be paid to the Manager in the future provided
that: (1) such payment shall be made to the Manager neither later than the end
of the third fiscal year after the Unaccrued Fees or Other Expenses Exceeding
Limit was incurred nor, in any event, after December 31, 2002; and (2) such
payment shall only be made to the extent that it does not result in the Fund's
aggregate expenses exceeding an expense limit of 2.00% of its average daily net
assets attributable to the Primary Class of shares or an expense limit of ____%
of its average daily net assets attributable to the Navigator Class of shares.
(d) The Manager may voluntarily agree to an additional expense
limitation (any such additional expense limitation hereinafter referred to as an
"Additional Expense Limitation"), at the same or a different level and for the
same or a different period of time beyond December 31, 2000 (any such additional
period being hereinafter referred to as an "Additional Period") provided,
however, that: (1) the calculations and methods of payment shall be as described
above; (2) no payment for cumulative Unaccrued Fees or cumulative Other Expenses
Exceeding Limit shall be made to the Manager more than three years after the end
of an Additional Period; and (3) payment for cumulative Unaccrued Fees or
3
<PAGE>
cumulative Other Expenses Exceeding Limit after the expiration of the Additional
Period shall only be made to the extent it does not result in the Fund's
aggregate expenses exceeding the Additional Expense Limitation to which the
unpaid amounts relate.
6. No director, officer or employee of the Corporation or Fund shall
receive from the Corporation any salary or other compensation as such director,
officer or employee while he is at the same time a director, officer, or
employee of the Manager or any affiliated company of the Manager. This paragraph
shall not apply to directors, executive committee members, consultants and other
persons who are not regular members of the Manager's or any affiliated company's
staff.
7. As compensation for the services performed and the facilities
furnished and expenses assumed by the Manager, including the services of any
consultants retained by the Manager, the Fund shall pay the Manager, as promptly
as possible after the last day of each month, a fee, computed daily at an annual
rate of 0.75% of the average daily net assets of the Fund. The first payment of
the fee shall be made as promptly as possible at the end of the month succeeding
the effective date of this Agreement, and shall constitute a full payment of the
fee due the Manager for all services prior to that date. If this Agreement is
terminated as of any date not the last day of a month, such fee shall be paid as
promptly as possible after such date of termination, shall be based on the
average daily net assets of the Fund in that period from the beginning of such
month to such date of termination, and shall be that proportion of such average
daily net assets as the number of business days in such period bears to the
number of business days in such month. The average daily net assets of the Fund
shall in all cases be based only on business days and be computed as of the time
of the regular close of business of the New York Stock Exchange, or such other
time as may be determined by the Board of Directors of the Corporation. Each
such payment shall be accompanied by a statement prepared either by the Fund or
by a reputable firm of independent accountants which shall show the amount
properly payable to the Manager under this Agreement and the detailed
computation thereof.
8. The Manager assumes no responsibility under this Agreement other
than to render the services called for hereunder, in good faith, and shall not
be responsible for any action of the Board of Directors of the Corporation in
following or declining to follow any advice or recommendations of the Manager;
provided, that nothing in this Agreement shall protect the Manager against any
liability to the Fund or its shareholders to which the Manager would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of its duties or by reason of its reckless disregard of its
obligations and duties hereunder.
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Corporation or the Fund, to engage in any other
business or to devote his time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature, nor to limit or restrict the right of the Manager to engage in any other
4
<PAGE>
business or to render services of any kind, including investment advisory and
management services, to any other corporation, firm, individual or association.
10. As used in this Agreement, the term "net assets" shall have the
meaning ascribed to it in the Articles of Incorporation of the Corporation and
the terms "assignment," "interested person," and "majority of the outstanding
voting securities" shall have the meanings given to them by Section 2(a) of the
1940 Act, subject to such exemptions as may be granted by the Securities and
Exchange Commission by any rule, regulation or order.
11. This Agreement will become effective with respect to the Fund on
____________, 1999, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of the Fund in
accordance with the requirements of the 1940 Act and, unless sooner terminated
as provided herein, will continue in effect for two years from the above written
date. Thereafter, if not terminated, this Agreement shall continue in effect
with respect to the Fund for successive annual periods ending on the same date
of each year, provided that such continuance is specifically approved at least
annually (i) by the Corporation's Board of Directors or (ii) by a vote of a
majority of the outstanding voting securities of the Fund, provided that in
either event the continuance is also approved by a majority of the Corporation's
Directors who are not interested persons of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
12. This Agreement is terminable with respect to the Fund without
penalty by the Corporation's Board of Directors, by vote of a majority of the
outstanding voting securities of the Fund, or by the Manager, on not less than
sixty (60) days' notice to the other party and will be terminated upon the
mutual written consent of the Manager and the Corporation. This Agreement shall
terminate automatically in the event of its assignment by the Manager and shall
not be assignable by the Corporation without the consent of the Manager.
13. In the event this Agreement is terminated by either party or upon
written notice from the Manager at any time, the Corporation hereby agrees that
it will eliminate from its corporate name any reference to the name of "Legg
Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part so long as this Agreement is effective or until such
notice is given.
14. The Manager agrees that for services rendered to the Fund, or
indemnity due in connection with service to the Fund, it shall look only to
assets of the Fund for satisfaction and that it shall have no claim against the
assets of any other portfolios of the Corporation.
15. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no material amendment of the Agreement shall be effective until
approved by vote of the holders of a majority of the Fund's outstanding voting
securities.
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16. This Agreement embodies the entire agreement and understanding
between the parties hereto, and supersedes all prior agreements and
understandings relating to the subject matter hereof. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding on and shall inure to the benefit of the parties
hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON LIGHT STREET TRUST, INC.
By: _________________________ By: ________________________________
Attest: LEGG MASON FUND ADVISER, INC.
By: _________________________ By: ________________________________
6
Exhibit 23(e)(ii)
FORM OF
UNDERWRITING AGREEMENT
LEGG MASON LIGHT STREET TRUST, INC.:
LEGG MASON CLASSIC VALUATION FUND
This UNDERWRITING AGREEMENT, made this ___ day of ________, 1999 by and
between Legg Mason Light Street Trust, Inc., a Maryland corporation
("Corporation"), on behalf of Legg Mason Classic Valuation Fund ("Fund"), and
Legg Mason Wood Walker, Inc., a Maryland corporation ("Distributor").
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), and has registered its shares of common stock
of the Fund for sale to the public under the Securities Act of 1933 (the "1933
Act") and filed appropriate notices under various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the shares of
common stock of the Fund ("Shares") and to furnish certain other services to the
Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under, the
1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and
to furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of Shares of the Fund. The
Distributor, as exclusive agent for the Corporation, upon the commencement of
operations of the Fund and subject to applicable federal and state law and the
Articles of Incorporation and By-Laws of the Corporation, shall: (i) promote the
Fund; (ii) solicit orders for the purchase of the Shares subject to such terms
and conditions as the Corporation may specify; and (iii) accept orders for the
purchase of the Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply will all applicable federal and state
laws and offer the Shares of the Fund on an agency or "best efforts" basis under
which the Corporation shall issue only such Shares as are actually sold. The
Distributor shall have the right to use any list of shareholders of the
Corporation or the Fund or any other list of investors which it obtains in
connection with its provision of services under this Agreement; provided,
however, that the Distributor shall not sell or knowingly provide such list or
lists to any unaffiliated person without the consent of the Corporation's Board
of Directors.
<PAGE>
(b) The Distributor shall provide ongoing shareholder liaison services,
including responding to shareholder inquiries, providing shareholders with
information on their investments, and any other services now or hereafter deemed
to be appropriate subjects for the payments of "service fees" under Conduct Rule
2830 of the National Association of Securities Dealers, Inc. ("NASD")
(collectively, "Shareholder Services").
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services and may enter into agreements with qualified dealers
and other qualified entities to perform recordkeeping and sub-accounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Corporation and the Distributor. In making such arrangements, the
Distributor shall act only as principal and not as agent for the Corporation. No
such dealer or other entity is authorized to act as agent for the Corporation in
connection with the offering or sale of Shares to the public or otherwise,
except for the limited purpose of determining the time as of which Shares are to
be priced, and then only if the agreement expressly provides in writing that it
shall so act.
3. The public offering price of the Shares of the Fund shall be the net
asset value per share (as determined by the Corporation) of the outstanding
Shares of the Fund plus any applicable sales charge as described in the
Registration Statement of the Corporation. The Corporation shall furnish the
Distributor with a statement of each computation of public offering price and of
the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on purchases
of Shares as set forth in the Registration Statement. The Distributor is
authorized to collect the gross proceeds derived from the sale of the Shares,
remit the net asset value thereof to the Corporation upon receipt of the
proceeds and retain the sales charge, if any. The Distributor shall receive from
the Fund a distribution fee and a service fee at the rates and under the terms
and conditions of the Plan of Distribution ("Plan") adopted by the Corporation
with respect to the Fund, as such Plan is in effect from time to time, and
subject to any further limitations on such fees as the Corporation's Board of
Directors may impose. The Distributor may reallow any or all of the sales
charge, distribution fee and service fee that it has received under this
Agreement to such dealers or sub-accountants as it may from time to time
determine; provided, however, that unless permitted under the rules of the NASD,
the Distributor may not reallow to any dealer for Shareholder Services an amount
in excess of .25% of the average annual net asset value of the shares with
respect to which said dealer provides Shareholder Services.
5. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Corporation with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to the Fund filed by the Corporation as part
of the Registration Statement, or as they may be amended from time to time.
2
<PAGE>
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or sub-accountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Corporation, and the Corporation shall not be responsible in
any way for any other information, statements or representations given or made
by the Distributor, any dealer or sub-accountant, or their representative or
agents. Except as specifically provided in this Agreement, the Corporation shall
bear none of the expenses of the Distributor in connection with its offer and
sale of the Shares.
7. The Corporation agrees at its own expense to register the Shares
with the Securities and Exchange Commission, state and other regulatory bodies,
and to prepare and file from time to time such Prospectuses, Statements of
Additional Information, amendments, reports and other documents as may be
necessary to maintain the Registration Statement. The Fund shall bear all
expenses related to preparing and typesetting such Prospectuses, Statements of
Additional Information, and other materials required by law and such other
expenses, including printing and mailing expenses, related to such Fund's
communications with persons who are shareholders of that Fund.
8. The Corporation agrees to indemnify, defend and hold the
Distributor, its several officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, arising out of or
based upon any alleged untrue statement of a material fact contained in the
Registration Statement or arising out of or based upon any alleged omission to
state a material fact required to be stated or necessary to make the
Registration Statement not misleading, provided that in no event shall anything
contained in this Agreement be construed so as to protect the Distributor
against any liability to the Corporation or its shareholders to which the
Distributor would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under this Agreement, and
further provided that the Corporation shall not indemnify the Distributor for
conduct as set forth in paragraph 9. The Distributor agrees that it shall look
only to assets of the Fund, and not to any other series of the Corporation, for
satisfaction of any obligation created by this paragraph or otherwise arising
under this Agreement.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
3
<PAGE>
Corporation, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, on account of any
wrongful act of the Distributor or any of its employees or arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Corporation for use
in the Registration Statement or arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading. As used in this paragraph, the term "employee" shall not include
a corporate entity under contract to provide services to the Corporation or any
series, or any employee of such a corporate entity, unless such person is
otherwise an employee of the Corporation.
10. The Corporation reserves the right at any time to withdraw all
offerings of the Shares of the Fund by written notice to the Distributor at its
principal office.
11. The Corporation shall not issue certificates representing Shares
unless requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued in such names and denominations as the Distributor shall from time
to time direct, provided that no certificates shall be issued for fractional
Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify, by telex or in writing, the
Corporation and Boston Financial Data Services, the Corporation's transfer
agent, of the orders for repurchase of Shares received by the Distributor since
the last such report, the amount to be paid for such Shares, and the identity of
the shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by the
Distributor for the repurchase of such Shares in cash or in the form of a credit
against moneys due the Corporation from the Distributor as proceeds from the
sale of Shares. The Corporation reserves the right to suspend such repurchase
right upon written notice to the Distributor. The Distributor further agrees to
act as agent for the Corporation to receive and transmit promptly to the
Corporation's transfer agent shareholder and dealer requests for redemption of
Shares.
13. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the sale and redemption of the Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's Board
of Directors on a quarterly basis showing such information concerning
expenditures related to this Agreement as from time to time shall be reasonably
requested by the Board of Directors.
4
<PAGE>
16. As used in this Agreement, the terms "assignment," "interested
person" and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
17. This Agreement will become effective with respect to the Fund on
the date first written above and, unless sooner terminated as provided herein,
will continue in effect for one year from the above written date. Thereafter, if
not terminated, this Agreement shall continue in effect with respect to the Fund
for successive annual periods ending on the same date of each year, provided
that such continuance is specifically approved at least annually (i) by the
Corporation's Board of Directors or (ii) by a vote of a majority of the
outstanding voting securities of the Fund (as defined the in 1940 Act), provided
that in either event the continuance is also approved by a majority of the
Corporation's Directors who are not interested persons (as defined in the 1940
Act) of any party to this Agreement, by vote cast in person at a meeting called
for the purpose of voting on such approval.
18. This Agreement is terminable, with respect to the Fund or in its
entirety, without penalty by the Corporation's Board of Directors, by vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act), or by the Distributor, on not less than 60 days' notice to the other
party and will be terminated upon the mutual written consent of the Distributor
and the Corporation. This Agreement will also automatically and immediately
terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived, discharged
or terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
20. In the event this Agreement is terminated by either party or upon
written notice from the Distributor at any time, the Corporation hereby agrees
that it will eliminate from its corporate name any reference to the name of
"Legg Mason." The Corporation shall have the non-exclusive use of the name "Legg
Mason" in whole or in part only so long as this Agreement is effective or until
such notice is given.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON LIGHT STREET TRUST, INC.
By: By:
Attest: LEGG MASON WOOD WALKER, INC.
By: By:
5
Exhibit 23(i)(ii)
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, DC 20036-1800
ARTHUR J. BROWN
(202) 778-9046
[email protected]
October 27, 1999
Legg Mason Light Street Trust, Inc.
100 Light Street
Baltimore, MD 21202
Dear Sir or Madam:
Legg Mason Light Street Trust, Inc. (the "Corporation") is a corporation
organized under the laws of the State of Maryland by Articles of Incorporation
dated August 5, 1998. You have requested our opinion regarding certain matters
regarding the issuance of certain Shares of the Corporation. As used in this
letter, the term "Shares" means the Primary Class shares of common stock of the
series of the Corporation listed below during the time that Post-Effective
Amendment No. 3 to the Corporation's Registration Statement is effective and has
not been superseded by another post-effective amendment. This series of the
Corporation is Legg Mason Classic Valuation Fund.
We have, as counsel, participated in various corporate and other matters
relating to the Corporation. We have examined certified copies of the Articles
of Incorporation and By-Laws, the minutes of meetings of the directors and other
documents relating to the organization and operation of the Corporation, and we
are generally familiar with its business affairs. Based upon the foregoing, it
is our opinion that the issuance of the Shares has been duly authorized by the
Corporation and that, when sold in accordance with the Corporation's Articles of
Incorporation, By-Laws and the terms contemplated by Post-Effective Amendment
No. 3 to the Corporation's Registration Statement, the Shares will have been
legally issued, fully paid and nonassessable by the Corporation.
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 3 to the Corporation's Registration Statement on
Form N-1A (File No. 33-61525) being filed with the Securities and Exchange
Commission. We also consent to the reference to our firm in the Statement of
Additional Information filed as part of the Registration Statement.
Sincerely,
/s/ Kirkpatrick & Lockhart LLP
------------------------------
KIRKPATRICK & LOCKHART LLP
Exhibit 23(m)(ii)
FORM OF
DISTRIBUTION PLAN OF
LEGG MASON LIGHT STREET TRUST, INC.:
LEGG MASON CLASSIC VALUATION FUND
WHEREAS, Legg Mason Light Street Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended ("1940 Act");
WHEREAS, the Corporation's Board of Directors ("Board") has established
a Series of shares of common stock of the Corporation known as Legg Mason
Classic Valuation Fund ("Fund");
WHEREAS, the Corporation has registered the offering of shares of
common stock of the Fund under a registration statement filed with the
Securities and Exchange Commission and that registration statement is in effect
as of the date hereof;
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the following
terms and conditions:
1. A. Legg Mason Classic Valuation Fund shall pay to Legg Mason, as
compensation for Legg Mason's services as principal underwriter of the Fund's
Primary Shares, a distribution fee at the rate of .75% on an annualized basis of
the average daily net assets attributable to Primary Shares of the Fund, such
fee to be calculated and accrued daily and paid monthly or at such other
intervals as the Board shall determine.
B. The Corporation shall pay to Legg Mason, as compensation
for ongoing services provided to the investors in Primary Shares of the Fund, a
service fee at the rate of .25% on an annualized basis of the average daily net
assets attributable to Primary Shares of the Fund, such fees to be calculated
and accrued daily and paid monthly or at such other intervals as the Board shall
determine.
C. The Corporation may pay a distribution or service fee to
Legg Mason at a lesser rate than the fees specified in paragraphs 1.A and 1.B,
respectively, of this Plan, in either case as agreed upon by the Board and Legg
Mason and as approved in the manner specified in paragraph 3 of this Plan. The
distribution and service fees payable hereunder are payable without regard to
the aggregate amount that may be paid over the years, provided that, so long as
the limitations set forth in Conduct Rule 2830 of the National Association of
Securities Dealers, Inc. ("NASD") remain in effect and apply to distributors or
dealers in the Corporation's shares, the amounts paid hereunder shall not exceed
those limitations, including permissible interest.
2. As principal underwriter of the Corporation's shares, Legg Mason may
spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the shares of the Fund and/or the
<PAGE>
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Legg Mason; compensation to Legg Mason, other
broker-dealers and other entities that engage in or support the distribution of
shares or who service shareholder accounts or provide sub-accounting and
recordkeeping services; expenses of Legg Mason and such other broker-dealers and
other entities, including overhead and telephone and other communication
expenses; the printing of prospectuses, statements of additional information,
and reports for other than existing shareholders; and preparation and
distribution of sales literature and advertising materials.
3. This Plan shall take effect on ____________, 1999 and shall continue
in effect for successive periods of one year from its execution for so long as
such continuance is specifically approved at least annually together with any
related agreements, by votes of a majority of both (a) the Board of Directors of
the Corporation and (b) those Directors who are not "interested persons" of the
Corporation, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements; and only if the
Directors who approve the Plan taking effect have reached the conclusion
required by Rule 12b-1(e) under the 1940 Act.
4. Any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to this Plan or any related agreement shall provide
to the Corporation's Board of Directors and the Board shall review, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made. Legg Mason shall submit only information
regarding amounts expended for "distribution activities," as defined in this
paragraph 4, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for "service
activities," as defined in this paragraph 4, to the Board in support of the
service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall mean any
activities in connection with Legg Mason's performance of its obligations under
the underwriting agreement, dated ___________, 1999, by and between the
Corporation and Legg Mason, with respect to the Fund, that are not deemed
"service activities." As used herein, "distribution activities" also include
sub-accounting or recordkeeping services provided by an entity if the entity is
compensated, directly or indirectly, by the Fund or Legg Mason for such
services. Such entity may also be paid a service fee if it provides appropriate
services. Nothing in the foregoing is intended to or shall cause there to be any
implication that compensation for such services must be made only pursuant to a
plan of distribution under Rule 12b-1. "Service activities" shall mean
activities covered by the definition of "service fee" contained in Conduct Rule
2830 of the NASD, including the provision by Legg Mason of personal, continuing
services to investors in the Corporation's shares. Overhead and other expenses
of Legg Mason related to its "distribution activities" or "service activities,"
including telephone and other communications expenses, may be included in the
information regarding amounts expended for such distribution or service
activities, respectively.
2
<PAGE>
5. This Plan may be terminated with respect to the Fund at any time by
vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the
outstanding voting securities of that Fund.
6. After the issuance of Primary Shares of the Fund, this Plan may not
be amended to increase materially the amount of distribution fees provided for
in paragraph 1.A. hereof or the amount of service fees provided for in paragraph
1.B. hereof unless such amendment is approved by a vote of at least "a majority
of the outstanding voting securities," as defined in the 1940 Act, of the Fund,
and no material amendment to the Plan shall be made unless such amendment is
approved in the manner provided for continuing approval in paragraph 3 hereof.
7. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation, as defined in the
1940 Act, shall be committed to the discretion of directors who are themselves
not interested persons.
8. The Corporation shall preserve copies of this Plan and any related
agreements for a period of not less than six years from the date of expiration
of the Plan or agreement, as the case may be, the first two years in an easily
accessible place; and shall preserve copies of each report made pursuant to
paragraph 4 hereof for a period of not less than six years from the date of such
report, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan
as of the day and year set forth below:
Date: LEGG MASON LIGHT STREET TRUST, INC.
Attest: By:
By:
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:
3
Exhibit 23(o)(ii)
FORM OF
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
LEGG MASON LIGHT STREET TRUST, INC.:
LEGG MASON CLASSIC VALUATION FUND
Legg Mason Light Street Trust, Inc. hereby adopts this Multiple Class
Plan pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended
(the "1940 Act"), on behalf of Legg Mason Classic Valuation Fund (the "Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
------------------------------------------------
1. PRIMARY CLASS SHARES. Primary Class shares of the Fund are offered and sold
without imposition of an initial sales charge or a contingent deferred sales
charge.
Primary Class shares of the Fund are available to all investors except
those qualified to purchase Navigator Class shares.
Primary Class shares of the Fund are subject to an annual distribution
fee of up to .75% of the average daily net assets of the Primary Class shares of
the Fund and an annual service fee of .25% of the average daily net assets of
the Primary Class shares of the Fund under a Distribution Plan adopted pursuant
to Rule 12b-1 under the 1940 Act.
2. NAVIGATOR CLASS SHARES. Navigator Class shares are offered and sold
without imposition of an initial sales charge or a contingent deferred sales
charge and are not subject to any service or distribution fees.
Navigator Class shares of the Fund are available for purchase only: (i)
to certain institutions who were clients of Fairfield Group, Inc. as of February
28, 1999 for investment of their own funds and funds for which they act in a
fiduciary capacity; (ii) to clients of Legg Mason Trust Company ("Trust
Company") for which Trust Company exercises discretionary investment management
responsibility; (iii) to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million; (iv) to any qualified
retirement plan of Legg Mason, Inc. or of any of its affiliates; (v) to ERISA
clients of Bartlett & Co. that were shareholders of Bartlett Short Term Bond
Fund or Bartlett Fixed Income Fund on December 19, 1996; and (vi) to
shareholders of Class Y shares of the Bartlett Financial Services Fund and
Bartlett Europe Fund series of Bartlett Capital Trust on October 5, 1999.
Navigator Class shares are also available for purchase by exchange, as described
below.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
----------------------------------
Certain expenses may be attributable to a particular Class of shares of
the Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the following other expenses:
<PAGE>
(1) legal, printing and postage expenses related to
preparing and distributing materials such as
shareholder reports, prospectuses, and proxies to
current shareholders of a specific Class;
(2) Blue Sky fees incurred by a specific Class of shares;
(3) SEC registration fees incurred by a specific Class of
shares;
(4) expenses of administrative personnel and services
required to support the shareholders of a specific
Class of shares;
(5) Directors' fees incurred as a result of issues
relating to a specific Class of shares;
(6) litigation expenses or other legal expenses relating
to a specific Class of shares;
(7) transfer agent fees and shareholder servicing
expenses identified as being attributable to a
specific Class; and
(8) such other expenses actually incurred in a different
amount by a Class or related to a Class' receipt of
services of a different kind or to a different degree
than another Class.
C. EXCHANGE PRIVILEGES:
--------------------
Primary Class and Navigator Class shares of the Fund may be exchanged
for shares of the corresponding Class of other Legg Mason funds, or may be
acquired through an exchange of shares of the corresponding Class of other Legg
Mason funds.
Legg Mason U.S. Government Money Market Portfolio, Legg Mason Cash
Reserve Trust and Legg Mason Tax Exempt Trust (collectively referred to as "Legg
Mason Money Market Funds") currently offer only one class of shares. So long as
a Legg Mason Money Market Fund offers only a single class of shares, Primary
Class and Navigator Class shares of the Fund may be exchanged for shares of that
Legg Mason Money Market Funds, or may be acquired through an exchange of shares
of that Money Market Fund.
These exchange privileges may be modified or terminated by the Fund in
certain instances, and exchanges may be made only into funds that are legally
available for sale in the investor's state of residence.
D. CLASS DESIGNATION:
------------------
Subject to approval by the Board of Directors, the Fund may alter the
nomenclature for the designations of one or more of its Classes of shares.
2
<PAGE>
E. ADDITIONAL INFORMATION:
-----------------------
This Multiple Class Plan is qualified by and subject to the terms of
the then current prospectuses for the applicable Classes; provided, however,
that none of the terms set forth in any such prospectuses shall be inconsistent
with the terms of the Classes contained in this Plan. The prospectuses for the
Fund contain additional information about the Classes and the Fund's multiple
class structure.
F. DATE OF EFFECTIVENESS:
----------------------
This Multiple Class Plan is effective on ________, 1999, provided that
this Plan shall not become effective with respect to the Fund unless such action
has first been approved by the vote of a majority of the Board of Directors of
Legg Mason Light Street Trust, Inc. and by vote of a majority of those directors
who are not interested persons.
_______________, 1999
3
