Legg Mason Investment Trust, Inc.
Legg Mason Opportunity Trust
PRIMARY SHARES PROSPECTUS December 23, 1999
logo
THE ART OF INVESTING 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.
<PAGE>
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:
1 Investment objective
3 Principal risks
8 Fees and expenses of the Fund
10 Management
A b o u t y o u r i n v e s t m e n t:
12 How to invest
14 How to sell your shares
15 Account policies
17 Services for investors
18 Distributions and taxes
<PAGE>
[icon]
Legg Mason Opportunity Trust:
I N V E S T M E N T O B J E C T I V E
Investment objective: Long-term growth of capital
Principal investment strategies:
The fund invests in securities that, in the adviser's opinion, offer the
opportunity for long-term capital appreciation. Although not limited to the
following securities, the fund's adviser typically seeks: securities that the
adviser believes are priced at large discounts relative to their intrinsic
value; securities of companies the adviser believes have prospects for
accelerating growth in revenues, free cash flows, or earnings; securities of
companies undergoing financial restructurings or involved in takeover or
arbitrage situations; or securities where special circumstances apply, such as
actual or anticipated changes in a company's management or strategy, a basic
change in the industry or regulatory environment, the prospect of new products
or technologies, or the prospect or effect of the sale of a portion of the
business or the entire business. Intrinsic value, according to the adviser, is
the value of the company measured, to different extents depending on the type of
company, on factors such as, but not limited to, the discounted value of its
projected future free cash flows, the company's ability to earn returns on
capital in excess of its cost of capital, private market values of similar
companies, and the costs to replicate the business. Qualitative factors, such as
an assessment of the company's products, competitive positioning, strategy,
industry economics and dynamics, regulatory frameworks and more, are also
important.
The fund's adviser exercises a flexible strategy in the selection of securities,
not limited by investment style or by the issuer's location, size, market
capitalization, or industry sector. Although the fund will invest the majority
of its assets in the common stock of U.S. issuers, the fund may also invest in
the common stock of foreign issuers and in other U.S. and foreign securities,
including securities convertible into common stock, debt securities, futures,
options, derivatives, and other instruments. Further, the fund may sell
securities short. Although the fund's adviser considers ratings in determining
whether securities convertible into common stock or debt securities are
appropriate investments for the fund, such securities may include investments
rated below investment grade, commonly referred to as junk bonds.
The fund's adviser may decide to sell securities given a variety of
circumstances, such as when a security no longer appears to the adviser to offer
the potential for long-term growth of capital, when an investment opportunity
arises that the adviser believes is more compelling, or to realize gains or
limit losses.
When cash is temporarily available, or for temporary defensive purposes, when
the adviser believes such action is warranted by abnormal market, economic, or
other situations, the fund may invest without limit in cash, money market
instruments, bonds or other debt securities. The fund may not achieve its
investment objective when so invested.
<PAGE>
[icon] P R I N C I P A L R I S K S
In general:
There is no assurance that the fund will meet its investment objective;
investors could lose money by investing in the fund. 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.
Equity securities:
Prices of equity securities generally fluctuate more than those of other
securities, such as debt securities.
Market risk, the risk that prices of securities will go down because of the
interplay of market forces, may affect a single issuer, an industry or a sector
of the economy, or may affect the market as a whole. The fund may experience a
substantial or complete loss on individual stocks.
It is anticipated that some of the portfolio's securities may not be widely
traded, and that the fund's position in such securities may be substantial in
relation to the market for such securities. Accordingly, it may be difficult for
the fund to dispose of such securities quickly at prevailing market prices.
The adviser may at times emphasize a value approach to investing, and may at
other times emphasize a growth approach:
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.
The growth approach to investing involves the risk that those stocks
may react with greater volatility to negative forecasts concerning
particular stocks, industries, sectors or the economy in general.
Growth stocks as a group may be out of favor for a long period of time,
while the market concentrates on "value" stocks.
Company risk:
The fund invests in securities that often involve certain special circumstances
which the adviser believes offer the opportunity for long-term capital
appreciation. Each of these types of investments may involve greater risks of
loss than investments in securities of well-established companies with a history
of consistent operating patterns. Additionally, investments in securities of
companies being restructured involve special risks, including difficulty in
obtaining information as to the financial condition of such issuers and the fact
that the market prices of such securities are subject to above-average price
volatility. Whereas there is always a risk that the adviser will not properly
assess the potential for an issuer's future growth, or that the issuer will not
realize that potential, this risk is especially true in connection with these
issuers.
Small and mid-sized company securities:
Investing in the securities of small and mid-sized companies involves special
risks. Small companies may have limited product lines, markets or financial
resources, or they may be dependent upon a limited management group. Among other
risks, the prices of securities of small and mid-sized companies generally are
more volatile than those of larger companies; the securities of small companies
generally are less liquid; and small companies generally are more likely to be
adversely affected by poor economic or market conditions.
Foreign securities risk:
Investments in foreign securities (including those denominated in U.S. dollars)
involve certain risks not typically associated with investments in domestic
issuers. These risks can include political and economic instability, foreign
taxation issues, different or lower standards in accounting, auditing and
financial reporting, less-developed securities regulation and trading systems,
fluctuations in foreign currency exchange rates, and the risk that a country may
impose controls on the exchange or repatriation of foreign currency.
Debt securities:
Debt securities are subject to interest rate risk, which is the possibility that
the market prices of the fund's investments may decline due to an increase in
market interest rates. Generally, the longer the maturity of a fixed income
security, the greater is the effect on its value when rates change.
Debt securities are also subject to credit risk, i.e., the risk that an issuer
of securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which the fund invests. However, ratings are only the opinions of the agencies
issuing them and are not absolute guarantees as to quality.
Debt securities rated BBB/Baa or better, and unrated securities considered by
the fund's adviser to be of equivalent quality, are considered investment grade.
Debt securities rated below BBB/Baa, which the fund may purchase from time to
time, are deemed by the ratings agencies to be speculative and may involve major
risk or exposure to adverse conditions. Those in the lowest rating categories
may involve a substantial risk of default or may be in default. Changes in
economic conditions or developments regarding the individual issuer are more
likely to cause price volatility and weaken the capacity of such securities to
make principal and interest payments than is the case for higher grade debt
securities.
Securities rated below BBB/Baa may be less liquid than higher-rated securities,
which means a fund may have difficulty selling them at times, and may have to
apply a greater degree of judgment in establishing a price.
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.
The value of a convertible security is a function of (1) its yield in comparison
with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege and (2) its worth, at market value, if converted
into the underlying common stock. Convertible securities are typically issued by
smaller capitalized companies whose stock prices may be volatile. The price of a
convertible security often reflects such variations in the price of the
underlying common stock in a way that non-convertible debt does not. Convertible
securities are also subject to credit risk, as described above.
Non-diversification risk:
The fund is non-diversified. This means that the percentage of its assets
invested in any single issuer is not limited by the Investment Company Act of
1940. When the fund's assets are invested in the securities of a limited number
of issuers or it holds a large portion of its assets in a few issuers, the value
of its shares will be more susceptible to any single economic, political, or
regulatory event than shares of a diversified fund.
Short sales:
A short sale involves the sale by the fund of a security that it does not own,
i.e., that is borrowed from a third party, with the hope of purchasing the same
security at a later date at a lower price. The fund may suffer significant
losses if securities which the fund sells short appreciate rather than
depreciate in value. Such transactions may also involve a cost of borrowing the
security.
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, its distributor, and
its 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 in the year
2000.
Portfolio turnover:
Although the fund's adviser does not anticipate a turnover rate in excess of
100%, the possibility exists. High turnover rates can result in increased
trading costs and higher levels of realized capital gains.
Performance:
The fund is newly organized. Because the fund had not commenced operations prior
to the date of this prospectus, the fund does not have any performance history.
<PAGE>
[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 table below describes 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. Other expenses include transfer agency, custody, professional
and registration fees. The Primary Class has no initial sales charge, but it is
subject to a deferred sales charge and 12b-1 fees. The fees and expenses are
calculated as a percentage of average net assets.
The fund currently offers only Primary Class shares. Other classes of shares may
be offered in the future.
Shareholder fees:
(fees paid directly from your investment)
- ------------------------------------------ -----------------------------
Primary Class Shares
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
Maximum Deferred Sales Charge (Load) (as 1.00%(a)
a % of net asset value)
- ------------------------------------------ -----------------------------
(a) Applies only to shares redeemed within 12 months of purchase. This deferred
sales charge is not applicable where the investor's broker-dealer of record
notifies the distributor prior to the time of investment that the broker-dealer
waives the compensation otherwise payable to it.
Annual fund operating expenses:
(expenses that are deducted from fund assets)
- ------------------------------------------ -----------------------------
Primary Class Shares
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
Management Fees 1.00%
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
Distribution and Service (12b-1) Fees 1.00%
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
Other Expenses(a) 0.39%
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
Total Annual Fund Operating Expenses 2.39%
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
Fee Waivers and Expense Reimbursement(b) -0.40%
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
Net Annual Fund Operating Expenses 1.99%
- ------------------------------------------ -----------------------------
(a) "Other expenses" are based on estimated expenses for the fiscal year
ending December 31, 2000.
(b) The manager has contractually agreed to waive fees and reimburse other
expenses so that fund expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) do not exceed an annual rate of 1.99% of average
daily net assets for the Primary Class until December 31, 2000. The fund
has agreed to pay the manager for waived fees and reimbursed expenses
provided that payment does not cause the fund's annual operating expenses
to exceed 1.99% of its average net assets and the payment is made within
three years after the year in which the manager earned the fee or incurred
the expense.
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. This example also assumes that the deferred sales charge is imposed on
redemptions made within the first year after purchase of Primary Class shares.
---------------------------------------------- ------------- ----------------
Opportunity Trust, Primary Class 1 Year 3 Years
---------------------------------------------- ------------- ----------------
---------------------------------------------- ------------- ----------------
Assuming redemption $302 $707
---------------------------------------------- ------------- ----------------
---------------------------------------------- ------------- ----------------
Assuming no redemption $202 $707
---------------------------------------------- ------------- ----------------
[icon] M A N A G E M E N T
Management and adviser:
LMM, LLC ("LMM"), 100 Light Street, Baltimore, Maryland 21202, provides the fund
with investment advisory and management services and is responsible for
overseeing the fund's relationship with outside service providers, such as the
sub-manager, custodian, transfer agent, accountants, and lawyers. Under its
advisory and management agreement with LMM, the fund pays LMM a fee calculated
daily and paid monthly of 1.00% of its average daily net assets up to $100
million and 0.75% of its average daily net assets in excess of $100 million. LMM
has delegated certain sub-advisory and administrative responsibilities to Legg
Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland 21202.
LMM is newly organized; however, its principal employees have been managers or
advisers to investment companies since 1982. LMFA acts as manager or adviser to
investment companies with aggregate assets of about $19 billion as of September
30, 1999. LMM was the sole investor in the fund prior to the public offering of
its shares.
Portfolio management:
William H. Miller, III, Managing Member of LMM and President of LMFA, is
portfolio manager of the fund. Mr. Miller has been the manager of Legg Mason
Value Trust, Inc. since 1990; from its inception in 1982 to 1990, he
served as co-manager. Mr. Miller was co-manager of Legg Mason Total Return
Trust, Inc. from 1992 to 1997; from 1990 to 1992, he served as manager.
Since its inception in 1985, Mr. Miller has also been primarily responsible
for the day-to-day management of Legg Mason Special Investment Trust, Inc.
Since its inception in 1998, Mr. Miller has been manager of LM Value
Institutional Portfolio.
Distributor of the fund's shares:
Legg Mason Wood Walker, Inc. ("Legg Mason"), 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 Class 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
Class shares of the fund. The distributor pays these brokers up to 100% of the
distribution and service fees that it receives from the fund for those sales.
[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
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. 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 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 Wire Call Legg Mason Funds Investors Services
at 1-800-822-5544 or your financial adviser to
transfer available cash 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.
- ------------------------ -------------------------------------------------------
- ------------------------ -------------------------------------------------------
Transfer of Funds from Arrangements may be made with some employers and
financial institutions for Financial Institutions regular automatic monthly
investments of $50 or more 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.
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.
<PAGE>
[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 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 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.
<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 Class 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 Class share price, the fund's assets attributable to that class
of shares are valued and totaled, liabilities attributable to Primary Class
shares are subtracted, and the resulting net assets are divided by the number of
Primary Class 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.
To the extent that the fund has portfolio securities that are primarily listed
on foreign exchanges that trade on days when the fund does not price its shares,
the net asset value of the fund may change on days when shareholders will not be
able to purchase or redeem the fund's shares.
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.
<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 Class shares (except a reinvestment of dividends, capital gain
distributions and purchases made through a transfer of funds from a financial
institution). 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 purchase shares through a transfer of funds from a
financial institution.
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:
Exchange privileges do not apply to the fund's shares.
<PAGE>
[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 any net capital gains to
holders of Primary Class shares annually.
Your dividends and other distributions will be automatically reinvested in
additional Primary Class shares of the fund unless you elect to receive your
dividends and/or other distributions in cash. To change your election, 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 distribution
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 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.
<PAGE>
L e g g M a s o n O p p o r t u n i t y T r u s t
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 further information and
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. Information on the operation of
the Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. Reports and other information about the fund are available on
the SEC's Internet site at http://www.sec.gov. Investors may also obtain this
information, after paying a duplicating fee, by electronic request at the
following e-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, DC 20549-0102.
LMF-015 SEC file number: 811-9613
<PAGE>
LEGG MASON INVESTMENT TRUST, INC.
LEGG MASON OPPORTUNITY TRUST
STATEMENT OF ADDITIONAL INFORMATION
December 23, 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
December 23, 1999), as appropriate, which has been filed with the U.S.
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 ("Legg Mason"), 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...................................................19
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................22
VALUATION OF FUND SHARES.....................................................24
PERFORMANCE INFORMATION......................................................24
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES...............................26
MANAGEMENT OF THE FUND.......................................................28
THE FUND'S INVESTMENT ADVISER/MANAGER........................................30
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................32
THE FUND'S DISTRIBUTOR.......................................................33
CAPITAL STOCK INFORMATION....................................................34
THE FUND'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT..............34
THE FUND'S LEGAL COUNSEL.....................................................35
THE FUND'S INDEPENDENT ACCOUNTANTS...........................................35
FINANCIAL STATEMENTS.........................................................35
Appendix A...................................................................38
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.
<PAGE>
DESCRIPTION OF THE FUND
Legg Mason Investment Trust, Inc. ("Investment Trust" or "Corporation")
is an open-end series investment company that was established as a Maryland
corporation on October 8, 1999. Legg Mason Opportunity Trust ("Opportunity
Trust" or "Fund") is a separate non-diversified series of Investment Trust.
FUND POLICIES
Opportunity Trust's investment objective is long-term growth of
capital.
In addition to the investment objective described in the Prospectus,
the Fund has adopted the following fundamental investment limitations that
cannot be changed except by vote of its shareholders.
Opportunity Trust 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. 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;
3. Engage in the business of underwriting the securities of
other issuers, except insofar as the Fund may be deemed an underwriter
under the Securities Act of 1933, as amended, in disposing of a portfolio
security;
4. Lend any security or make any other 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;
5. 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);
6. Issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended ("1940 Act"); or
7. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
The foregoing fundamental limitations and the investment objective may
be changed by "the vote of a majority of the outstanding voting securities" of
the Fund, a term defined in the 1940 Act to mean the vote (a) of 67% or more of
the voting securities present at a meeting, if the holders of more than 50% of
the outstanding voting securities of the Fund are present, or (b) of more than
50% of the outstanding voting securities of the Fund, whichever is less.
The following are some of the non-fundamental limitations that the Fund
currently observes. The Fund may not:
1. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with the use of futures contracts, options, forward
contracts, swaps, caps, floors, collars, and other financial instruments;
2. Make short sales of securities or maintain a short position if, when
added together, more than 100% of the value of the Fund's net assets would be
(a) deposited as collateral for the obligation to replace securities borrowed to
effect short sales, and (b) allocated to segregated accounts in connection with
short sales. Short sales "against the box" are not subject to this limitation;
or
3. Acquire additional securities if its borrowings exceed 5% of
its total assets.
The Fund is a non-diversified fund; however, the Fund intends to
continue to qualify as a regulated investment company under the Internal Revenue
Code of 1986, as amended, which requires that, among other things, at the close
of each quarter of the Fund's taxable year: (1) with respect to 50% of its total
assets, no more than 5% of its total assets may be invested in the securities of
any one issuer; and (2) no more than 25% of the value of the Fund's total assets
may be invested in the securities of a single issuer. These limits do not apply
to U.S. Government securities and investment company securities.
Except as otherwise stated, if a fundamental or non-fundamental
percentage limitation 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. Opportunity Trust will monitor the level of borrowing and illiquid
securities in its portfolio and will make necessary adjustments to maintain
required asset coverage and adequate liquidity.
Unless otherwise stated, the investment policies and limitations
contained in the Prospectus and this Statement of Additional Information are not
fundamental, and can be changed by the Board of Directors 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:
Illiquid and Restricted Investments
The Fund may invest up to 15% of its net assets in illiquid
investments. For this purpose, "illiquid investments" are those that cannot be
disposed of within seven days for approximately the price at which the Fund
values the security. Illiquid investments include repurchase agreements with
terms of greater than seven days, restricted investments other than those the
adviser has determined are liquid pursuant to guidelines established by the
Fund's Board of Directors, securities involved in swap, cap, collar, and floor
transactions, and over-the-counter ("OTC") options and their underlying
collateral.
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.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written 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.
Senior Securities
The 1940 Act prohibits the issuance of senior securities by a
registered open-end fund with one exception. The Fund may borrow from banks
provided that immediately after any such borrowing there is an asset coverage of
at least 300% for all borrowings of the Fund. Borrowing for temporary purposes
only and in an amount not exceeding 5% of the value of the total assets of the
Fund at the time the borrowing is made is not deemed to be an issuance of a
senior security.
There are various investment techniques which may give rise to an
obligation of the Fund to pay in the future about which the Commission has
stated it would not raise senior security concerns, provided the Fund maintains
segregated assets in an amount that covers the future payment obligation. Such
investment techniques include, among other things, when-issued securities,
futures and forward contracts, short options positions, and repurchase
agreements.
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
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
American Depository Receipts ("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 Global Depository Receipts ("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 49% of its total
assets in foreign securities either directly or through ADRs or GDRs.
Debt Securities
The Fund may invest in the debt securities of governmental or corporate
issuers. Corporate debt securities may pay fixed or variable rates of interest.
These securities may be convertible into preferred or common equity, or may be
bought as part of a unit containing common stock.
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.
Debt securities and securities convertible into common stock need not
necessarily be of a certain grade as determined by rating agencies such as
Standard & Poor's ("S&P") or Moody's Investors Service, Inc. ("Moody's");
however, the Fund's adviser does consider such ratings in determining whether
the security is an appropriate investment for the Fund. Generally, debt
securities rated below BBB by S&P, or below Baa by 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. However, debt
securities, regardless of their ratings, generally have a higher priority in the
issuer's capital structure than do equity securities.
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 S&P and
Moody's 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.
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 assets, 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.
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.
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.
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
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 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.
Options, Futures and Other Strategies
General. The Fund may invest in certain options, futures contracts
(sometimes referred to as "futures"), options on futures contracts, forward
currency contracts, swaps, caps, collars, floors, indexed securities and other
derivative instruments (collectively, "Financial Instruments") to attempt to
enhance the Fund's income or yield or to attempt to hedge the Fund's
investments. The strategies described below may be used in an attempt to manage
the Fund's foreign currency exposure (including exposure to the Euro) as well as
other risks of the Fund's investments that can affect fluctuation in its net
asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since the Fund is authorized to invest in foreign
securities, it may purchase and sell foreign currency and Euro derivatives.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in the Fund's portfolio. Thus, in a short hedge the Fund
takes a position in a Financial Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to acquire.
Thus, in a long hedge, the Fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the SEC, the several exchanges upon which they are traded and the Commodity
Futures Trading Commission (the "CFTC"). In addition, the Fund's ability to use
Financial Instruments may be limited by tax considerations. See "Additional Tax
Information."
In addition to the instruments, strategies and risks described below,
the adviser expects to discover additional opportunities in connection with
Financial Instruments and other similar or related techniques. These new
opportunities may become available as the adviser develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. The adviser may utilize
these opportunities to the extent that they are consistent with the Fund's
investment objective and permitted by the Fund's investment limitations and
applicable regulatory authorities. The Fund might not use any of these
strategies, and there can be no assurance that any strategy used will succeed.
The Fund's Prospectus or SAI will be supplemented to the extent that new
products or techniques involve materially different risks than those described
below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon the adviser's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation, between price
movements of a Financial Instrument and price movements of the investments being
hedged. For example, if the value of a Financial Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Financial Instruments are
traded. The effectiveness of hedges using Financial Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The Fund
may invest in options and futures contracts based on securities with different
issuers, maturities or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because the adviser projected a decline in the
price of a security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase in the
price of the security, the Fund could suffer a loss. In either such case, the
Fund would have been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
(5) The Fund's ability to close out a position in a Financial Instrument prior
to expiration or maturity depends on the existence of a liquid secondary market
or, in the absence of such a market, the ability and willingness of the other
party to the transaction (the "counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover in accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its market value. If
the call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Illiquid and
Restricted Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid and Restricted
Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more sensitive
to changes in the value of the related instrument. The Fund may purchase or
write both exchange-traded and OTC options. Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund purchases an OTC
option, it relies on the counterparty from whom it purchased the option to make
or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the Fund might be unable to close
out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("multiplier"),
which determines the total dollar value for each point of such difference. When
the Fund buys a call on an index, it pays a premium and has the same rights as
to such call as are indicated above. When the Fund buys a put on an index, it
pays a premium and has the right, prior to the expiration date, to require the
seller of the put, upon the Fund's exercise of the put, to deliver to the Fund
an amount of cash if the closing level of the index upon which the put is based
is less than the exercise price of the put, which amount of cash is determined
by the multiplier, as described above for calls. When the Fund writes a put on
an index, it receives a premium and the purchaser of the put has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the index and exercise
price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, the Fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same securities as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund great flexibility to
tailor the option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
Futures Contracts and Options on Futures Contracts. The purchase of
futures or call options on futures can serve as a long hedge, and the sale of
futures or the purchase of put options on futures can serve as a short hedge.
Writing call options on futures contracts can serve as a limited short hedge,
using a strategy similar to that used for writing call options on securities or
indices. Similarly, writing put options on futures contracts can serve as a
limited long hedge. Futures contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If the adviser wishes to shorten
the average duration of the Fund's fixed-income portfolio, the Fund may sell a
debt futures contract or a call option thereon, or purchase a put option on that
futures contract. If the adviser wishes to lengthen the average duration of the
Fund's fixed-income portfolio, the Fund may buy a debt futures contract or a
call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a futures contract, the premium
paid plus transaction costs is all that is at risk. In contrast, when the Fund
purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If the Fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on
a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by the adviser may
still not result in a successful transaction. The adviser may be incorrect in
its expectations as to the extent of various interest rate, currency exchange
rate or stock market movements or the time span within which the movements take
place.
Index Futures. The risk of imperfect correlation between movements in
the price of an index futures and movements in the price of the securities that
are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index futures moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest in them in an
orderly fashion, it is possible that the market may decline instead. If the Fund
then concludes not to invest in them at that time because of concern as to
possible further market decline or for other reasons, it will realize a loss on
the futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums required to establish
these positions (excluding the amount by which options are "in-the-money" at the
time of purchase) may not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts the Fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
Foreign Currency Hedging Strategies -- Special Considerations. The Fund
may use options and futures contracts on foreign currencies (including the
Euro), as described above, and forward currency contracts, as described below,
to attempt to hedge against movements in the values of the foreign currencies in
which the Fund's securities are denominated or to attempt to enhance income or
yield. Currency hedges can protect against price movements in a security that
the Fund owns or intends to acquire that are attributable to changes in the
value of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to other
causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are available
or such Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the value of which the adviser
believes will have a high degree of positive correlation to the value of the
currency being hedged. The risk that movements in the price of the Financial
Instrument will not correlate perfectly with movements in the price of the
currency subject to the hedging transaction is magnified when this strategy is
used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
The Fund may also use forward currency contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if the Fund owned securities denominated in Euros, it could enter
into a forward currency contract to sell Euros in return for U.S. dollars to
hedge against possible declines in the Euro's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the Euro. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase its
exposure to foreign currencies that the adviser believes might rise in value
relative to the U.S. dollar, or shift its exposure to foreign currency
fluctuations from one country to another. For example, if the Fund owned
securities denominated in a foreign currency and the adviser believed that
currency would decline relative to another currency, it might enter into a
forward currency contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency 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. When the Fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Successful use of forward currency contracts depends on the adviser's
skill in analyzing and predicting currency values. Forward currency contracts
may substantially change the Fund's exposure to changes in currency exchange
rates and could result in losses to the Fund if currencies do not perform as the
adviser anticipates. There is no assurance that the adviser's use of forward
currency contracts will be advantageous to the Fund or that the adviser will
hedge at an appropriate time.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its 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. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Collars, and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
the cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.
Swap agreements, including caps, collars and floors, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their structure,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by the adviser. If a firm's creditworthiness
declines, the value of the agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such transaction,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such accounts with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. The adviser and the Fund believe that
such obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The Fund understands that the position of the SEC is that assets
involved in swap transactions are illiquid and are, therefore, subject to the
limitations on investing in illiquid investments.
See "Illiquid and Restricted Investments."
Indexed Securities
Indexed securities are securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators, subject to its operating policy
regarding derivative instruments. 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 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. Indexed
securities may be more volatile than the underlying investments. 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 purchase indexed securities
only 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 multiple changes in
the underlying instrument and, in that respect, have a leverage-like effect on
the Fund.
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 currently 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 agreements 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.
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.
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 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 foreign 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.
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.
Investors also should be aware that if shares are purchased shortly before the
record date for a dividend or other distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
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
gain or loss recognized on these deemed sales, and sixty percent 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, the Fund 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).
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 Fund currently offers one class of shares known as Primary Shares.
Other classes of shares may be offered in the future. Primary Shares are
available from Legg Mason, certain of its affiliates and unaffiliated entities
having an agreement with Legg Mason.
Transfer of Funds from Financial Institutions
Investors in Primary Shares may also buy shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of the Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is drawn on, the
investor may be subject to extra charges in order to cover collection costs.
These charges may be deducted from the investor's shareholder account.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or more, you
may also elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Simplified Employee Pension Plan ("SEP"), Savings Incentive Match Plan for
Employees ("SIMPLE") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value per share
determined as of the close of regular trading of the New York Stock Exchange
("Exchange") (normally 4:00 p.m., eastern time) ("close of the Exchange") on the
first day of each month. If the Exchange is not open for business on that day,
the shares will be redeemed at the per share net asset value determined as of
the close of regular trading of the Exchange on the preceding business day. The
check for the withdrawal payment will usually be mailed to you on the next
business day following redemption. If you elect to participate in the Systematic
Withdrawal Plan, dividends and other distributions on all Primary Shares in your
account must be automatically reinvested in Primary Shares. You may terminate
the Systematic Withdrawal Plan at any time without charge or penalty. The Fund,
its transfer agent, and Legg Mason also reserve the right to modify or terminate
the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and distributions, the
amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund if
you maintain a Systematic Withdrawal Plan, because you may incur tax liabilities
in connection with such purchases and withdrawals. 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 for each Class as
of the close of the Exchange, on every day the Exchange is open, by dividing the
value of the total assets attributable to that Class, less liabilities
attributable to that Class, by the number of shares of that Class outstanding.
Pricing will not be done on days when the Exchange is closed. The Exchange
currently observes the following holidays: New Year's Day, Presidents' Day,
Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, and Christmas. As described in the 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 cost. Securities and other assets quoted in foreign currencies will
be valued in U.S. dollars based on the currency exchange rates prevailing at the
time of the valuation. All other securities are valued at fair value as
determined by or under the direction of the Fund's Board of Directors. Premiums
received on the sale of call options are included in the net asset value of each
Class, and the current market value of options sold by the Fund will be
subtracted from net assets of each Class.
PERFORMANCE INFORMATION
General
From time to time the Fund may compare the performance of a Class to
the performance of other investment companies, groups of investment companies,
various market indices, the features or performance of alternative investments,
in advertisements, sales literature, and reports to shareholders. The Fund may
also include calculations, such as hypothetical compounding examples or tax-free
compounding examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an express set of
assumptions that are not indicative of the performance of the Fund.
From time to time, the total return of the Fund may be quoted in
advertisements, shareholder reports, or other communications to shareholders.
Total Return Calculations
Average annual total return quotes used in the Fund's advertising and
other promotional materials ("Performance Advertisements") are calculated
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.
Fund advertisements may reference the history of the distributor and
its affiliates, the education, experience, investment philosophy and strategy of
the portfolio manager, and the fact that the portfolio manager engages in
certain approaches to investing.
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 independent third parties such as
Ibbotson Associates and Frontier Analytics, Inc. to compare the returns of
various capital markets and to show the value of a hypothetical investment in a
capital market. Typically, different indices are used 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 $94.6 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
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 an LMM 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 ($500)
may be contributed for any year to Education IRAs for the same beneficiary.
Contributions are not deductible and may not be made after the beneficiary
reaches age 18; however, earnings accumulate tax-free, and withdrawals are not
subject to tax if used to pay the qualified higher education expenses of the
beneficiary (or transferred to an Education IRA of a qualified family member).
Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares.
Savings Incentive Match Plan for Employees -- SIMPLE
An employer with no more than 100 employees that does not maintain
another retirement plan 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 Corporation's officers are responsible for the operation of the
Corporation under the direction of the Board of Directors. The officers and
directors of the Corporation 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 director and officer is 100 Light Street,
Baltimore, Maryland 21202, unless otherwise indicated.
JOHN F. CURLEY, JR.* [7/24/39], Director; President and/or Chairman
of the Board and Director/Trustee of all 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; 10310 Tamo Shander Place,
Bradenton, Florida. 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; The Brooklyn Museum of Art,
200 Eastern Parkway, Brooklyn, New York. 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).
JENNIFER W. MURPHY* [12/18/64], President and Director;
Senior Vice President of Legg Mason Fund Adviser, Inc.; employee of
Legg Mason since 1995. Formerly: strategy consultant with Corporate
Decisions, Inc. (1992-1995).
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. Retired: Managing
Director/Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999).
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], Director; Senior Executive Vice
President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice Chairman
and Director of LMFA and Director of Western Asset Management Company;
President and/or Director/Trustee of all Legg Mason funds except Legg
Mason Tax Exempt Trust. 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).
The executive officers of the Corporation, other than those who also
serve as directors, are:
MARIE K. KARPINSKI* [1/1/49], Vice President and Treasurer;
Treasurer of LMFA; Vice President and Treasurer of all Legg Mason funds;
Vice President of Legg Mason.
PATRICIA A. MAXEY* [7/10/67], Secretary; Secretary of Legg Mason
Cash Reserve Trust; employee of Legg Mason since November 1999. Formerly:
Consultant with Select Appointments International, Inc. (1998-1999);
Product Manager with Fidelity Investments (1995-1997).
W. SHANE HUGHES* [4/24/68], Assistant 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 O'Brien, and Dr.
McGovern.
Officers and directors of the Corporation who are "interested persons"
of the Corporation receive no salary or fees from the Corporation. Each Director
of the Corporation who is not an interested person of the Corporation
("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 December 1, 1999, the directors and officers of the Corporation
beneficially owned in the aggregate less than 1% of the Fund's outstanding
shares.
The following table provides certain information relating to the
compensation of the Corporation's directors. None of the Legg Mason funds has
any retirement plan for its directors.
<PAGE>
COMPENSATION TABLE
=========================== ====================== =========================
Total Compensation From Fund
Fund and Fund Complex Paid
Name of Person and Position Aggregate Compensation To Directors
From Fund*
- --------------------------- ----------------------- ---------------------------
- --------------------------- ----------------------- ---------------------------
John F. Curley, Jr.
- Director None None
- --------------------------- ----------------------- ---------------------------
Jennifer W. Murphy -
President None None
and Director
- --------------------------- ----------------------- ---------------------------
Edward A. Taber, III
- - Director None None
- --------------------------- ----------------------- ---------------------------
- --------------------------- ----------------------- ---------------------------
Richard G. Gilmore
- Director $1,200 $37,800
- --------------------------- ----------------------- ---------------------------
Arnold L. Lehman
- - Director $1,200 $37,800
- --------------------------- ----------------------- ---------------------------
Jill E. McGovern
- - Director $1,200 $37,800
- --------------------------- ----------------------- ---------------------------
T.A. Rodgers
- - Director $1,200 $37,800
- --------------------------- ----------------------- ---------------------------
G. Peter O'Brien
- - Director $1,200 $15,000
- --------------------------- ----------------------- ---------------------------
* Represents estimated compensation that will be paid to each director
during the first fiscal year of operations.
** Represents estimated aggregate compensation paid to each director
during the calendar year ended December 31, 1999. There are twelve
open-end investment companies in the Legg Mason Complex (with a total
of twenty-four funds).
THE FUND'S INVESTMENT ADVISER/MANAGER
LMM, a Delaware limited liability company located at 100 Light Street,
Baltimore, Maryland 21202, is 50% owned by Legg Mason, Inc. and 50% owned,
directly or indirectly, by William H. Miller, III. LMM serves as the Fund's
investment adviser and manager under a Management Agreement ("Management
Agreement"). LMFA, a Maryland corporation located at 100 Light Street,
Baltimore, Maryland 21202, is a wholly-owned subsidiary of Legg Mason, Inc. LMFA
serves as sub-manager to the Fund under a Sub-Management Agreement
("Sub-Management Agreement").
The Management Agreement provides that, subject to overall direction by
the Fund's Board of Directors, LMM manages or oversees the investment and other
affairs of the Fund. LMM 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. The Management Agreement further
provides that LMM is responsible, subject to the general supervision of 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.
LMM receives for its services to the Fund a management fee, calculated
daily and payable monthly. LMM receives from Opportunity Trust a management fee
at an annual rate of 1.00% of the average daily net assets of the Fund up to
$100 million and 0.75% of its average daily net assets in excess of $100
million. LMM has agreed to waive its fees for Opportunity Trust for expenses
related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of 1.99% of average net assets attributable to
the shares until December 31, 2000. The Fund has agreed to pay the manager for
waived fees and reimbursed expenses provided that payment does not cause the
Fund's annual operating expenses to exceed 1.99% of its average net assets and
the payment is made within three years after the year in which the manager
earned the fee or incurred the expense.
The Sub-Management Agreement provides that LMFA is obligated to perform
certain advisory and administrative services for the Fund. Regarding advisory
services, LMFA will regularly provide investment research, advice, management
and supervision; otherwise assist in determining from time to time what
securities will be purchased, retained or sold by the Fund; and implement
decisions to purchase, retain or sell securities made on behalf of the Fund, all
subject to the supervision of LMM and the general supervision of the
Corporation's Board of Directors. LMFA will also place orders for the Fund
either directly with the issuer or with any broker or dealer; provide advice and
recommendations with respect to other aspects of the business and affairs of the
Fund; and perform such other functions of management and supervision as may be
directed by the Board of Directors of the Corporation and LMM.
Regarding administrative services, LMFA will (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 expenses, taxes, brokerage fees and commissions,
expenses of preparing and setting in type prospectuses, proxy statements and
reports to shareholders and of printing and distributing them to existing
shareholders, custodian charges, transfer agency fees, distribution fees to the
Fund's distributor, compensation of the independent directors, legal and audit
expenses, insurance expenses, shareholder meetings, proxy solicitations,
expenses of registering and qualifying Fund shares for sale under federal and
state law, governmental fees, and expenses incurred in connection with
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.
For LMFA's services to the Fund, LMM (not the Fund) pays LMFA a fee,
calculated daily and payable monthly, of 0.10% of the average daily net assets
of the Fund up to $100 million and 0.05% of the average daily net assets of the
Fund in excess of $100 million.
Under the Management Agreement and Sub-Management Agreement, LMM and
LMFA 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 Management Agreement
or the Sub-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 Management Agreement and Sub-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 LMM and LMFA, 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 against the possibility that the Fund will be affected by
personal trading of employees, the corporation and LMM 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 Management 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.
On any given trade, the choice of broker may be made by either LMM or LMFA. Such
research and analysis may be useful to either the Fund's adviser or sub-adviser
in connection with services to clients other than the Fund whose brokerage
generated the service. LMM's and LMFA's fee is not reduced by reason of its
receiving such brokerage and research services.
From time to time the Fund may use Legg Mason as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. Commissions
paid to Legg Mason will not exceed "usual and customary brokerage commissions."
Rule 17e-1 under the 1940 Act defines "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission, fee
or other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In the over-the-counter
market, the Fund generally deals with responsible primary market-makers unless a
more favorable execution can otherwise be obtained.
Except as permitted by SEC rules or orders, the Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. The Fund's Board of Directors has adopted procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that
are offered in certain underwritings in which Legg Mason or any of its
affiliated persons is a participant. 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
Management Agreement expressly provides such consent.
Investment decisions for the Fund are made independently from those of
other funds and accounts advised by LMM. 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.
Under the Underwriting 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 Legg Mason.
The Primary Shares are subject to a deferred sales charge payable to
Legg Mason if they are redeemed within 12 months of purchase. This deferred
sales charge is not applicable where the investor's broker-dealer of record
notifies the distributor prior to the time of investment that the broker-dealer
waives the payment otherwise payable to it. Except as specifically provided for
in the Fund's prospectus, for purposes of exchange privileges, the Fund is not
considered a Legg Mason fund.
The Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits the Fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. Payments are made
only from assets attributable to Primary Shares. Under the 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.
With respect to Primary Shares, Legg Mason has also agreed to waive its
fees for the Fund as described under "The Fund's Investment Adviser/Manager."
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 LMM and 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 LMM and 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 directors who are not "interested persons" of the Corporation as
that term is defined in the 1940 Act and who have no direct or indirect
financial interest in the operation of the Plan or the Underwriting Agreement
("12b-1 Directors"), 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 candidates for Independent Director
will be committed to the discretion of the Independent Directors.
CAPITAL STOCK INFORMATION
The Articles of Incorporation of Investment Trust authorize issuance of
400 million shares of common stock, par value $0.001 per share, of Legg Mason
Opportunity Trust. The Fund has three authorized classes of shares: Class A
shares, Primary Class shares, and Navigator Class shares. Class A shares and
Navigator Class shares are not being offered at this time.
Each share in the Fund is entitled to one vote for the election of
directors and any other matter submitted to a vote of Fund shareholders.
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.
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 Investment 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 ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, serves as custodian of the Fund's assets. Boston
Financial Data Services ("BFDS"), P.O. Box 953, Boston, Massachusetts 02103, as
agent for State Street, 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
Ernst & Young LLP, Two Commerce Square, 2001 Market Street,
Philadelphia, PA 19103, serves as independent auditors for Opportunity Trust.
FINANCIAL STATEMENTS
LEGG MASON INVESTMENT TRUST, INC.:
LEGG MASON OPPORTUNITY TRUST
Statement of Assets and Liabilities
December 14, 1999
Cash $100,000
Receivable from LMM 100,000
Deferred offering costs 27,000
----------------
Total Assets 227,000
----------------
Organization and offering costs payable 127,000
----------------
Net Assets - Offering price of $10.00 per
share with 10,000 shares outstanding
(400,000,000 shares par value $.001 per
share Primary Class authorized) $100,000
================
- -------------------------
Statement of Operations
For the Period October 8, 1999 through December 14, 1999
Organization expenses $100,000
Expenses reimbursed by LMM (100,000)
------------------
Net Income $ 0
==================
Notes to Financial Statements
Legg Mason Investment Trust, Inc. (the "Corporation"), comprised of Legg Mason
Opportunity Trust (the "Fund"), was organized on October 8, 1999. The Fund has
had no operations other than those matters related to its organization and
registration as an investment company under the Investment Company Act of 1940
and the sale of its initial shares. The Fund currently offers only Primary Class
shares. LMM, LLC ("LMM"), the Fund's investment advisor and manager and an
affiliate of Legg Mason, Inc. (a financial services holding company), has
provided the initial capital for the Fund by purchasing 10,000 shares of the
Primary Class at $10.00 per share. Such shares were acquired for investment and
can be disposed of only by redemption. Legg Mason Wood Walker, Incorporated, a
wholly owned subsidiary of Legg Mason, Inc. and a member of the New York Stock
Exchange, acts as the distributor of the Fund's shares.
Organization costs of the Fund have been expensed as incurred. Offering costs
have been deferred and will be expensed over a twelve-month period beginning the
day operations commence. Under the terms of the investment management agreement,
LMM is required to bear any expenses through December 31, 2000, including
organization costs, which would cause the Fund's ratio of expenses to average
net assets to exceed 1.99%. Thereafter, through December 31, 2003, the Fund is
required to reimburse LMM for these expenses, provided that average net assets
have grown or expenses have declined sufficiently to allow reimbursement without
causing the Fund's ratio of expenses to average net assets to exceed 1.99%. At
December 14, 1999, organization costs of $100,000 of the Fund have been borne by
LMM and under the arrangement, are subject to reimbursement by the Fund through
December 14, 2002.
<PAGE>
Report of Independent Auditors
To the Shareholder and Board of Directors
Legg Mason Investment Trust, Inc. - Legg Mason Opportunity Trust
We have audited the accompanying statement of assets and liabilities of Legg
Mason Opportunity Trust (the "Fund") as of December 14, 1999 and the related
statement of operations for the period October 8, 1999 through December 14,
1999. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Legg Mason Opportunity Trust at
December 14, 1999, and the results of its operations for the period October 8,
1999 through December 14, 1999, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
December 16, 1999
<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 by an
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 risk appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered as 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 some time 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 as 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 of
maintenance of other terms of the contract over any long period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Description of Standard & Poor's ("S&P") corporate bond ratings:
AAA-An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA -An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A-An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB-An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. Obligations rated BB, B, CCC, CC, and C are regarded as
having significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB-An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B-An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC-An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC-An obligation rated CC is currently highly vulnerable to nonpayment.
C-A subordinated debt or preferred stock obligation rated C is
currently highly vulnerable to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued. A C also will be
assigned to a preferred stock issue in arrears on dividends or sinking fund
payments but that is currently paying.
D-An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-)-The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r-This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R.-This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.
