Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Edward A. Taber, III
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Corporation
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Accountants
Coopers & Lybrand L.L.P.
Baltimore, MD
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Wood Walker, Incorporated
- --------------------------------------------------------------------------------
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (bullet) 539 (bullet) 0000
LMF-002
8/97
Semi-Annual Report
September 30, 1997
Legg Mason
Value Trust, Inc.
Special Investment
Trust, Inc.
Total Return Trust, Inc.
The Art of Investing
[LEGG MASON LOGO]
FUNDS
<PAGE>
To Our Shareholders,
We are pleased to provide you with semi-annual reports for the Legg Mason
Value Trust, Special Investment Trust and Total Return Trust for the period
ended September 30, 1997.
Each of the funds continued to perform exceptionally well in the quarter and
in the nine months ended September 30, as did the stock market generally. The
table below compares the funds' results with those of three widely-followed
stock market indices: the S&P 500 Composite Index consists of the common stocks
of 500 of America's largest companies, the Value Line Index measures a broader
group of 1700 common stocks, and the Russell Index measures performance of the
stocks of 2000 small and medium-sized companies.
<TABLE>
<CAPTION>
For the periods ended September 30, 1997:
3 Month 9 Month
Total Return* Total Return*
------------- -------------
<S> <C>
Value Trust 16.5% 42.2%
Special Investment Trust 15.1% 27.2%
Total Return Trust 13.8% 32.1%
S&P 500 Composite Index 7.5% 29.6%
Value Line Index of 1700 stocks 11.9% 26.6%
Russell 2000 Index 14.9% 26.6%
</TABLE>
Investment results for each of the funds over longer periods of time are
shown in the "Performance Information" section of this report. In this regard,
we are pleased to note that $10,000 invested in the Legg Mason Value Trust, our
original equity fund, at its inception in April 1982 would have grown to
$178,615 by September 30, 1997, producing an annual return of 20.5% over the
151/2 year period. $10,000 invested in common stocks included in the Standard &
Poor 500 and Value Line indices would have grown to $137,058 and $56,664,
respectively, over the same period. All figures assume reinvestment of dividends
and other distributions.
On the following pages, Bill Miller, the portfolio manager for the Value
Trust and Special Investment Trust and Nancy Dennin, the portfolio manager for
the Total Return Trust, discuss the funds and the investment outlook.
The Board of Directors has approved an ordinary income dividend of $.13 per
share to Primary Class shareholders of Total Return Trust, payable on November
20, 1997 to shareholders of record on November 19, 1997. Most shareholders will
receive this distribution in the form of additional shares credited to their
accounts.
Sincerely,
/s/ John F. Curley, Jr.
_____________________
John F. Curley, Jr.
President
November 10, 1997
- ---------
*Total return measures investment performance in terms of appreciation or
depreciation in net asset value per share plus dividends and any capital gain
distributions. It assumes that dividends and distributions were reinvested at
the time they were paid. Total return percentages and other information
regarding the Legg Mason funds in this letter are for the Primary Class of
shares of the funds.
<PAGE>
Portfolio Managers' Comments
Market Commentary
Third Quarter 1997
Despite the turbulence of late October, investors in the stock market have
continued to earn solid returns. Even after this pullback, the S&P 500 is up
over 20% for the year, about double its long-term average. As we noted in our
last shareholders' report, we believe that the most likely course for the market
in the next several years is what we've called a return to normalcy, where
returns have two features that have been absent from the recent annual stock
market data: a central tendency in the high single, or low double digit area,
and a greater propensity for returns that may lag bonds or even cash from time
to time.
We are suspicious of most measures of central tendency in time series data,
and believe that betting on regression from the mean is at least as profitable a
strategy as counting on regression to the mean. Robust or predictable
regularities in markets are usually short lived and not scalable; about the time
you think you've found a profitable pattern it ceases to work. Markets are far
too complex and adaptive to be amenable to analysis by simple formulas such as
average price/earnings ratios, dividend yields, or counting the time since the
last recession or the last 10% correction. This has not discouraged the press or
commentators from using such formulas to generate wrong predictions. Markets are
context dependent, their behavior is a function of the particular circumstances
that obtain and how those circumstances are expected to or do change. The trick
is not to predict an unknowable future, but to try to understand the present,
and the probabilities of the various paths that may evolve from it.
The present economic circumstances in the US are about as good as it gets:
high growth, low inflation, low unemployment, record profit margins and profits,
high returns on capital, and a world generally at peace. Biologists often use
the notion of a fitness landscape, first devised by Sewell Wright in the 1930s,
to characterize the situation in which a species (say) might find itself. The
objective is to reach local or, better yet, global peaks on the landscape. If
you're on a peak, things are great, but they don't get better. If you're in a
valley, things are bad, but since any direction will take you up, they are
likely to improve almost no matter what you do.
The US economy appears to be at a peak on its fitness landscape, or maybe a
plateau. The nervousness of the markets is due to investors being worried that
any change from here is likely to be for the worse. After years of terrific
returns, valuations in the market generally reflect the strength and health of
corporate America. If the Asian currency devaluations had not spooked the equity
market, something else would have; we agree with Alan Greenspan's testimony on
that point. The recent declines have taken a lot of froth off the market and we
think it unlikely that the exuberance of the late summer will return soon.
The market is just "p" and "e": price times earnings. If earnings are moving
forward, if inflation is not rising, if interest rates are stable, and if stocks
are not too overpriced, the path of least resistance for the market is higher.
We think earnings are going to be up 5% to 8% next year, that the Asian flu will
slow the US down a bit, that the Fed is unlikely to tighten amidst this kind of
market instability, and that stocks are priced about where they should be. If
prices were to fall sharply from here, we think it would represent an excellent
buying opportunity.
2
<PAGE>
Value Trust
Third Quarter 1997
The financial turbulence of the past few weeks makes the third quarter seem
like a distant memory. Asian stock markets, already the worst performing in the
world, fell apart in late October. Hong Kong dropped over 30% in a week, then
rebounded almost 20% in one day. Our market saw the largest single day point
drop and the largest point gain in history on successive days. Although the
percentage moves were not so dramatic, they were still sharp enough to generate
world-wide headlines and occasion much commentary on what all of this might
mean. Our current views on the market are detailed in the "Market Commentary"
section above.
Your fund has continued to perform quite well, as this table shows:
<TABLE>
<CAPTION>
Third Quarter Year to Date Twelve Months Ended
1997 1997 September 30, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust 16.49% 42.19% 62.87%
Lipper Growth Funds 10.61% 26.65% 33.52%
S&P 500 Composite Index 7.48% 29.64% 40.44%
Dow Jones Industrial Average 4.00% 24.93% 37.70%
</TABLE>
Of course, neither the absolute nor the relative gains experienced by the
Value Trust recently are sustainable. You may think this is just false modesty,
and that no matter what we say, we really expect to knock the cover off the ball
all the time. If so, a brief excursus on what constitutes reasonable return
expectations might be helpful.
Stocks have provided remarkably stable real (after inflation) returns
averaging about 7% per year since the early 1800s, according to work done by
Jeremy Siegel, a Wharton professor. Recent work by economist Peter Bernstein
shows similar results, although the real rate is lower due to the different
methodology employed. Bernstein found a nominal return average of 9.6%, which
equated to a real return of 5.7% after inflation for the period 1871-1995. He
calculates what's called the equity risk premium to be 330 basis points (100
basis points = 1%). This is the return premium stock investors have historically
earned over bond investors for the greater perceived risk of stocks relative to
the contractually guaranteed returns of bonds.
With bonds yielding 6.2%, a 330 basis point premium for stocks would imply an
average annual return for stocks of 9.2% per year from these levels, assuming no
change in the overall valuation of the market. There is another way to extract
the potential rate of return: take the 7% real return that Siegel found and add
to it the inflation rate implied by the difference between the new inflation
indexed bonds and regular bonds. The implied inflation rate calculated that way
is 2.15%, which when added to 7% gives you an implied nominal return of 9.15%,
remarkably similar to that reached using Bernstein's approach. Either way, we're
a long way from the 20% rates of return averaged by the Value Trust over its 15
year existence.
Consistent with the above, we think the stock market may average 8-10% annual
returns over the next several years. This compares to an average annual return
of over 20% for the past 5 years, and 18% per year for the last 15 years. This
assumes that current valuations, which are among the highest ever achieved,
persist. If economic conditions become less favorable, valuations would likely
decline somewhat, further pressuring returns.
3
<PAGE>
Portfolio Managers' Comments--Continued
The Value Trust has outperformed the market over time, and we would hope to
be able to continue to do so, but it is unrealistic to expect us to do it each
year, or even most years. Our strategy has been and will remain consistent: we
attempt to buy companies whose shares trade at substantial discounts to our
assessment of intrinsic value, and to hold those shares long term.
Our technology and financial stocks were the star performers in the third
quarter. These two groups have led the market since 1990, and we still think
they represent the best values among the major industry sectors. When the market
corrects, as it is doing now, they also tend to pull back sharply as worried
investors try to protect gains. We do not get too caught up in the ebb and flow
of investor sentiment, preferring instead to concentrate on understanding the
economics and prospects of the businesses we own on your behalf.
Among our laggards was Columbia/HCA, the big hospital chain whose billing
practices are currently under investigation by the government, MCI, whose shares
fell when their merger agreement with British Telecom was amended, and Amgen,
the leading biotech company, whose stock has been hurt by concerns about
reimbursement rates for one of their major drugs, and by a relative lack of new
product offerings for the next year or so. In each case, we used the price
weakness to add to positions. We think Columbia in the mid to high $20s
represents good value, even considering the headline risk associated with the
flow of bad news surrounding this company. Columbia should be able to earn about
$3.00 per share in a couple of years, and could then sell in the mid-$40s. The
previous management has been replaced and the current team is cooperating with
the government. The ride may still be bumpy from here, but it should ultimately
prove rewarding. MCI has rebounded as two new bidders have emerged. We prefer
the Worldcom offer at present, but are keeping an open mind as the situation
unfolds. We have built up our Amgen position and think this company is the best
value among the major pharmaceuticals, trading at only 15x next year's earnings,
compared to about 25x for Bristol Myers and Schering Plough, and over 30x for
Pfizer.
We sold longtime holding Provident Bankshares in the quarter. It's a good
bank and has been a fine investment for us, but it reached what we believed was
fair value. The Argentine government called its Brady bonds during the quarter
so we had to give up our holdings. As you may recall, we bought these during the
last emerging markets panic in 1995 when everyone was throwing away their Latin
American investments because of the Mexican devaluation. In a little over 2
years we nearly doubled our money on one series, and almost tripled it on the
other. The Asian currency crisis is likewise inducing panic, and probably
creating some outstanding values, but none are quite as obvious as were the
Latin Brady bonds. We are primarily domestic investors, and so don't expect to
end up with much of anything in the Asian markets, but would not rule out doing
something if exceptional opportunities turn up.
We didn't buy anything new in the past quarter, though we have added a name
or so in the recent decline. If the market continues to fall, you can expect our
buying to accelerate. We have about $300 million in cash and would love for the
market to drop sufficiently for us to put it all to work.
Bill Miller, CFA
4
<PAGE>
Special Investment Trust
Third Quarter 1997
Your fund continued to perform well during the third calendar quarter, and
has posted solid results for the year to date and for the past twelve months, as
the table below shows:
<TABLE>
<CAPTION>
Third Quarter Year to Date Twelve Months Ended
1997 1997 September 30, 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Special Investment Trust 15.12% 27.23% 37.71%
Lipper Mid Cap Funds 14.51% 24.27% 26.88%
Lipper Small Cap Funds 16.55% 27.03% 29.79%
S&P 500 Composite Index 7.48% 29.64% 40.44%
Russell 2000 Index 14.88% 26.60% 33.19%
</TABLE>
During the third quarter, small and mid-sized company stocks performed
substantially better than the large stocks that make up the top half of the S&P
500 and that have dominated the market for the past several years. We think the
currency turmoil in Southeast Asia is a modest negative for big multinationals
since growth will slow in that region, impacting exports. Currency translation
will also clip the reported results of large companies with overseas exposure.
Smaller companies, which typically lack significant foreign presence, should
benefit. We also believe that smaller companies are, in general, more
attractively valued than their larger brethren and have somewhat better
prospects over the next few years.
The market turbulence experienced at the end of October, and discussed more
fully above, has knocked our results back a bit but has also provided us with an
opportunity to add to positions at more favorable prices than prevailed a few
weeks ago.
Our returns in the quarter were paced by Quantum, which makes disk and tape
storage systems for computers. Quantum is in the midst of a turnaround from poor
results experienced a few years ago. We are quite optimistic about the prospects
for both the industry and the company. In addition to Quantum, we have
significant positions in two other storage companies, Western Digital and
StorageTek.
Several of our laggards came to life in the quarter, including Cell Genesys
(the successor company to Somatix Therapy), Hollywood Park, and John Alden. Cell
Genesys reported success in lab tests of its treatment for AIDS, which sent the
stock higher. We think this company has outstanding science and believe its
experimental therapies for various cancers also have much promise. Hollywood
Park announced that it will seek to recapture the paired share, REIT (Real
Estate Investment Trust) status it held up until a few years ago. This is a
variant of the normal REIT structure that allows a company to operate as well as
own real estate while preserving most of the tax advantages of a REIT. Paired
share REITs have been prominent in the news recently as Starwood Lodging made a
bid to acquire ITT. Its status as a paired share REIT enabled it to handily
outbid Hilton. If Hollywood Park is successful in re-establishing this status,
we would expect the company's perceived value to rise, perhaps significantly.
John Alden is in the midst of an earnings turnaround and has been reported to be
in takeover talks. We peg the company's value in the mid $30s.
I'm pleased to announce that Lisa Rapuano, CFA, has been named assistant
manager of your fund. Lisa is a graduate of Yale and a former All-American
swimmer who joined our staff as an analyst three years ago. She has covered many
of our largest and most successful investments, including America Online, Home
Shopping Network, and Western Digital, among others. A recent analysis by
Morningstar for Money Magazine (11/97 issue) showed that over the three years
ended August 31, 1997, female fund managers have performed somewhat better than
male managers based on average annual returns in five broad categories. The
performance gap was especially wide in the sub-category consisting of small
5
<PAGE>
Portfolio Managers' Comments--Continued
company growth funds. The analysis was based on the average annual returns of
2,562 mutual funds. I hope this means that if Lisa is just an average female
manager, our results will improve!
We remain quite optimistic about the prospects for small and mid-sized
companies and believe that your portfolio is well positioned to deliver solid
results. As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
----------------------------------------------
Total Return Trust
Third Quarter 1997
As shown below, your fund had an excellent third quarter, and has performed
exceptionally well over the nine and twelve months ended September 30, 1997:
<TABLE>
<CAPTION>
Third Quarter Year to Date Twelve Months Ended
1997 1997 September 30, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Total Return Trust 13.83% 32.07% 48.56%
Lipper Growth and Income Funds 9.04% 25.95% 35.76%
S&P 500 Composite Index 7.48% 29.64% 40.44%
Dow Jones Industrial Average 4.00% 24.93% 37.70%
<S> <C>
While these results are quite gratifying, stockholders should understand that
this is an equity fund and its results will tend to reflect results in the
equity market. The market is often subject to swings as earnings expectations
change and emotions move from one extreme to the other. We do not try to time
the market, an endeavor we regard as fruitless, and if the market goes into a
protracted decline, we will undoubtedly participate. That said, we are
reasonably optimistic about the market over the next twelve months, and hope to
do well. (See the "Market Commentary" section for more detail.)
As this letter is being written, the market is in the midst of a correction,
and the major market indices have been closed during the normal trading day for
the first time since the "circuit breakers"* were installed after the market
correction of October 1987. We are strongly opposed to trading halts during
periods of volatility. The US market is obviously an open, efficient market, and
investors should be able to transact freely without halts at various arbitrary
levels.
This sell-off was precipitated by the currency crisis in Southeast Asia, and
the resultant weakness in its equity markets, most specifically Hong Kong. We
believe the difficulties in Southeast Asia will have a limited effect in the
United States, and expect our economy to continue its growth over the next
twelve months or so, as more fully discussed in the "Market Commentary" section.
Your fund's results in the quarter benefited from many of its financial
holdings as shown in the "biggest gainers/laggers" list elsewhere in the report.
John Alden Financial Corporation, an insurance company, was the best performing
security in the quarter, after reporting earnings significantly above
expectations. Over the last eighteen months, the company has been restructuring
its portfolio of businesses to improve profitability, an endeavor that has begun
to impact the bottom line. In the spring of this year, John Alden sold its
annuity business, and we expect the company to repurchase its shares with most
of the proceeds from the sale.
While the company has begun to take concrete steps to improve shareholder
value, the stock still sells at a significant discount to the overall market.
John Alden is trading at 13.5x 1997 and 10.5x 1998
6
<PAGE>
estimated earnings, and only 1.4x book value. In contrast, the S&P 500 is
trading at 19.5x 1997 and 18.0x 1998 estimated earnings.
Northrop Grumman performed quite well in the quarter after it was announced
the company would be acquired by Lockheed Martin, as consolidation in the
defense industry continues.
When we purchased Northrop Grumman about eighteen months ago, it had many of
the characteristics we look for when investing in a company. The stock was
selling at a significant discount to the market and its peer group, catalysts
were in place to improve the company's operating results, and management was
very committed to shareholder value.
Northrop Grumman is joining what is arguably the leading defense contractor
in the world, and shareholders are getting a full price. Lockheed Martin is
paying about 1.3x 1997 estimated revenues, and almost 10x operating cash flow.
This is one of the richest premiums ever paid for a major player in the defense
industry.
General Motors and Ford Motor posted strong appreciation in the quarter, as
they both announced programs to continue to unlock shareholder value.
Several of the Real Estate Investment Trusts ("REITs") were among the biggest
laggers in the quarter, although fundamentally their results have been in line
with expectations. We have used the weakness in several of the REITs to add to
our positions. We now have 15% of the portfolio invested in REITs, and expect
them to perform well over the next several years.
Portfolio activity was modest in the quarter. We purchased two new
securities, Tupperware and Union Planters, and sold one, Exxon Corporation, that
reached our price target.
Tupperware, a well-recognized household products company, has performed very
poorly, down over 50% year-to-date, as the company has reported disappointing
earnings throughout the year. We believe the bad news is already reflected in
the price, and purchased the stock in the mid $20 level. At this price, the
stock trades at only 14x 1998 estimated earnings, compared to a peer group
average of 24x, and carries a 3.4% yield. Once the company's near-term problems
are resolved and earnings visibility improves, we expect the stock to trade
about 18x earnings, implying an attractive total return.
Union Planters is the third largest bank in Tennessee and one of the top 50
US banks. Including pending transactions, Union Planters has $17 billion in
assets across eight states. The bank is in the process of consolidating many
recent acquisitions to help lower its costs. Assuming an 85% relative market
multiple (a conservative assumption in our opinion), the stock has appreciation
potential of about 20% over our cost basis, and carries a 2.9% yield.
We would like to thank our shareholders, both old and new, for their
confidence. As always, we appreciate your support and welcome your comments and
suggestions.
Nancy Dennin, CFA
November 10, 1997
DJIA 7,552.59
- ----------
*"Circuit breakers" halt all trading on the New York Stock Exchange when the
market drops by various point levels. When the market declines 350 points,
trading is halted for 30 minutes. When the market drops 550 points, the halt is
in effect for one hour. Both of these levels were reached on October 27, 1997.
7
<PAGE>
Performance Information
Total Return for One, Five, Ten Years and Life of Funds, as of September 30, 1997
The returns shown on these pages are based on historical results and
are not intended to indicate future performance. The investment return and
principal value of an investment in any of these Funds will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Average annual returns tend to smooth out variations
in a fund's return, so they differ from actual year-to-year results. No
adjustment has been made for any income taxes payable by shareholders.
Total returns as of September 30, 1997 for each Fund and the Value Line
Geometric Average ("Value Line") and S&P 500 Stock Indices are shown in
the table below.
Each Fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees and shareholder servicing expenses are determined
separately for each class and the Navigator Class does not incur Rule
12b-1 distribution fees.
Average annual and cumulative total returns as of September 30, 1997
were as follows:
</TABLE>
<TABLE>
<CAPTION>
Special S&P 500
Value Investment Total Return Value Line Composite
Trust Trust Trust Index Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Average Annual Total Return
Primary Class:
One Year +62.87% +37.71% +48.56% +34.19% +40.44%
Five Years +27.80 +20.55 +20.49 +16.55 +20.77
Ten Years +16.05 +14.83 +13.16 +8.26 +14.75
Life of Class--Value Trust(A) +20.50 +11.87 +18.45
Life of Class--Special Investment Trust(B) +15.27 +9.92 +17.01
Life of Class--Total Return Trust(C) +13.02 +9.90 +17.41
Navigator Class:
One Year +64.57 +39.19 +50.20 +34.19 +40.44
Life of Class(D) +45.47 +29.01 +33.18 +23.84 +31.77
Cumulative Total Return
Primary Class:
One Year +62.87% +37.71% +48.56% +34.19% +40.44%
Five Years +240.89 +154.57 +153.92 +115.10 +156.92
Ten Years +343.13 +298.49 +244.27 +121.23 +295.89
Life of Class--Value Trust(A) +1,686.15 +466.64 +1,270.58
Life of Class--Special Investment Trust(B) +431.71 +203.94 +533.25
Life of Class--Total Return Trust(C) +327.20 +206.37 +570.81
Navigator Class:
One Year +64.57 +39.19 +50.20 +34.19 +40.44
Life of Class(D) +189.44 +105.90 +125.34 +80.03 +113.53
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Inception of Value Trust--April 16, 1982.
(B) Inception of Special Investment Trust--December 30, 1985.
(C) Inception of Total Return Trust--November 21, 1985.
(D) Commencement of sale of Navigator Shares for each fund--December 1, 1994.
8
<PAGE>
Value Trust
Illustration of an Assumed Investment of $10,000 made on April 16, 1982
(inception of the Value Trust Primary Class)
[GRAPH APPEARS HERE - PLOT POINTS BELOW]
Value of original
shares purchased
Value of shares plus shares acquires
acquired through through reimbursement
reinvestment of of capital gain
income dividends Distributions
----------------- ---------------------
4/16/82 10,000 10,000
3/31/83 16,400.97 16,160
3/31/84 19,425.44 18,870.50
3/31/85 24,682.58 23,582.98
3/31/86 34,509.72 32,555.48
3/31/87 37,924.3 35,503.58
3/31/88 34,729.33 32,267.83
3/31/89 41,109.15 37,650.23
3/31/90 44,289.55 39,890.82
3/31/91 43,013.79 37,701.34
3/31/92 51,413.83 44,210.32
3/31/93 59,003.27 50,183.93
3/31/94 62,337.34 52,789.39
3/31/95 68,426.55 57,816.96
3/31/96 97,226.16 82,355.78
3/31/97 129,881.47 110,379.07
9/30/97 178,615.27 151,963.73
-------------------------------------------------
Selected Portfolio Performance*
Strong performers for the 3rd quarter 1997
---------------------------------------------------
1. Compaq Computer Corporation +88.3%
2. Dell Computer Corporation +65.0%
3. American Online, Inc. +35.6%
4. American Online, Inc.
(Private Placement) +35.6%
5. Conseco Inc. +31.9%
6. Lloyds TSB Group plc +30.6%
7. The Bear Stearns Companies, Inc. +28.7%
8. Nokia Corporation ADS +27.2%
9. Western Digital Corporation +26.7%
10. BankBoston Corporation +22.7%
* Securities held for the entire quarter.
Weak performers for the 3rd quarter 1997
- ----------------------------------------------------------
1. Columbia/HCA Healthcare
Corporation -26.9%
2. MCI Communications Corporation -23.3%
3. Amgen Inc. -17.5%
4. Philip Morris Companies, Inc. -6.3%
5. United States Treasury Notes,
8.125%, 2/15/98 -0.5%
6. Zions Bancorporation -0.3%
7. Circus Circus Enterprises, Inc. +2.3%
8. Freddie Mac +2.5%
9. Seagate Technology, Inc. +2.7%
10. Fleet Financial Group, Inc. +3.7%
Portfolio Changes
Securities added during the 3rd quarter 1997
-----------------------------------------------
None
Securities sold during the 3rd quarter 1997
- -----------------------------------------------------
Provident Bankshares Corporation
Republic of Argentina Floating Rate Bonds,
6.75%, 3/31/05
Republic of Argentina Par Bonds,
5.25%, 3/31/23
9
<PAGE>
Performance Information--Continued
Special Investment Trust
Illustration of an assumed investment of $10,000 made on December 30, 1985
(inception of the SpecialInvestment Trust Primary Class)
[GRAPH APPEARS HERE - PLOT POINTS BELOW]
Value of original
shares purchased
Value of shares plus shares acquires
acquired through through reimbursement
reinvestment of of capital gain
income dividends Distributions
----------------- ---------------------
12/30/85 10,000 10,000
3/31/86 11,530 11,530
3/31/87 13,073 13,050.76
3/31/88 11,219.70 11,106.84
3/31/89 13,125.95 12,981.74
3/31/90 15,142.97 14,889.53
3/31/91 18,391.89 17,776.51
3/31/92 22,154.20 21,249.28
3/31/93 24,481.50 23,528.14
3/31/94 29,708.01 28,511.30
3/31/95 27,814.80 26,706.89
3/31/96 35,733.08 34,291
3/31/97 39,870.52 38,344.53
9/30/97 53,171.10 51,228.40
-------------------------------------------------
Selected Portfolio Performance*
Strong performers for the 3rd quarter 1997
---------------------------------------------------
1. Quantum Corporation +88.6%
2. Cell Genesys, Inc. +59.5%
3. John Alden Financial Corporation +48.1%
4. Players International, Inc. +47.9%
5. America Online, Inc. +35.6%
6. Mego Financial Corporation +30.4%
7. HSN, Inc. +30.0%
8. Hollywood Park, Inc. +29.5%
9. Novell Inc. +29.3%
10. The Bear Stearns Companies, Inc. +28.7%
* Securities held for the entire quarter.
Weak performers for the 3rd quarter 1997
- ----------------------------------------------------------
1. Ultrafem, Inc. -35.5%
2. PennCorp Financial Group, Inc. -19.5%
3. Shoney's, Inc. -16.8%
4. Calenergy Company, Inc. -12.5%
5. Salant Corporation -12.5%
6. Cott Corporation Quebec -4.7%
7. Gateway 2000, Inc. -3.1%
8. Sun Healthcare Group Inc. -1.2%
9. Briggs & Stratton Corporation -1.1%
10. Olsen & Associates AG +0.4%
Portfolio Changes
Securities added during the 3rd quarter 1997
----------------------------------------------------
NETCOM On-line Communication Services, Inc.
Securities sold during the 3rd quarter 1997
- ----------------------------------------------------------
Anchor Gaming
Argyle Television, Inc.
General Cable Corporation
Physician Corporation of America
10
<PAGE>
Total Return Trust
Illustration of an Assumed Investment of $10,000 made on November 21, 1985
(inception of the Total Return Trust Primary Class)
[GRAPH APPEARS HERE - PLOT POINTS BELOW]
Value of original
shares purchased
Value of shares plus shares acquires
acquired through through reimbursement
reinvestment of of capital gain
income dividends Distributions
----------------- ---------------------
11/21/85 10,000 10,000
3/31/86 10,780 10,780
3/31/87 11,884.09 11,673.03
3/31/88 10,675 10,295.43
3/31/89 12,293 11,689.85
3/31/90 12,720.53 11,874.31
3/31/91 12,714.62 11,498.61
3/31/92 15,714.56 13,884.21
3/31/93 18,839.30 16,234.03
3/31/94 19,701.15 16,637.21
3/31/95 19,916.82 16,637.21
3/31/96 26,535.98 21,341.73
3/31/97 32,992.20 26,102.28
9/30/97 42,719.83 34,111.53
-------------------------------------------------
Selected Portfolio Performance*
Strong performers for the 3rd quarter 1997
----------------------------------------------------
1. John Alden Financial Corporation +48.1%
2. Northrop Grumman Corporation +38.2%
3. Lloyds TSB Group plc +30.6%
4. The Bear Stearns Companies, Inc. +28.7%
5. Enhance Financial Services
Group, Inc. +24.8%
6. Chase Manhattan Corporation +21.6%
7. General Motors Corporation +20.2%
8. Ford Motor Company +19.9%
9. Olin Corporation +19.8%
10. LaSalle Re Holdings Ltd. +19.1%
* Securities held for the entire quarter.
Weak performers for the 3rd quarter 1997
- ----------------------------------------------------------
1. National Golf Properties, Inc. -5.8%
2. Illinova Corporation -2.0%
3. Regency Realty Corporation -1.8%
4. Walden Residential Properties, Inc. -1.5%
5. Edison International +1.5%
6. Dynex Capital, Inc. +3.1%
7. Hercules, Inc. +3.9%
8. RJR Nabisco Holdings Corp. +4.2%
9. American Financial Group
Incorporated +4.9%
10. United States Treasury Bonds,
6%, 2/15/26 +5.0%
Portfolio Changes
Securities added during the 3rd quarter 1997
---------------------------------------------------
Tupperware Corporation
Union Planters Corporation
Securities sold during the 3rd quarter 1997
- ----------------------------------------------------------
Exxon Corporation
11
<PAGE>
Statement of Net Assets
September 30, 1997 (Unaudited)
(Amounts in Thousands)
Legg Mason Value Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 89.4%
Automotive -- 4.0%
Chrysler Corporation 1,900 $ 69,944
General Motors Corporation 1,200 80,325
---------
150,269
---------
Banking -- 15.5%
BankAmerica Corporation 800 58,650
BankBoston Corporation 850 75,172
Chase Manhattan Corporation 1,175 138,650
Citicorp 800 107,150
Fleet Financial Group, Inc. 669 43,871
Lloyds TSB Group plc 7,907 106,150
Zions Bancorporation 1,403 52,605
---------
582,248
---------
Computer Services and Systems -- 24.6%
Compaq Computer Corporation 1,700 127,075(A)
Dell Computer Corporation 3,600 348,750(A)
International Business Machines Corporation 1,350 143,016(A)
Seagate Technology, Inc. 2,000 72,250(A)
Storage Technology Corporation 2,100 100,406
Western Digital Corporation 3,311 132,647(A)
---------
924,144
---------
Electrical Equipment -- 2.1%
Philips Electronics N.V. 950 79,800
---------
Entertainment -- 4.9%
Circus Circus Enterprises, Inc. 4,600 115,862(A)
MGM Grand, Inc. 1,551 67,372(A)
---------
183,234
---------
Finance -- 11.2%
American Express Company 150 12,281
Fannie Mae 3,200 150,400
Freddie Mac 2,000 70,500
MBNA Corporation 2,830 114,626
The Bear Stearns Companies, Inc. 1,654 72,765
---------
420,572
---------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Food, Beverage and Tobacco -- 4.6%
PepsiCo, Inc. 850 $ 34,478
Philip Morris Companies, Inc. 1,475 61,305
RJR Nabisco Holdings Corp. 2,215 76,141
---------
171,924
---------
Food Merchandising -- 1.9%
Kroger Co. 2,400 72,450(A)
---------
Footwear -- 0.7%
Reebok International Ltd. 527 25,639
---------
Health Care -- 2.8%
Columbia/HCA Healthcare Corporation 1,275 36,656
Foundation Health Systems, Inc. 2,100 67,200(A)
---------
103,856
---------
Insurance -- 2.4%
AMBAC Inc. 766 31,167
Conseco Inc. 575 28,067
MBIA, Inc. 255 31,986
---------
91,220
---------
Manufacturing -- 1.9%
Danaher Corporation 1,200 69,600
---------
Media -- 4.0%
America Online, Inc. 1,650 124,472
America Online, Inc. 363 24,610(B)
---------
149,082
---------
Multi-Industry -- 0.6%
Coltec Industries Inc. 967 20,903(A)
---------
Pharmaceuticals -- 2.6%
Amgen Inc. 1,350 64,716(A)
Warner-Lambert Company 250 33,734
---------
98,450
---------
Savings and Loan -- 1.1%
Washington Mutual, Inc. 600 41,850
---------
</TABLE>
13
<PAGE>
Statement of Net Assets--Continued
Legg Mason Value Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Telecommunications -- 4.5%
MCI Communications Corporation 1,025 $ 30,109
Nokia Corporation ADS 700 65,669
Telefonos de Mexico S.A. ADR 1,425 73,744
---------
169,522
---------
Total Common Stocks and Equity Interests (Identified Cost-- $1,452,404) 3,354,763
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 1.4%
United States Treasury Notes, 8.125%, 2/15/98 $ 230 232
United States Treasury Bonds, 6.625%, 2/15/27 50,000 51,195
---------
Total U.S. Government Obligations (Identified Cost-- $50,864) 51,427
- --------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement -- 9.1%
Lehman Brothers, Inc.
6.20%, dated 9/30/97, to be repurchased at $341,152 on 10/1/97
(Collateral: $350,826 Freddie Mac Mortgage-backed securities,
7%, due 2/1/26 - 12/1/26, value $352,038)
(Identified Cost-- $341,093) 341,093 341,093
- --------------------------------------------------------------------------------------------------------------------------
Total Investments-- 99.9% (Identified Cost-- $1,844,361) 3,747,283
Other Assets Less Liabilities-- 0.1% 4,749
---------
Net assets consisting of:
Accumulated paid-in capital applicable to:
78,160 Primary shares outstanding $1,648,218
2,813 Navigator shares outstanding 69,327
Accumulated net investment loss (958)
Undistributed net realized gain on investments 132,523
Unrealized appreciation of investments 1,902,922
---------
Net assets-- 100.0% $3,752,032
==========
Net asset value per share:
Primary Class $46.33
======
Navigator Class $46.60
======
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Non-income producing
(B) Private placement
See notes to financial statements.
14
<PAGE>
Statement of Net Assets
September 30, 1997 (Unaudited)
(Amounts in Thousands)
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 94.7%
Advertising -- 4.2%
WPP Group plc 13,250 $ 59,824
---------
Apparel -- 0.1%
Salant Corporation 450 1,181(A)
---------
Banking -- 2.2%
Peoples Heritage Financial Group, Inc. 750 31,734
---------
Biotechnology -- 0.5%
Cell Genesys, Inc. 883 6,955(A)
---------
Computer Services and Systems -- 22.9%
Bell & Howell Company 895 29,032(A)
Gateway 2000, Inc. 1,000 31,438(A)
Imation Corporation 659 17,592(A)
InaCom Corp. 925 34,398(A,B)
Madge Networks N.V. 2,019 15,141(A)
NETCOM On-Line Communication Services, Inc. 1,100 13,338(A,B)
Novell Inc. 1,900 17,041(A)
Quantum Corporation 1,725 66,089(A)
Storage Technology Corporation 1,000 47,813(A)
Western Digital Corporation 1,400 56,088(A)
---------
327,970
---------
Energy -- 3.8%
Calenergy Company, Inc. 750 24,937(A)
Northeast Utilities System 3,000 28,875(A)
---------
53,812
---------
Entertainment -- 8.4%
Circus Circus Enterprises, Inc. 1,935 48,738(A)
Hollywood Park, Inc. 2,338 44,266(A,B)
Mirage Resorts, Incorporated 548 16,502(A)
Players International, Inc. 2,442 10,834(A,B)
---------
120,340
---------
Finance -- 7.7%
Amerin Corporation 1,600 46,000(A,B)
Mego Financial Corporation 643 2,895(A,C)
The Bear Stearns Companies, Inc. 551 24,255
United Asset Management Corporation 1,300 37,294
---------
110,444
---------
</TABLE>
15
<PAGE>
Statement of Net Assets--Continued
Legg Mason Special Investment Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Food, Beverage and Tobacco -- 2.9%
Cott Corporation Quebec 4,100 $ 41,512(B)
---------
Health Care -- 5.1%
Magellan Health Services, Inc. 950 30,163(A)
Sun Healthcare Group Inc. 1,435 29,497(A)
Sunrise Medical, Inc. 822 12,848(A)
Ultrafem, Inc. 100 888(A)
---------
73,396
---------
Insurance -- 14.0%
CMAC Investment Corporation 760 40,755
Enhance Financial Services Group, Inc. 555 30,386
John Alden Financial Corporation 1,250 38,750
Orion Capital Corporation 1,180 53,469
PennCorp Financial Group, Inc. 1,189 36,862
---------
200,222
---------
Manufacturing -- 1.9%
Briggs & Stratton Corporation 287 14,198
Danaher Corporation 236 13,688
---------
27,886
---------
Media -- 7.5%
America Online, Inc. 1,425 107,498(A)
---------
Miscellaneous -- 0.1%
Olsen & Associates AG 300 2,063(A,C)
---------
Real Estate -- 1.8%
Dynex Capital, Inc. 1,473 21,169
Mego Mortgage Corporation 306 4,134
---------
25,303
---------
Restaurants -- 0.7%
Shoney's, Inc. 2,000 9,875(A)
---------
Savings and Loan -- 3.6%
Washington Mutual, Inc. 750 52,313
---------
Speciality Retail -- 7.3%
HSN, Inc. 1,498 60,873(A)
MacFrugal's Bargains o Close-outs Inc. 1,439 43,880(A,B)
---------
104,753
---------
Total Common Stocks and Equity Interests (Identified Cost-- $781,046) 1,357,081
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement -- 5.7%
Lehman Brothers, Inc.
6.20%, dated 9/30/97, to be repurchased at $81,070 on 10/1/97
(Collateral: $31,663 Fannie Mae Mortgage-backed securities,
7%, due 6/1/09 - 11/1/10, value $32,360; and $51,265 Freddie Mac
Mortgage-backed securities, 7%, due 8/1/26 - 10/1/26, value $51,442)
(Identified Cost-- $81,056) $ 81,056 $ 81,056
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 100.4% (Identified Cost-- $862,102) 1,438,137
Other Assets Less Liabilities-- (0.4%) (5,971)
---------
Net assets consisting of:
Accumulated paid-in capital applicable to:
40,657 Primary shares outstanding $809,896
1,671 Navigator shares outstanding 35,932
Accumulated net operating loss (6,390)
Undistributed net realized gain on investments 16,693
Unrealized appreciation of investments 576,035
---------
Net assets-- 100.0% $1,432,166
==========
Net asset value per share:
Primary Class $33.80
======
Navigator Class $34.65
======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Non-income producing
(B) Affiliated Companies--As defined in the Investment Company Act of 1940
an "Affiliated Company" represents Fund ownership of at least 5% of the
outstanding voting securities of the issuer. At September 30, 1997, the
total market value of Affiliated Companies was $234,228 and identified
cost was $170,497.
(C) Private placement
See notes to financial statements.
17
<PAGE>
Statement of Net Assets
September 30, 1997 (Unaudited)
(Amounts in Thousands)
Legg Mason Total Return Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks and Equity Interests -- 90.5%
Aerospace -- 2.6%
Northrop Grumman Corporation 120 $ 14,565
---------
Automotive -- 7.8%
Chrysler Corporation 405 14,909
Ford Motor Company 315 14,254
General Motors Corporation 210 14,057
---------
43,220
---------
Banking -- 10.4%
BankAmerica Corporation 140 10,264
Chase Manhattan Corporation 125 14,750
Lloyds TSB Group plc 2,194 29,448
Union Planters Corporation 56 3,123
---------
57,585
---------
Chemicals -- 4.7%
Hercules, Inc. 230 11,442
Olin Corporation 310 14,526
---------
25,968
---------
Commercial Services -- 2.0%
Ogden Corporation 473 11,172
---------
Computer Services and Systems --5.6%
International Business Machines Corporation 290 30,722
---------
Construction Materials -- 1.4%
Masco Corporation 165 7,559
---------
Consumer Products -- 2.0%
Tupperware Corporation 392 11,019
---------
Electric Utilities --4.0%
Edison International 175 4,419
Illinova Corporation 602 12,974
Unicom Corporation 200 4,675
---------
22,068
---------
Finance --5.1%
Fannie Mae 222 10,434
The Bear Stearns Companies, Inc. 397 17,457
---------
27,891
---------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Food, Beverage and Tobacco -- 5.2%
RJR Nabisco Holdings Corp. 382 $ 13,135
UST, Inc. 510 15,587
---------
28,722
---------
Insurance -- 12.1%
American Financial Group Incorporated 254 11,303
Enhance Financial Services Group, Inc. 305 16,715
IPC Holdings Limited 463 13,659
John Alden Financial Corporation 450 13,950
LaSalle Re Holdings Ltd. 310 10,871
---------
66,498
---------
Real Estate -- 15.5%
Dynex Capital, Inc. 800 11,506
Mid-America Apartment Communities, Inc. 440 13,065
National Golf Properties, Inc. 426 13,952
Nationwide Health Properties, Inc. 525 12,633
Regency Realty Corporation 403 10,767
Tanger Factory Outlet Centers, Inc. 422 12,420(A)
Walden Residential Properties, Inc. 450 11,362
---------
85,705
---------
Retail Sales -- 2.2%
J.C. Penney Company, Inc. 210 12,233
---------
Savings and Loan -- 8.0%
Bank United Corp. 316 13,987
Washington Federal, Inc. 498 14,759
Washington Mutual, Inc. 218 15,229
---------
43,975
---------
Telecommunications -- 1.9%
Telefonos de Mexico S.A. ADR 200 10,350
---------
Total Common Stocks and Equity Interests (Identified Cost--$313,774) 499,252
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Shares -- 1.9%
Kmart Corporation, 7.75%, Cv. (Identified Cost--$8,763) 178 10,390
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 3.7%
United States Treasury Bonds, 6%, 2/15/26 (Identified Cost--$19,121) $22,000 20,666
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Statement of Net Assets--Continued
Legg Mason Total Return Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement -- 3.9%
Lehman Brothers, Inc.
6.20%, dated 9/30/97, to be repurchased at $21,421 on 10/1/97
(Collateral: $22,066 Freddie Mac Mortgage-backed securities,
7%, due 12/1/26, value $22,143)
(Identified Cost--$21,417) $21,417 $ 21,417
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments-- 100.0% (Identified Cost--$363,075) 551,725
Other Assets Less Liabilities-- (N.M.) (241)
---------
Net assets consisting of:
Accumulated paid-in capital applicable to:
23,072 Primary shares outstanding $340,027
646 Navigator shares outstanding 9,837
Undistributed net investment income 3,415
Undistributed net realized gain on investments 9,555
Unrealized appreciation of investments 188,650
---------
Net assets --100.0% $551,484
=========
Net asset value per share:
Primary Class $23.25
======
Navigator Class $23.39
======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Affiliated Companies--As defined in the Investment Company Act of 1940
an "Affiliated Company" represents Fund ownership of at least 5% of the
outstanding voting securities of the issuer. At September 30, 1997, the
total market value of Affiliated Companies was $12,420 and the
identified cost was $11,266.
N.M.-- Not meaningful
See notes to financial statements.
20
<PAGE>
Statements of Operations
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 9/30/97
---------------------------------------------------------
Value Special Investment Total Return
Trust Trust Trust
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends:
Affiliated companies $ -- $ 126 $ 289
Other securities(A) 17,452 3,637 8,475
Interest 7,872 930 1,129
------- ------- -------
Total income 25,324 4,693 9,893
------- ------- -------
Expenses:
Investment advisory fee 10,564 4,540 1,740
Distribution and service fees 14,013 5,773 2,257
Transfer agent and shareholder servicing expense 687 425 142
Audit and legal fees 70 36 28
Custodian fees 291 131 74
Directors' fees 9 6 6
Registration fees 120 52 31
Reports to shareholders 210 114 29
Other expenses 41 24 10
------- ------- -------
26,005 11,101 4,317
Less expenses reimbursed (32) (21) --
------- ------- -------
Total expenses, net of reimbursement 25,973 11,080 4,317
------- ------- -------
Net Investment Income (Loss) (649) (6,387) 5,576
------- ------- -------
Net Realized and Unrealized Gain on Investments:
Realized gain on investments 132,848 16,945(B) 9,644
Change in unrealized appreciation of investments 799,356 330,112 103,379
------- ------- -------
Net Realized and Unrealized Gain on Investments 932,204 347,057 113,023
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting from Operations $931,555 $340,670 $118,599
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Net of foreign taxes withheld of $86, $61 and $66, respectively.
(B) Includes $8,670 net realized loss on sale of shares of Affiliated
Companies.
See notes to financial statements.
21
<PAGE>
Statements of Changes in Net Assets
(Amounts in Thousands)
<TABLE>
<CAPTION>
Value Special Investment
Trust Trust
------------------------ -------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
9/30/97 3/31/97 9/30/97 3/31/97
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C>
Change in Net Assets:
Net investment income (loss) $ (649) $ 8,701 $ (6,387) $ (8,339)
Net realized gain on investments 132,848 88,721 16,945 71,717
Change in unrealized appreciation of
investments 799,356 409,292 330,112 32,855
- ---------------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations 931,555 506,714 340,670 96,233
Distributions to shareholders:
From net investment income:
Primary Class (2,413) (9,017) -- --
Navigator Class (599) (814) -- --
From net realized gain on investments:
Primary Class (30,285) (85,562) (48,210) (46,505)
Navigator Class (1,108) (3,095) (2,090) (2,070)
Change in net assets from Fund share transactions:
Primary Class 519,053 391,899 148,287 110,520
Navigator Class 15,677 16,921 4,410 2,950
- ---------------------------------------------------------------------------------------------------------------------
Change in net assets 1,431,880 817,046 443,067 161,128
Net Assets:
Beginning of period 2,320,152 1,503,106 989,099 827,971
- ---------------------------------------------------------------------------------------------------------------------
End of period $3,752,032 $2,320,152 $1,432,166 $989,099
- ---------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (loss) $ (958) $ 2,703 $ (6,390) $ (3)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total Return
Trust
-------------------------
Six Months Year
Ended Ended
9/30/97 3/31/97
- ----------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Change in Net Assets:
Net investment income (loss) $ 5,576 $ 8,441
Net realized gain on investments 9,644 41,202
Change in unrealized appreciation of
investments 103,379 18,340
- ----------------------------------------------------------------------------------------
Change in net assets resulting
from operations 118,599 67,983
Distributions to shareholders:
From net investment income:
Primary Class (3,629) (7,201)
Navigator Class (182) (258)
From net realized gain on investments:
Primary Class (27,566) (9,643)
Navigator Class (773) (261)
Change in net assets from Fund share transactions:
Primary Class 71,775 64,231
Navigator Class 2,754 1,587
- ----------------------------------------------------------------------------------------
Change in net assets 160,978 116,438
Net Assets:
Beginning of period 390,506 274,068
- ----------------------------------------------------------------------------------------
End of period $551,484 $390,506
- ----------------------------------------------------------------------------------------
Undistributed net investment income (loss) $ 3,415 $ 1,651
- ----------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
22
<PAGE>
Financial Highlights
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
----------------------------------- ---------------------
Net Asset Net Net Realized Total Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Period (Loss) Investments Operations Income Investments Distributions Period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
--Primary Class
Six Months Ended
Sept. 30, 1997* $34.11 $(.02) $12.72 $12.70 $ (.04) $ (.44) $ (.48) $46.33
Years Ended Mar. 31,
1997 26.99 .13 8.68 8.81 (.16) (1.53) (1.69) 34.11
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41) 26.99
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09) 20.21
1994 17.81 .08 .92 1.00 (.11) (.20) (.31) 18.50
1993 15.69 .18 2.12 2.30 (.18) -- (.18) 17.81
--Navigator Class
Six Months Ended
Sept. 30, 1997* $34.30 $ .17 $12.80 $12.97 $ (.23) $ (.44) $ (.67) $46.60
Years Ended Mar. 31,
1997 27.08 .41 8.75 9.16 (.41) (1.53) (1.94) 34.30
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64) 27.08
1995(B) 18.76 .12 1.40 1.52 (.01) -- (.01) 20.27
Special Investment Trust
--Primary Class
Six Months Ended
Sept. 30, 1997* $26.55 $(.16) $ 8.74 $ 8.58 $ -- $(1.33) $(1.33) $33.80
Years Ended Mar. 31,
1997 25.09 (.23) 3.10 2.87 -- (1.41) (1.41) 26.55
1996 19.96 -- 5.60 5.60 -- (.47) (.47) 25.09
1995 21.56 (.06) (1.31) (1.37) -- (.23) (.23) 19.96
1994 17.91 (.11) 3.93 3.82 (.03) (.14) (.17) 21.56
1993 17.00 .03 1.66 1.69 -- (.78) (.78) 17.91
--Navigator Class
Six Months Ended
Sept. 30, 1997* $27.04 $ (.01) $ 8.95 $ 8.94 $ -- $(1.33) $(1.33) $34.65
Years Ended Mar. 31,
1997 25.26 .02 3.17 3.19 -- (1.41) (1.41) 27.04
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64) 25.26
1995(B) 19.11 .07 .85 .92 -- -- -- 20.03
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net
Investment Average Net Assets
Expenses Income (Loss) Portfolio Commission End of
Total to Average to Average Turnover Rate Period
Return Net Assets Net Assets Rate Paid(A) (in thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
--Primary Class
Six Months Ended
Sept. 30, 1997* 37.52%(C) 1.74%(D) (.1)%(D) 13.6%(D) $.0559 $3,620,938
Years Ended Mar. 31,
1997 33.59% 1.77% .4% 10.5% .0557 2,236,400
1996 42.09% 1.82% .8% 19.6% -- 1,450,774
1995 9.77% 1.81% .5% 20.1% -- 986,325
1994 5.65% 1.82% .5% 25.5% -- 912,418
1993 14.76% 1.86% 1.1% 21.8% -- 878,394
--Navigator Class
Six Months Ended
Sept. 30, 1997* 38.21%(C) .74%(D) .9%(D) 13.6%(D) $.0559 $ 131,094
Years Ended Mar. 31,
1997 34.97% .77% 1.4% 10.5% .0557 83,752
1996 43.53% .82% 1.8% 19.6% -- 52,332
1995(B) 8.11%(C) .82%(D) 1.8%(D) 20.1%(D) -- 36,519
Special Investment Trust
--Primary Class
Six Months Ended
Sept. 30, 1997* 33.36%(C) 1.84%(D) (1.1)%(D) 20.3%(D) $.0399 $1,374,255
Years Ended Mar. 31,
1997 11.58% 1.92% (.9)% 29.2% .0514 947,684
1996 28.47% 1.96% -- 35.6% -- 792,240
1995 (6.37)% 1.93% (.2)% 27.5% -- 612,093
1994 21.35% 1.94% (.6)% 16.7% -- 565,486
1993 10.50% 2.00% .2% 32.5% -- 322,572
--Navigator Class
Six Months Ended
Sept. 30, 1997* 34.11%(C) .82%(D) (.1)%(D) 20.3%(D) $.0399 $ 57,911
Years Ended Mar. 31,
1997 12.81% .85% .1% 29.2% .0514 41,415
1996 29.85% .88% 1.0% 35.6% -- 35,731
1995(B) 4.81%(C) .90%(D) 1.0%(D) 27.5%(D) -- 26,123
- ----------------------------
</TABLE>
(A) Pursuant to SEC regulations effective for fiscal years beginning after
September 1, 1995, this is the average commission rate paid on securities
purchased and sold by the Funds.
(B) For the period December 1, 1994 (commencement of sale of Navigator shares)
to March 31, 1995.
(C) Not annualized
(D) Annualized
* Unaudited
See notes to financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
----------------------------------- ----------------------
Net Asset Net Net Realized Total Net Net Asset
Value, Investment and Unrealized From Net Realized Value,
Beginning Income Gain (Loss) on Investment Investment Gain on Total End of
of Period (Loss) Investments Operations Income Investments Distributions Period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Total Return Trust
--Primary Class
Six Months Ended
Sept. 30, 1997* $19.39 $ .24 $ 5.19 $ 5.43 $(.18) $(1.39) $(1.57) $23.25
Years Ended Mar. 31,
1997 16.45 .46 3.47 3.93 (.43) (.56) (.99) 19.39
1996 12.79 .48 3.69 4.17 (.51) -- (.51) 16.45
1995 13.54 .33 (.19) .14 (.29) (.60) (.89) 12.79
1994 13.61 .36 .24 .60 (.33) (.34) (.67) 13.54
1993 11.64 .39(E) 1.89 2.28 (.31) -- (.31) 13.61
--Navigator Class
Six Months Ended
Sept. 30, 1997* $19.53 $ .33 $ 5.24 $ 5.57 $(.32) $(1.39) $(1.71) $23.39
Years Ended Mar. 31,
1997 16.52 .65 3.48 4.13 (.56) (.56) (1.12) 19.53
1996 12.83 .62 3.72 4.34 (.65) -- (.65) 16.52
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23) 12.83
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net
Investment Average Net Assets
Expenses Income (Loss) Portfolio Commission End of
Total to Average to Average Turnover Rate Period
Return Net Assets Net Assets Rate Paid(A) (in thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Total Return Trust
--Primary Class
Six Months Ended
Sept. 30, 1997*
Years Ended Mar. 31, 29.48%(C) 1.89%(D) 2.4%(D) 18.9%(D) $.0582 $ 536,386
1997
1996 24.33% 1.93% 2.6% 38.4% .0528 380,458
1995 33.23% 1.95% 3.2% 34.7% -- 267,010
1994 1.09% 1.93% 2.5% 61.9% -- 194,767
1993 4.57% 1.94% 2.7% 46.6% -- 184,284
19.88% 1.95%(E) 3.1%(E) 40.5% -- 139,034
--Navigator Class
Six Months Ended
Sept. 30, 1997*
Years Ended Mar. 31, 30.18%(C) .84%(D) 3.4%(D) 18.9%(D) $.0582 $ 15,098
1997
1996 25.67% .86% 3.7% 38.4% .0528 10,048
1995B 34.67% .94% 4.2% 34.7% -- 7,058
2.28%(C) .86%(D) 3.6%(D) 61.9%(D) -- 4,823
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Pursuant to SEC regulations effective for fiscal years beginning after
September 1, 1995, this is the average commission rate paid on
securities purchased and sold by the Funds.
(B) For the period December 1, 1994 (commencement of sale of Navigator
shares) to March 31, 1995.
(C) Not annualized
(D) Annualized
(E) Net of fees waived by the Adviser in excess of a voluntary expense
limitation of 1.95% on the Primary Class from November 1, 1992, and
.95% on the Navigator Class from inception, both to September 30, 1997.
* Unaudited
See notes to financial statements.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Value Trust, Inc. ("Value Trust"), the Legg Mason
Special Investment Trust, Inc. ("Special Investment Trust") and the Legg
Mason Total Return Trust, Inc. ("Total Return Trust") (each separately
referred to as a "Fund" and collectively as the "Funds") are registered
under the Investment Company Act of 1940, as amended, each as an open-end,
diversified investment company.
Each of the Funds consist of two classes of shares: Primary Class,
offered since 1982 for Value Trust, and since 1985 for Special Investment
Trust and Total Return Trust, and Navigator Class, offered to certain
institutional investors since December 1, 1994 for all Funds. The income
and expenses of each of these Funds are allocated proportionately to the
two classes of shares based on daily net assets, except for Rule 12b-1
distribution fees, which are charged only on Primary shares, and transfer
agent and shareholder servicing expenses, which are determined separately
for each class.
24
<PAGE>
--------------------------------------------------------------------------
Security Valuation
Securities traded on national securities exchanges are valued at the
last quoted sales price. Over-the-counter securities, and listed
securities for which no sales price is available, are valued at the mean
between the latest bid and asked prices. Securities for which market
quotations are not readily available are valued at fair value as
determined by management and approved in good faith by the Board of
Directors. Fixed income securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized. Dividend income and distributions to shareholders are
allocated at the class level and are recorded on the ex-dividend date. Net
capital gain distributions, which are calculated at a composite level, are
declared and paid after the end of the tax year in which the gain is
realized.
Investment Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes. At
September 30, 1997, receivables for securities sold and not yet delivered
and payables for securities purchased and not yet received for each of the
Funds were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
- -----------------------------------------------------------------------------
Value Trust $ -- $5,269
Special Investment Trust 171 8,905
Total Return Trust -- 2,189
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. Government or its agencies and such collateral is in
the possession of the Funds' custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Funds' investment adviser,
acting under the supervision of their Board of Directors, reviews the
value of the collateral and the creditworthiness of those banks and
dealers with which the Funds enter into repurchase agreements to evaluate
potential risks.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Funds intend to continue to qualify as regulated investment companies and
distribute all of their taxable income to their shareholders.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
25
<PAGE>
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
2. Investment Transactions:
For the six months ended September 30, 1997, investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds from Sales
- --------------------------------------------------------------------------------
Value Trust $459,768 $196,980
Special Investment Trust 167,836 117,721
Total Return Trust 78,105 42,467
At September 30, 1997, cost, aggregate gross unrealized appreciation
and gross unrealized depreciation based on the cost of securities for
federal income tax purposes for each Fund were as follows:
Cost Appreciation Depreciation
- --------------------------------------------------------------------------------
Value Trust $1,844,361 $1,921,143 $(18,221)
Special Investment Trust 862,102 624,224 (48,189)
Total Return Trust 363,075 188,800 (150)
3. Transactions with Affiliates:
Each Fund has an investment advisory and management agreement with
Legg Mason Fund Adviser, Inc. ("Adviser"), a corporate affiliate of Legg
Mason Wood Walker , Incorporated ("Legg Mason"), a member of the New York
Stock Exchange and the distributor for the Funds. Pursuant to their
respective agreements, the Adviser provides the Funds with investment
advisory, management and administrative services for which each Fund pays
a fee, computed daily and payable monthly at annual rates of each Fund's
average daily net assets as follows: Value Trust, 1% for the first $100
million, 0.75% between $100 million and $1 billion and 0.65% in excess of
$1 billion; Special Investment Trust, 1% for the first $100 million, 0.75%
between $100 million and $1 billion and 0.65% in excess of $1 billion; and
Total Return Trust, 0.75% for all such assets.
The Adviser has agreed to waive its fees and reimburse Total Return
Trust for its expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) which in any month are in excess of an annual rate
of 1.95% of average daily net assets for Primary Shares and 0.95% for
Navigator Shares. The Funds' agreements with the Adviser provide that
expense reimbursements be made to Value Trust and Special Investment Trust
for audit fees and compensation of the Funds' independent directors. At
September 30, 1997 amounts due to the Adviser were $4,706, $1,924, and
$755, respectively, for Value Trust, Special Investment Trust and Total
Return Trust.
Legg Mason, as distributor of the Funds, receives an annual
distribution fee and an annual service fee, computed daily and payable
monthly from each of the Funds at annual rates based on the average daily
net assets of each Fund's Primary Class as follows: Value Trust, 0.70% and
0.25%; Special Investment Trust and Total Return Trust, 0.75% and 0.25%,
for distribution and service fees respectively. At September 30, 1997,
distribution and service fees due to the distributor were as follows:
Value Trust, $2,745; Special Investment Trust, $1,099; and Total Return
Trust, $426.
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was
paid the following amounts by the transfer agent for the six months ended
September 30, 1997: Value Trust, $189; Special Investment Trust, $111; and
Total Return Trust, $33.
26
<PAGE>
4. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in
a $75 million line of credit ("Credit Agreement") to be utilized as an
emergency source of cash in the event of unanticipated, large redemption
requests by shareholders. Pursuant to the Credit Agreement, each
participating fund is liable only for principal and interest payments
related to borrowings made by that Fund. Borrowings under the line of
credit bear interest at prevailing short-term interest rates. For the six
months ended September 30, 1997, the Funds had no borrowings under the
line of credit.
5. Fund Share Transactions:
At September 30, 1997 there were 200,000, 100,000 and 50,000 shares
authorized at $.001 par value for the Primary class of Value Trust,
Special Investment Trust and Total Return Trust, respectively. At
September 30, 1997 there were 100,000 shares authorized at $.001 par value
for the Navigator class of Value Trust. The Navigator class of Special
Investment Trust and Total Return Trust each have 50,000 shares authorized
at $.001 par value.
Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
----------------- ---------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Value Trust
--Primary Class
Six Months Ended Sept. 30, 1997 20,159 $822,682 836 $31,791 (8,397) $(335,420) 12,598 $519,053
Year Ended March 31, 1997 20,980 690,516 3,078 93,067 (12,250) (391,684) 11,808 391,899
--Navigator Class
Six Months Ended Sept. 30, 1997 710 30,296 36 1,414 (375) (16,033) 371 15,677
Year Ended March 31, 1997 686 22,688 127 3,838 (303) (9,605) 510 16,921
Special Investment Trust
--Primary Class
Six Months Ended Sept. 30, 1997 7,070 $214,900 1,711 $47,689 (3,813) $(114,302) 4,968 $148,287
Year Ended March 31, 1997 20,143 520,404 1,751 46,003 (17,785) (455,887) 4,109 110,520
--Navigator Class
Six Months Ended Sept. 30, 1997 474 15,120 72 2,064 (406) (12,774) 140 4,410
Year Ended March 31, 1997 312 8,240 78 2,060 (273) (7,350) 117 2,950
Total Return Trust
--Primary Class
Six Months Ended Sept. 30, 1997 3,479 $73,832 1,542 $30,373 (1,572) $(32,430) 3,449 $71,775
Year Ended March 31, 1997 4,769 88,767 901 16,417 (2,274) (40,953) 3,396 64,231
--Navigator Class
Six Months Ended Sept. 30, 1997 119 2,555 48 954 (36) (755) 131 2,754
Year Ended March 31, 1997 142 2,588 29 518 (83) (1,519) 88 1,587
</TABLE>
27
