As filed with the Securities and Exchange Commission on May 30, 1997.
1933 Act File No. 2-75766
1940 Act File No. 811-3380
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
-------
Post-Effective Amendment No: 23 [X]
-------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 24
---
LEGG MASON VALUE TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on , 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[X] on July 31 1997 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1997 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrants have filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for their most
recent fiscal year on May 30, 1997.
<PAGE>
Legg Mason Value Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Table of Contents
Cross Reference Sheets
Part A - Prospectus--Primary Shares
Prospectus--Navigator Shares
Part B -Statement of Additional Information
Part C -Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Value Trust, Inc. (Primary Shares)
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. Prospectus Caption
<S> <C>
1 Cover Page
2 Prospectus Highlights; Expenses
3 Financial Highlights; Performance Information
4 Investment Objectives and Policies; Description of each
Corporation/Trust and Its Shares
5 Expenses; The Funds' Management and Investment
Adviser; The Funds' Distributor
6 Prospectus Highlights; Dividends and Other Distributions;
Shareholder Services; Tax Treatment of Dividends and
Other Distributions; How Your Shareholder Account Is
Maintained; Description of each Corporation/Trust and Its
Shares
7 How You Can Invest In the Funds; How Your Shareholder
Account Is Maintained; How Net Asset Value Is
Determined; The Funds' Distributor
8 How You Can Redeem Your Primary Shares
9 Not Applicable
</TABLE>
<PAGE>
Legg Mason Value Trust, Inc.
(Navigator Value Trust)
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. Prospectus Caption
<S> <C>
1 Cover Page
2 Expenses
3 Financial Highlights; Performance Information
4 Investment Objectives and Policies; Description of each
Corporation/Trust and Its Shares
5 Expenses; The Funds' Management and Investment
Adviser; The Funds' Distributor
6 Dividends and Other Distributions; Shareholder Services;
Tax Treatment of Dividends and Other Distributions;
How Your Shareholder Account Is Maintained;
Description of each Corporation/Trust and Its Shares
7 How To Purchase and Redeem Shares; How Your
Shareholder Account Is Maintained; How Net Asset Value
Is Determined; The Funds' Distributor
8 How To Purchase and Redeem Shares
9 Not Applicable
</TABLE>
<PAGE>
Legg Mason Value Trust, Inc.
(Primary Shares)
(Navigator Value Trust)
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Statement of Additional
Part B Item No. Information Caption
<S> <C>
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About Investment Limitations and
Policies; Portfolio Transactions and Brokerage
14 The Funds' Directors and Officers
15 The Funds' Directors and Officers
16 The Funds' Investment Adviser; The Funds' Distributor;
The Funds' Directors and Officers; The Funds'
Independent Accountants/Auditors; The Funds' Legal
Counsel; The Funds' Custodian and Transfer and
Dividend - Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Fund Shares; Additional Purchase and
Redemption Information
20 Additional Tax Information; Tax-Deferred Retirement
Plans
21 Portfolio Transactions and Brokerage; The Funds'
Distributor; The Funds' Custodian and Transfer and
Dividend - Disbursing Agent
22 Performance Information
23 Financial Statements
</TABLE>
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 5
Performance Information 6
Investment Objectives and Policies 8
How You Can Invest in the Funds 19
How Your Shareholder Account is Maintained 20
How You Can Redeem Your Primary Shares 20
How Net Asset Value is Determined 21
Dividends and Other Distributions 22
Tax Treatment of Dividends and Other Distributions 22
Shareholder Services 23
The Funds' Management and Investment Advisers 24
The Funds' Distributor 26
Description of Each Corporation /Trust and its Shares 26
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036
INDEPENDENT ACCOUNTANTS /AUDITORS:
[ ]
217 East Redwood Street, Baltimore, Maryland 21202
[ ]
One North Charles Street, Baltimore, Maryland 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ANY FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY ANY FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
[Recycle Logo] PRINTED ON RECYCLED PAPER
LMF-001
LEGG MASON
EQUITY
FUNDS
VALUE TRUST, INC.
TOTAL RETURN TRUST, INC.
SPECIAL INVESTMENT
TRUST, INC.
AMERICAN LEADING
COMPANIES TRUST
BALANCED TRUST
PRIMARY SHARES
PUTTING YOUR FUTURE FIRST
PROSPECTUS
JULY 31, 1997
[Legg Mason Logo]
FUNDS
<PAGE>
LEGG MASON EQUITY FUNDS -- PRIMARY SHARES
LEGG MASON VALUE TRUST , INC.
LEGG MASON TOTAL RETURN TRUST , INC.
LEGG MASON SPECIAL INVESTMENT TRUST , INC.
LEGG MASON AMERICAN LEADING COMPANIES TRUST
(A SERIES OF LEGG MASON INVESTORS TRUST , INC.)
LEGG MASON BALANCED TRUST
(A SERIES OF LEGG MASON INVESTORS TRUST , INC.)
This Prospectus sets forth concisely the information about the
funds that a prospective investor ought to know before investing. It
should be read and retained for future reference. A Statement of
Additional Information about the funds dated July 31, 1997 has been
filed with the Securities and Exchange Commission ("SEC") and, as
amended or supplemented from time to time, is incorporated herein by
reference. The Statement of Additional Information is available
without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers
listed below).
Legg Mason Special Investment Trust, Inc. may invest up to 35% of
its net assets in debt securities rated below investment grade
(commonly known as "junk bonds"), and may invest up to 20% of its
total assets in the securities of companies involved in actual or
anticipated restructurings. Both types of investments involve an
increased risk of payment default and/or loss of principal.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE
NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
July 31, 1997
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
THE LEGG MASON VALUE TRUST, INC. ("Value Trust") is a diversified,
open-end management investment company seeking long-term growth of
capital. Value Trust invests principally in those equity securities which
its investment adviser, Legg Mason Fund Adviser, Inc. ("Adviser" or
"Manager"), believes are undervalued and therefore offer above-average
potential for capital appreciation. The Adviser believes that Value Trust
shares may be appropriate for investments by Individual Retirement
Accounts, Keogh Plans, Simplified Employee Pension Plans, Savings
Incentive Match Plans for Employees and other qualified retirement plans
(collectively referred to as "Retirement Plans") whose principal
investment objective is capital appreciation. Other investors who seek
capital appreciation may also invest in Value Trust shares.
THE LEGG MASON TOTAL RETURN TRUST, INC. ("Total Return Trust") is a
diversified, open-end management investment company seeking capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. In attempting to
achieve this objective, the Adviser selects a diversified portfolio,
composed of dividend-paying common stocks and securities convertible into
common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common
stock which do not pay current dividends but which offer prospects for
capital appreciation and future income; and debt instruments of various
maturities. Total Return Trust may write covered put and call options. The
Adviser believes that Total Return Trust shares may be appropriate for
investments by Retirement Plans. Due to Total Return Trust's investment
objective, however, investors should not expect capital appreciation
comparable to funds devoted solely to growth, or income comparable to
funds devoted to maximum current income.
THE LEGG MASON SPECIAL INVESTMENT TRUST, INC. ("Special Investment
Trust") is a diversified, open-end management investment company seeking
capital appreciation. Special Investment Trust invests principally in
equity securities of companies with market capitalizations of less than
$2.5 billion which, in the opinion of the Adviser, have one or more of the
following characteristics: they are not closely followed by, or are out of
favor with, investors generally, and the Adviser believes they are
undervalued in relation to their long-term earning power or asset values;
unusual developments have occurred which suggest the possibility that the
market value of the securities will increase; or they are involved in
actual or anticipated reorganizations or restructurings under the
Bankruptcy Code. Special Investment Trust also invests in the securities
of companies with larger capitalizations which have one or more of these
characteristics. Special Investment Trust may invest up to 35% of its
assets in debt securities rated below investment grade.
THE LEGG MASON AMERICAN LEADING COMPANIES TRUST ("American Leading
Companies") is a professionally managed portfolio seeking long-term
capital appreciation and current income consistent with prudent investment
risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Investors Trust"), a diversified, open-end
management investment company. Under normal market conditions, American
Leading Companies will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion.
American Leading Companies' investment adviser, Legg Mason Capital
Management, Inc. ("LMCM"), defines a "Leading Company" as a company that,
in the opinion of LMCM, has attained a major market share in one or more
products or services within its industry(ies), and possesses the financial
strength and management talent to maintain or increase market share and
profit in the future. Such companies are typically well known as leaders
in their respective industries; most are found in the top half of the
Standard & Poor's Composite Index of 500 Stocks
2
<PAGE>
("S&P 500"). LMCM believes that American Leading Companies' shares may be
appropriate for investment by Retirement Plans.
THE LEGG MASON BALANCED TRUST ("Balanced Trust") is a professionally
managed portfolio seeking long-term capital appreciation and current
income in order to achieve an attractive total investment return
consistent with reasonable risk. Balanced Trust is a separate series of
Investors Trust. Under normal conditions, Balanced Trust will invest no
more than 75% of its assets in equity securities. The term "equity
securities" includes, without limitation, common stocks and convertible
securities of domestic issuers, securities of closed-end investment
companies and U.S. dollar-denominated securities of foreign issuers,
including American Depositary Receipts ("ADRs") and Global Depositary
Receipts ("GDRs"). Balanced Trust will invest at least 25% of its
portfolio in fixed income securities. Bartlett & Co. ("Bartlett"), as
investment adviser, believes that Balanced Trust shares may be appropriate
for investment by Retirement Plans.
Value Trust, Total Return Trust, Special Investment Trust, American
Leading Companies and Balanced Trust (each separately referred to as a
"Fund" and collectively referred to as the "Funds") each may invest a
significant portion of its assets in debt securities, and may invest to
some extent in securities rated below investment grade. Each Fund may
invest in foreign securities, which would expose it to the possibility of
currency fluctuations and other risks of foreign investing. Each Fund may
use futures contracts (except American Leading Companies) and/or options
for hedging or income purposes, which may expose it to the potential for
losses greater than the value of the Fund's investment in such
instruments.
Of course, there can be no assurance that any Fund will achieve its
objective. See "Investment Objectives and Policies," page 11, which also
includes a discussion of risks.
Each Fund offers two classes of shares, Primary Class ("Primary
Shares") and Navigator Class ("Navigator Shares"). Primary Shares offered
in this Prospectus are available to all investors except certain
institutions (see page 5). No initial sales charge is payable on
purchases, and no redemption charge is payable on sales of the Funds'
shares. Each Fund pays management fees to its respective Adviser/Manager
and distribution fees (Primary Shares only) to Legg Mason, as described in
this Prospectus.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISERS:
Legg Mason Fund Adviser, Inc. (for Value Trust, Total Return Trust and
Special Investment Trust)
Legg Mason Capital Management, Inc. (for American Leading Companies)
Bartlett & Co. (for Balanced Trust)
PURCHASE METHODS:
Send bank/personal check or wire federal funds. There is a $1,000
minimum, generally, for initial purchases, and a $100 minimum, generally,
for subsequent purchases. Lower minimums for initial and subsequent
purchases apply for automatic investments. See "How You Can Invest in the
Funds," page 22.
REDEMPTION METHODS:
Redeem by calling your Legg Mason or affiliated investment executive
or redeem by mail. See "How You Can Redeem Your Primary Shares," page 23.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 26.
DIVIDENDS:
Declared and paid quarterly for Value Trust, Total Return Trust and
Balanced Trust. Declared and paid after the end of each taxable year of
Special Investment Trust and American Leading Companies. See "Dividends
and Other Distributions," page 25.
REINVESTMENT:
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
3
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth in the table are based on average net assets and annual Fund
operating expenses related to Primary Shares for the year ended March 31,
1997. For Balanced Trust, which has a limited operating history prior to
the date of this Prospectus, other expenses are based on estimates for the
current fiscal year, and fees are adjusted for current expense limits and
fee waiver levels.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
----------------------------------------------
Management fees
(after fee
waivers) 0.72% 0.75% 0.78% 0.64% 0.00%
12b-1 fees
(after fee
waivers) 0.95% 1.00% 1.00% 1.00% 0.30%
Other expenses 0.10% 0.18% 0.14% 0.31% 1.55%
----------------------------------------------
Total operating
expenses
(after fee
waivers) 1.77% 1.93% 1.92% 1.95% 1.85%
==============================================
(A) The Manager and Legg Mason have voluntarily agreed to waive the
management and 12b-1 fees to the extent necessary to limit total
operating expenses relating to Primary Shares (exclusive of taxes,
brokerage commissions, interest and extraordinary expenses) as follows:
for Total Return Trust and American Leading Companies, 1.95% of each
Fund's average daily net assets attributable to Primary Shares
indefinitely; and for Balanced Trust, 1.85% of average daily net assets
attributable to Primary Shares until July 31, 1998. In the absence of
such waivers, the management fee, 12b-1 fee, other expenses and total
operating expenses relating to Primary Shares would have been as
follows: for Total Return Trust, the same as described above; for
American Leading Companies, 0.75%, 1.00%, 0.31% and 2.06% of average net
assets; and for Balanced Trust, 0.75%, 0.75%, 1.55% and 3.05% of average
net assets.
For further information concerning the Funds' expenses, please see
"The Funds' Management and Investment Advisers" and "The Funds'
Distributor," pages 27-29. Because each Fund pays 12b-1 fees with respect
to Primary Shares, long-term investors in Primary Shares may pay more in
distribution expenses than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. ("NASD").
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each time
period. The Funds charge no redemption fees of any kind.
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
----------------------------------------------------------
1 Year $ 18 $ 20 $ 20 $ 20 $19
3 Years $ 56 $ 61 $ 60 $ 61 $58
5 Years $ 96 $104 $104 $105 N/A
10 Years $208 $225 $224 $227 N/A
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE
ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT
THE PROJECTED OR ACTUAL PERFORMANCE OF, PRIMARY SHARES OF THE FUNDS. THE
ABOVE TABLE AND EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The actual expenses attributable to Primary Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which the Manager and/or
Legg Mason waive their fees and the extent to which Primary Shares incur
variable expenses, such as transfer agency costs.
4
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. Navigator Shares are currently offered for sale only to
institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own monies and monies for which they act in a fiduciary
capacity, to clients of Legg Mason Trust Company ("Trust Company") for
which Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg Mason
Profit Sharing Plan and Trust. Navigator Shares pay no 12b-1 distribution
fees and may pay lower transfer agency fees. The information for Primary
Shares reflects the 12b-1 fees paid by that Class.
The financial information in the tables that follow has been audited
for Value Trust, Total Return Trust and Special Investment Trust by [
], independent accountants and for American Leading
Companies and Balanced Trust, by [ ], independent auditors.
Each Fund's financial statements for the year ended March 31, 1997 and the
report of [ ] or [ ] thereon are
included in their respective combined annual reports and are incorporated
by reference in the Statement of Additional Information. The combined
annual report for each Fund is available to shareholders without charge by
calling your Legg Mason or affiliated financial advisor or Legg Mason's
Funds Marketing Department at 800-822-5544.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
<S> <C>
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Year (Loss) Investments Operations Income Investments Distributions
----------------------------------------------------------------------------------------------------------------------
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 26.99 $ .13 $ 8.68 $ 8.81 $ (.16) $ (1.53) $ (1.69)
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41)
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09)
1994 17.81 .08 .92 1.00 (.11) (.20) (.31)
1993 15.69 .18 2.12 2.30 (.18) -- (.18)
1992 13.38 .25 2.34 2.59 (.28) -- (.28)
1991 14.19 .32 (.74) (.42) (.36) (.03) (.39)
1990 14.16 .33 .77 1.10 (.33) (.74) (1.07)
1989 12.14 .21 1.99 2.20 (.18) -- (.18)
1988 15.07 .21 (1.54) (1.33) (.20) (1.40) (1.60)
-- Navigator Class
Years Ended Mar. 31,
1997 $ 27.08 $ 41 $ 8.75 $ 9.16 $ (.41) $ (1.53) $ (1.94)
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64)
1995(B) 18.76 .12 1.40 1.52 (.01) -- (.01)
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 25.09 $ (.23) $ 3.10 $ 2.87 $ -- $ (1.41) $ (1.41)
1996 19.96 -- 5.60 5.60 -- (.47) (.47)
1995 21.56 (.06) (1.31) (1.37) -- (.23) (.23)
1994 17.91 (.11) 3.93 3.82 (.03) (.14) (.17)
1993 17.00 .03 1.66 1.69 -- (.78) (.78)
1992 14.59 .12 2.83 2.95 (.14) (.40) (.54)
1991 13.58 .18 2.42 2.60 (.27) (1.32) (1.59)
1990 11.84 .12 1.70 1.82 (.08) -- (.08)
1989 10.14 .06 1.65 1.71 (.01) -- (.01)
1988 12.80 .13 (1.825) (1.695) (.075) (.89) (.965)
-- Navigator Class
Years Ended Mar. 31,
1997 $ 25.26 $ .02 $ 3.17 $ 3.19 $ -- $ (1.41) $ (1.41)
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64)
1995(B) 19.11 .07 .85 .92 -- -- --
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 16.45 $ .46 $ 3.47 $ 3.93 $ (.43) $ (.56) $ (.99)
1996 12.79 .48 3.69 4.17 (.51) -- (.51)
1995 13.54 .33 (.19) .14 (.29) (.60) (.89)
1994 13.61 .36 .24 .60 (.33) (.34) (.67)
1993 11.64 .39 1.89 2.28 (.31) -- (.31)
1992 9.64 .34 1.91 2.25 (.25) -- (.25)
1991 10.03 .28 (.31) (.03) (.29) (.07) (.36)
1990 10.06 .21 .15 .36 (.21) (.18) (.39)
1989 8.86 .15 1.18 1.33 (.13) -- (.13)
1988 11.63 .18 (1.35) (1.17) (.21) (1.39) (1.60)
-- Navigator Class
Years Ended Mar. 31,
1997 $ 16.52 $ .65 $ 3.48 $ 4.13 $ (.56) $ (.56) $ (1.12)
1996 12.83 .62 3.72 4.34 (.65) -- (.65)
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
<S> <C>
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Year Return Net Assets Net Assets Rate Paid(A) (in thousands)
-----------------------------------------------------------------------------------------------------------------
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 34.11 33.59% 1.77% .4% 10.5% $.0557 $2,236,400
1996 26.99 42.09% 1.82% .8% 19.6% -- 1,450,774
1995 20.21 9.77% 1.81% .5% 20.1% -- 986,325
1994 18.50 5.65% 1.82% .5% 25.5% -- 912,418
1993 17.81 14.76% 1.86% 1.1% 21.8% -- 878,394
1992 15.69 19.53% 1.90% 1.7% 39.4% -- 745,833
1991 13.38 (2.88)% 1.90% 2.5% 38.8% -- 690,053
1990 14.19 7.74% 1.86% 2.2% 30.7% -- 808,780
1989 14.16 18.33% 1.96% 1.6% 29.7% -- 720,961
1988 12.14 (8.42)% 1.97% 1.5% 47.8% -- 665,689
-- Navigator Class
Years Ended Mar. 31,
1997 $ 34.30 34.97% .77% 1.4% 10.5% $.0557 $ 83,752
1996 27.08 43.53% .82% 1.8% 19.6% -- 52,332
1995(B) 20.27 8.11%(C) .82%(D) 1.8%(D) 20.1% -- 36,519
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 26.55 11.58% 1.92% (.9)% 29.2% $.0514 $ 947,684
1996 25.09 28.47% 1.96% -- 35.6% -- 792,240
1995 19.96 (6.37)% 1.93% (.2)% 27.5% -- 612,093
1994 21.56 21.35% 1.94% (.6)% 16.7% -- 565,486
1993 17.91 10.50% 2.00% .2% 32.5% -- 322,572
1992 17.00 20.46% 2.10% 0.8% 56.9% -- 201,772
1991 14.59 21.46% 2.30% 1.4% 75.6% -- 106,770
1990 13.58 15.37% 2.30% 1.0% 115.9% -- 68,240
1989 11.84 16.99% 2.50% 0.7% 122.4% -- 44,450
1988 10.14 (14.18)% 2.50% 1.0% 158.9% -- 43,611
-- Navigator Class
Years Ended Mar. 31,
1997 $ 27.04 12.81% .85% .1% 29.2% $.0514 $ 41,415
1996 25.26 29.85% .88% 1.0% 35.6% -- 35,731
1995(B) 20.03 4.81%(C) .90%(D) 1.0%(D) 27.5% -- 26,123
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 19.39 24.33% 1.93% 2.6% 38.4% $.0528 $ 380,458
1996 16.45 33.23% 1.95% 3.2% 34.7% -- 267,010
1995 12.79 1.09% 1.93% 2.5% 61.9% -- 194,767
1994 13.54 4.57% 1.94% 2.7% 46.6% -- 184,284
1993 13.61 19.88% 1.95%(E) 3.1%(E) 40.5% -- 139,034
1992 11.64 23.59% 2.34% 3.1% 38.4% -- 52,360
1991 9.64 (0.05)% 2.50% 3.1% 62.1% -- 22,822
1990 10.03 3.48% 2.39% 2.0% 39.2% -- 26,815
1989 10.06 15.16% 2.40% 1.6% 25.7% -- 30,102
1988 8.86 (10.17)% 2.30% 1.9% 50.1% -- 35,394
-- Navigator Class
Years Ended Mar. 31,
1997 $ 19.53 25.67% .86% 3.7% 38.4% $.0528 $ 10,048
1996 16.52 34.67% .94% 4.2% 34.7% -- 7,058
1995(B) 12.83 2.28%(C) .86%(D) 3.6%(D) 61.9% -- 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 MARCH 31, 1997.
5
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
<S> <C>
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Year (Loss) Investments Operations Income Investments Distributions
----------------------------------------------------------------------------------------------------------------------
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1997 $ 12.23 $ .01(G) $ 3.00 $ 3.01 $ (.02) $ (.48) $ (.50)
1996 10.18 .07(G) 2.08 2.15 (.10) -- (.10)
1995 9.69 .12(G) .48 .60 (.11) -- (.11)
Sept. 1, 1993(A)-
Mar. 31, 1994 10.00 .06(G) (.34) (.28) (.03) -- (.03)
-- Navigator Class
Oct. 4, 1996(B) to
Mar. 31, 1997 $ 13.30 $ .07(H) $ 1.94 $ 2.01 $ (.12) $ (.48) $ (.60)
BALANCED TRUST
Oct. 1, 1996(C)-
Mar. 31, 1997 $ 10.00 $ .09(I) $ .11 $ .20 $ (.04) $ -- $ (.04)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
<S> <C>
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Year Return Net Assets Net Assets Rate Paid(F) (in thousands)
-----------------------------------------------------------------------------------------------------------------
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1997 $ 14.74 24.73% 1.95%(G) .05%(G) 55.7% $.0640 $ 104,812
1996 12.23 21.24% 1.95%(G) .69%(G) 43.4% -- 76,100
1995 10.18 6.24% 1.95%(G) 1.21%(G) 30.5% -- 59,985
Sept. 1, 1993(A)-
Mar. 31, 1994 9.69 (2.86)%(D) 1.95%(E,G) 1.14%(E,G) 21.0%(E) -- 55,022
-- Navigator Class
Oct. 4, 1996(B) to
Mar. 31, 1997 $ 14.71 15.16%(D) .86%(E,H) .98%(E,H) 55.7% $.0640 $ 55
BALANCED TRUST
Oct. 1, 1996(C)-
Mar. 31, 1997 $ 10.16 2.02%(D) 1.85%(E,I) 2.52%(E,I) 5.1%(E) $.0622 $ 17,948
</TABLE>
(A) FOR THE PERIOD SEPTEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1994.
(B) FOR THE PERIOD OCTOBER 4, 1996 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES)
TO MARCH 31, 1997.
(C) FOR THE PERIOD OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1997.
(D) NOT ANNUALIZED
(E) ANNUALIZED
(F) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY EACH FUND.
(G) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.95%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE ADVISER,
THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE
PERIOD SEPTEMBER 1, 1993 TO MARCH 31, 1994 AND FOR THE YEARS ENDED MARCH
31, 1995, 1996 AND 1997 WOULD HAVE BEEN 2.28%, 2.12%, 2.20%, AND 2.06%,
RESPECTIVELY.
(H) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 0.95% OF
AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE ADVISER, THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD
OCTOBER 4, 1996 TO MARCH 31, 1997 WOULD HAVE BEEN 0.97%.
(I) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.85%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE ADVISER,
THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE
PERIOD OCTOBER 1, 1996 TO MARCH 31, 1997 WOULD HAVE BEEN 3.03%.
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of each class
of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
CUMULATIVE TOTAL RETURN shows the fund's performance over a specific
period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns. For comparison
purposes, each Fund's total return is compared with total returns of the
Value Line Geometric Average, an index of approximately 1,700 stocks
("Value Line Index"), and the S&P 500, two unmanaged indexes of widely
held common stocks. No adjustment has been made for any income taxes
payable by shareholders.
The investment return and principal value of an investment in each
Fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Returns
6
<PAGE>
of each Fund would have been lower if the Advisers and/or Legg Mason had
not waived certain fees for the fiscal years ended March 31, as follows:
1989 through 1997 for Value Trust; 1986 through 1995 for Total Return
Trust and 1986 through 1997 for Special Investment Trust; 1994 through
1997 for American Leading Companies and 1997 for Balanced Trust.
Performance figures reflect past performance only and are not intended
to and do not indicate future performance. Further information about each
Fund's performance is contained in its Annual Report to Shareholders,
which may be obtained without charge by calling your Legg Mason or
affiliated financial advisor or
Legg Mason's Funds Marketing Department at
800-822-5544.
Total returns as of March 31, 1997 were as follows:
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED VALUE LINE S&P STOCK
TRUST TRUST TRUST COMPANIES TRUST INDEX INDEX
-------------------------------------------------------------------------------------------------------------------
<S> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year
Five Years
Ten Years
Life of Class --
Value Trust(A)
Life of Class --
Total Return Trust(B)
Life of Class --
Special Investment Trust(C)
Life of Class --
American Leading Companies(D)
Life of Class --
Balanced Trust(E)
Navigator Class:
One Year
Life of Class(F)
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year
Five Years
Ten Years
Life of Class --
Value Trust(A)
Life of Class --
Total Return Trust(B)
Life of Class --
Special Investment Trust(C)
Life of Class --
American Leading Companies(D)
Life of Class --
Balanced Trust(E)
Navigator Class:
One Year
Life of Class(F)
</TABLE>
(A) INCEPTION OF VALUE TRUST -- APRIL 16, 1982.
(B) INCEPTION OF TOTAL RETURN TRUST -- NOVEMBER 21, 1985.
(C) INCEPTION OF SPECIAL INVESTMENT TRUST -- DECEMBER 30, 1985.
(D) INCEPTION OF AMERICAN LEADING COMPANIES -- SEPTEMBER 1, 1993.
(E) INCEPTION OF BALANCED TRUST -- OCTOBER 1, 1996.
(F) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES
OF VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST) TO MARCH
31, 1997; AND FOR THE PERIOD OCTOBER 10, 1996 (COMMENCEMENT OF SALE OF
NAVIGATOR SHARES OF AMERICAN LEADING COMPANIES) TO MARCH 31, 1997.
The S&P 500 and Value Line Index figures assume reinvestment of
dividends paid by their component stocks. Unlike the figures presented for
the Funds, the S&P 500 and Value Line Index figures do not include
brokerage commissions and other costs of investing.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Funds' Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. The Adviser
believes that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. The
Adviser believes, however, that purchasing securities depressed by
temporary factors will provide investment returns superior to those
obtained when premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
the Adviser believes the return on certain debt securities may equal or
exceed the return on equity securities. The Fund may invest in debt
securities of both foreign and domestic issuers of any maturity without
regard to rating, and may invest its assets in such securities without
regard to a percentage limit. The Adviser currently anticipates that under
normal market conditions, the Fund will invest no more than 25% of its
total assets in long-term debt securities. Up to 10% of its total assets
may be invested in debt securities not rated investment grade, i.e., not
rated at least BBB by Standard & Poor's ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's") or, if unrated by those entities,
deemed by the Adviser to be of comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which, in the Adviser's opinion,
offer prospects for capital appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may invest its assets in such securities without regard to a percentage
limit. The Adviser currently anticipates that under normal market
conditions, the Fund will invest no more than 50% of its total assets in
intermediate-term and long-term debt securities, and no more than 5% of
its total assets
8
<PAGE>
in debt securities not rated investment grade, i.e., not rated at least
BBB by S&P or Baa by Moody's or, if unrated by those entities, deemed by
the Adviser to be of comparable quality.
SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities, and securities convertible into equity securities, of
companies with market capitalizations of less than $2.5 billion which the
Adviser believes have one or more of the following characteristics:
1. The companies generally are not closely followed by, or are out of
favor with, investors, and which appear to be undervalued in relation to
their long-term earning power or asset values. A security may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling, or actual or anticipated
developments affecting the issuer.
2. The companies are experiencing unusual and possibly non-repetitive
developments which, in the opinion of the Adviser, may cause the market
values of the securities to increase. Such developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. The companies are involved in actual or anticipated reorganizations
or restructurings under the Bankruptcy Code. No more than 20% of the
Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the Fund
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 at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities 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 sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
net assets may be invested in debt securities not rated at least BBB by
S&P, or Baa by Moody's, and securities unrated by those entities,
9
<PAGE>
deemed by the Adviser to be of comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be in issuers whose long-term debt is rated in one of the
four highest rating categories by S&P or Moody's or, if unrated by S&P or
Moody's, deemed by the Adviser to be of comparable quality.
AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMCM
defines a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMCM's goal is to invest in companies having what LMCM believes is a
reasonable price/earnings ratio, and it will favor those companies with
well established histories of dividends and dividend growth rates. The
Fund may also invest in companies having capitalizations above or below $2
billion which LMCM believes show strong potential for future market
leadership, and in companies which LMCM believes, because of corporate
restructuring or other changes, are undervalued based on their potential
for future growth. There is always a risk that LMCM will not properly
assess the potential for an issuer's future growth, or that an issuer will
not realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. Under normal circumstances, the Fund
expects to own a minimum of 35 different securities. The Fund may also
invest in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income. The Fund may invest in when-issued
securities, which may involve additional risks.
During periods when LMCM believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMCM to be of comparable quality.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities not rated at least Ba by Moody's or BB by S&P or, if unrated by
those entities, deemed by the Adviser to be of comparable quality.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk.
10
<PAGE>
The Fund will invest in a combination of equity, debt and money market
securities in attempting to achieve its objective. Under normal
conditions, the Fund will invest no more than 75% of its assets in equity
securities. Bartlett will emphasize investments in dividend-paying equity
securities that, in the opinion of Bartlett, offer the potential for long-
term growth, and in common stocks or securities convertible into common
stock that do not pay current dividends but offer prospects for capital
appreciation and future income.
The Fund will invest at least 25% of its portfolio in fixed income
securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations, and mortgage-related securities;
certificates of deposit; Treasury bills, notes, bonds and other
obligations of the U.S. Government, its agencies and instrumentalities;
commercial paper and other money market instruments rated not less than
A-1, P-1 or F-1 by Moody's, S&P or Fitch Investors Services ("Fitch"),
respectively; and repurchase agreements. No more than 5% of the Fund's
total assets may be invested in fixed income or convertible securities not
rated at least BBB or Baa at the time of purchase, or comparable unrated
securities. If an investment grade security purchased by the Fund
subsequently loses its investment grade rating, Bartlett will determine
whether to retain that security in the Fund's portfolio. The Fund may
invest in securities of any maturity, but, under normal circumstances,
expects to maintain its portfolio of fixed income securities so as to have
an average dollar-weighted maturity of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity and
debt securities. This approach attempts to "balance" the potential for
growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common and
preferred stocks and the remaining 40% in various fixed income securities.
These percentages may vary in attempting to increase returns or reduce
risk.
The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and may purchase exchange-traded futures contracts
on stock indices and options thereon. The Fund may use derivatives, such
as options and futures, in its investment activities. No more than 15% of
the Fund's net assets may be invested in illiquid securities. The Fund may
also engage in reverse repurchase agreements.
The portfolio turnover rate for the equity portion of the Fund's
portfolio is estimated to be 50% and the portfolio turnover rate for the
fixed income portion is estimated to be 120%. The Fund's portfolio
turnover rate is not expected to exceed 80%.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
FOR EACH FUND:
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in money market instruments,
including repurchase agreements and 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 each 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. Each 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 Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust, Total Return Trust and Special Investment Trust) or 15% (for
American Leading Companies and Balanced Trust) of its net assets would be
invested in such agreements and other illiquid investments.
11
<PAGE>
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its net assets.
For further information concerning securities lending, see the Statement
of Additional Information.
PREFERRED STOCK
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. 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 on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. 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.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, its adviser reviews and
monitors the creditworthiness of each issuer and issue. The adviser also
analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA") ); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Bank
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Fannie Mae ("FNMA") securities); and (4) solely the
creditworthiness of the issuer (e.g., Federal Home Loan Mortgage
Corporation ("FHLMC") securities). Neither the U.S. Government nor any of
its agencies or instrumentalities guarantees the market value of the
securities they issue. Therefore, the market value of such securities can
be expected to fluctuate in response to changes in interest rates.
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
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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 make no cash interest payments but instead are
issued at a significant discount from face value. Each year, a portion of
the discount is attributed to bond holders as income. Because each Fund is
required to pay out substantially all of its income each year, including
income imputed to zero coupon bonds, a Fund may have to sell other
holdings to raise cash necessary to make the payout. Because zero coupon
bonds do not make periodic interest payments, their prices can be very
volatile when market interest rates change.
CLOSED-END INVESTMENT COMPANIES
Each 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. A
Fund will invest in such funds, when, in the adviser's judgment, the
potential benefits of such investment justify the payment of any
applicable premium or sales charge.
FOREIGN SECURITIES
Each 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 to 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 Funds may also invest in ADRs, which are securities issued by
banks evidencing their ownership of specific foreign securities. 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. Although ADRs are denominated in
U.S. dollars, the underlying security often is not; thus, the value of the
ADR may be subject to exchange controls and variations in the exchange
rate. The Funds may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank
evidencing its ownership of the underlying foreign securities.
Although not a fundamental policy subject to shareholder vote, the
adviser currently anticipates that Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies will each invest
no more than 25% of its total assets in foreign securities. Bartlett
currently anticipates that Balanced Trust will not invest more than 10% of
its total assets in foreign securities, either directly or through ADRs or
GDRs.
ILLIQUID SECURITIES
Value Trust, Total Return Trust, and Special Investment Trust may each
invest up to 10% of its net assets in illiquid securities. American
Leading Companies and Balanced Trust may each invest up to 15% of its net
assets in illiquid securities. Illiquid securities are securities that
cannot be expected to be sold within seven days at approximately the price
at which they are valued. Due to the absence of an active trading market,
a Fund may have difficulty valuing or disposing of illiquid securities
promptly. Securities whose sale is legally restricted are often considered
illiquid. Foreign securities that are freely tradable in their country of
origin or in their principal market are not considered restricted
securities even if they are not registered for sale in the U.S.
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WHEN-ISSUED SECURITIES
Each 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 a Fund purchases
securities on a when-issued basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at
the time of receipt. However, a Fund does not have to pay for the
obligations until they are delivered to it. This is normally 7 to 15 days
later, but could be considerably longer in the case of some
mortgage-backed securities. Use of this practice would have a leveraging
effect on a Fund. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations, in an amount at least equal to the payment that will
be due. A Fund may sell the securities subject to a when-issued purchase,
which may result in a gain or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
Each of Value Trust, Total Return Trust, Special Investment Trust and
Balanced Trust can invest in futures and options transactions, including
puts and calls. Because such investments "derive" their value from the
value of the underlying security, index, or interst rate on which they are
based, they are sometimes referred to as "derivative" securities. Such
investments involve risks that are different from those presented by
investing directly in the securities themselves. While utilization of
options, futures contracts and similar instruments may be advantageous to
the Funds, if the adviser is not successful in employing such instruments
in managing a Fund's investments the Fund's performance will be worse than
if the Fund did not make such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. A Fund
may sell an interest rate futures contract to offset price changes of debt
securities it already owns. This strategy is intended to minimize any
price changes in the debt securities a Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be
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limited to the amount of the premium it received. If stock prices remain
the same over time, it is likely that the Fund will also profit, because
it should be able to close out the option at a lower price. If stock
prices fall, the Fund would expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying index, with results similar to
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, when writing call
options the Fund would give up some ability to participate in security
price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the adviser in managing the Funds'
portfolios. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate its hedged position. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested.
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract is an obligation to purchase or sell a
specific amount of a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
foreign currency contract, a Fund "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration
of the contract. A Fund may enter into these contracts for the purpose of
hedging against risk arising from its investment in securities denominated
in foreign currencies or when it anticipates investing in such securities.
Forward currency contracts involve certain costs and risks, including the
risk that currency movements will not be accurately predicted, causing a
Fund to sustain losses on these contracts.
AMERICAN LEADING COMPANIES:
Although American Leading Companies may not invest in futures
transactions, it may to a limited extent sell covered call options on any
security in which it is permitted to invest for the purpose of enhancing
income. American Leading Companies may not invest in any other form of
option transaction.
The Fund may sell covered call options on any security in which it is
permitted to invest for the purpose of enhancing income. A call option
gives the purchaser the right to purchase the underlying security from the
Fund at a specified price (the "strike price") during a specified period.
A call option is "covered" if, at all times the
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option is outstanding, the Fund holds the underlying security or a right
to obtain that security at no additional cost. The Fund may purchase a
call option for the purpose of closing out a short position in an option.
The use of options involves certain risks. These risks include: (1)
the fact that use of these instruments can reduce the opportunity for
gain; (2) dependence on LMCM's ability to predict movements in the prices
of individual securities, fluctuations in the general securities markets
or in market sectors; (3) imperfect correlation between movements in the
price of options and movements in the price of the underlying securities;
(4) the possible lack of a liquid secondary market for a particular option
at any particular time; (5) the possibility that the use of cover
involving a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other
short-term obligations; and (6) the possible need to defer closing out
positions in these instruments in order to avoid adverse tax consequences.
There can be no assurance that the use of options by the Fund will be
successful. As a non-fundamental policy, the Fund will not sell a covered
call option if, as a result, the value of the portfolio securities
underlying all outstanding covered call options would exceed 25% of the
value of the equity securities held by the Fund. See the Statement of
Additional Information for a more detailed discussion of options
strategies.
THE FOLLOWING DISCUSSION OF INVESTMENTS AND RISKS APPLIES ONLY TO BALANCED
TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
Mortgage-related securities may be issued by governmental or government-
related entities or by non-governmental entities such as banks, savings
and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments
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at maturity or specified call dates. In contrast, mortgage-related
securities provide monthly payments which consist of interest and, in most
cases, principal. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments to holders of mortgage-related securities
are caused by repayments resulting from the sale of the underlying
residential property, refinancing or foreclosure. Some mortgage-related
securities entitle the holders to receive all interest and principal
payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-related
security will influence the yield of that security. Increased prepayment
of principal may limit a Fund's ability to realize the appreciation in the
value of such securities that would otherwise accompany declining interest
rates. An increase in mortgage prepayments could cause the Fund to incur a
loss on a mortgage-related security that was purchased at a premium. On
the other hand, a decrease in the rate of prepayments, resulting from an
increase in market interest rates, among other causes, may extend the
effective maturities of mortgage-related securities, increasing their
sensitivity to changes in market interest rates. In determining the
average maturity of the fixed-income portion of the Fund, Bartlett must
apply certain assumptions and projections about the maturity and
prepayment of mortgage-related securities; actual prepayment rates may
differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-through securities are, however, subject to the same
market risk as comparable debt securities. Therefore, the effective
maturity and market value of the Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
FHLMC, a corporate instrumentality of the U.S. Government, issues
mortgage participation certificates ("PCs") which represent interests in
mortgages from FHLMC's national portfolio. The mortgage loans in FHLMC's
portfolio are not government backed; rather, the loans are either
uninsured with loan-to-value ratios of 80% or less, or privately insured
if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of
principal on FHLMC PCs.
FNMA is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of approved
seller/servicers, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
certificates issued by FNMA ("FNMA certificates") are guaranteed as to
timely payment of principal and interest by FNMA, not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal
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payments and any prepayments from the collateral pool are paid first to
the "Class 1" bondholders. The principal payments are such that the Class
1 obligations are scheduled to be completely repaid no later than, for
example, five years after the offering date. Thereafter, all payments of
principal are allocated to the next most senior class of bonds until that
class of bonds has been fully repaid. Although full payoff of each class
of bonds is contractually required by a certain date, any or all classes
of obligations may be paid off sooner than expected because of an increase
in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND AS NOTED:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER-RATED DEBT SECURITIES
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. Debt securities rated C by Moody's and S&P are bonds on
which no interest is being paid and which can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
However, debt securities, regardless of their ratings, generally have a
higher priority in the issuer's capital structure than do equity
securities.
Lower-rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
Lower-rated debt securities are also sometimes referred to as "junk
bonds."
The market for lower-rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower-rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on
lower-rated debt securities rose dramatically, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur.
The market for lower-rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower-rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. 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. If
securities are rated investment grade by one rating organization and below
investment grade by the other, the adviser may rely on the rating that it
believes is more accurate. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed
by the adviser to determine, to the extent possible, that the planned
investment is sound.
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INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Other Fund policies, unless described as fundamental, can be
changed by action of the Board of Directors.
The fundamental restrictions applicable to American Leading Companies
include a prohibition on investing 25% or more of its total assets in the
securities of issuers having their principal business activities in the
same industry (with the exception of securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements with respect thereto).
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason or with an affiliate that has a dealer agreement
with Legg Mason. Your Legg Mason or affiliated financial advisor will be
pleased to explain the shareholder services available from the Funds and
answer any questions you may have. Documents available from your Legg
Mason or affiliated financial advisor should be completed if you invest in
shares of the Funds through an Individual Retirement Account ("IRA"),
Self-Employed Individual Retirement Plan ("Keogh Plan"), Simplified
Employee Pension Plan ("SEP") Savings Incentive Match Plan for Employees
("SIMPLE") or other qualified retirement plan.
Investors who are considering establishing an IRA, Keogh Plan, SEP,
SIMPLE or other qualified retirement plan may wish to consult their
attorneys or tax advisers with respect to individual tax questions. Your
Legg Mason or affiliated financial advisor can make available to you forms
of plans. The option of investing in these plans through regular payroll
deductions may be arranged with Legg Mason and your employer. Additional
information with respect to these plans is available upon request from any
Legg Mason or affiliated financial advisor.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds and investments in an IRA or similar plan, is $1,000, and the
minimum investment for each purchase of additional shares is $100, except
as noted below. The minimum amount for subsequent investments in an IRA or
similar plan will be waived if an investment will bring the investment for
the year to the maximum amount permitted under the Internal Revenue Code
of 1986, as amended ("Code"). For those investing through the Funds'
Future First Systematic Investment Plan, payroll deduction plans and plans
involving automatic payment of funds from financial institutions or
automatic investment of dividends from certain unit investment trusts,
minimum initial and subsequent investments are lower. Each Fund may change
these minimum amount requirements at its discretion.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Funds:
1. THROUGH YOUR LEGG MASON OR AFFILIATED FINANCIAL ADVISOR
Shares may be purchased through any Legg Mason or affiliated financial
advisor. A financial advisor will be pleased to open an account for you,
explain to you the shareholder services available from the Funds and
answer any questions you may have. After you have established a Legg Mason
or affiliated account, you can order shares
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from your financial advisor in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Funds of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to transfer funds each month from
your checking account. Please contact any Legg Mason or affiliated
financial advisor for further information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through any Legg Mason or
affiliated financial advisor.
Primary Share purchases will be processed at the net asset value next
determined after your Legg Mason or affiliated financial advisor has
received your order; payment must be made within three business days to
Legg Mason. Orders received by your Legg Mason or affiliated financial
advisor before the close of regular trading on the New York Stock Exchange
("Exchange") (normally 4:00 p.m. Eastern time) ("close of the Exchange")
on any day the Exchange is open will be executed at the net asset value
determined as of the close of the Exchange on that day. Orders received by
your Legg Mason or affiliated financial advisor after the close of the
Exchange or on days the Exchange is closed will be executed at the net
asset value determined as of the close of the Exchange on the next day the
Exchange is open. See "How Net Asset Value is Determined," page 24. Each
Fund reserves the right to reject any order for its shares or to suspend
the offering of shares for a period of time.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. Shares may not be held in, or
transferred to, an account with any brokerage firm other than Legg Mason
or its affiliates. The Funds no longer issue share certificates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Legg Mason or affiliated financial advisor an order for
redemption of your shares. Please have the following information ready
when you call: the name of the Fund, the number of shares (or dollar
amount) to be redeemed and your shareholder account number. Second, you
may send a written request for redemption to: [insert complete Fund name],
c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
Requests for redemption received by your Legg Mason or affiliated
financial advisor before the close of the Exchange on any day when the
Exchange is open, will be transmitted to BFDS, transfer agent for the
Funds, for redemption at the net asset value per share determined as of
the close of the Exchange on that day. Requests for redemption received by
your Legg Mason or affiliated financial advisor after the close of the
Exchange will be executed at the net asset value determined as of the
close of the Exchange on its next trading day. A redemption request
received by your Legg Mason or affiliated financial advisor may be treated
as a request for repurchase and, if it is accepted by Legg Mason, your
shares will be purchased at the net asset value per share determined as of
the next close of the Exchange.
Proceeds from your redemption will settle in your Legg Mason brokerage
account two business days after trade date. The proceeds of your
redemption or repurchase may be more or less than your original cost. If
the shares to be redeemed or repurchased were paid for by check (including
certified
20
<PAGE>
or cashier's checks), within 10 business days of the redemption or
repurchase request, the proceeds will not be disbursed unless the Fund can
be reasonably assured that the check has been collected.
Written requests for redemption must be in "good order." A redemption
request will be considered to be received in "good order" only if:
1. You have indicated in writing the number of Primary Shares (or
dollar amount) to be redeemed, the complete Fund name and your shareholder
account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Legg Mason or
affiliated financial advisor.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. The Funds may
be liable for losses due to unauthorized or fraudulent instructions if
they do not follow reasonable procedures. Telephone redemption privileges
are available automatically to all shareholders unless certificates have
been issued. Shareholders who do not wish to have telephone redemption
privileges should call their Legg Mason or affiliated investment executive
for further instructions.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days to
make an additional investment to avoid having your account closed.
To redeem your Legg Mason Fund retirement account, a Distribution
Request Form must be completed and returned to Legg Mason Client Services
for processing. This form can be obtained through your Legg Mason or
affiliated financial advisor or Legg Mason Client Services in Baltimore,
Maryland. Upon receipt of your form, your shares will be redeemed at the
net asset value per share determined as of the next close of the Exchange.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
the Adviser, the respective Fund could be adversely affected by immediate
payment. (The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.)
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily as
of the close of the Exchange, on every day that the Exchange is open, by
subtracting the liabilities attributable to Primary Shares from the total
assets attributable to such shares and dividing the result by the number
of Primary Shares outstanding. Securities owned by each Fund for which
market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by each Fund's Board of Directors.
Where a security is traded on more than one market, which may include
foreign markets, the securities are generally valued on the market
considered by each Fund's adviser to be the primary market. Securities
21
<PAGE>
with remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Primary Shares out of its
investment company taxable income (which consists of net investment
income, any net short-term capital gain and any net gains from certain
foreign currency transactions) attributable to those shares. Value Trust,
Total Return Trust and Balanced Trust declare and pay dividends from net
investment income quarterly; they pay dividends from any net short-term
capital gains and net gains from foreign currency transactions annually.
Special Investment Trust and American Leading Companies declare and pay
dividends from investment company taxable income following the end of each
taxable year. Each Fund also distributes substantially all of its net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) after the end of the taxable year in which the gain is
realized. A second distribution of net capital gain may be necessary in
some years to avoid imposition of the excise tax described under the
heading "Additional Tax Information" in the Statement of Additional
Information. Dividends and other distributions, if any, on shares held in
an IRA, Keogh Plan, SEP, SIMPLE or other qualified retirement plan and by
shareholders maintaining a Systematic Withdrawal Plan generally are
reinvested in Primary Shares of the distributing Fund on the payment
dates. Other shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares of
the distributing Fund;
2. Receive dividends in cash and other distributions in Primary Shares
of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Legg Mason
fund. Please contact your financial advisor for additional information
about this option.
If no election is made, both dividends and other distributions are
credited to your Fund account in Primary Shares of the distributing Fund
at the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also are credited to your
account at that net asset value. Shareholders electing to receive
dividends and/or other distributions in cash will be sent a check or will
have their Legg Mason account credited after the payment date. You may
elect at any time to change your option by notifying the applicable Fund
in writing at: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. Your election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of federal
income tax on that part of its investment company taxable income and net
capital gain that is distributed to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Primary Shares) are taxable to its
shareholders (other than IRAs, Keogh Plans, SEPs, SIMPLEs, other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent of the Fund's earnings and profits. Distributions of each Fund's
net capital gain (whether paid in cash or reinvested in Primary Shares),
when designated as such, are taxable to those shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. Each Fund
is required to withhold 31% of all dividends, capital gain distributions
and
22
<PAGE>
redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Primary Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Primary Shares for shares of any other Legg Mason
fund generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege." If Fund shares are purchased within 30
days before or after redeeming at a loss other shares of the same Fund
(regardless of class), all or part of that loss will not be deductible and
instead will increase the basis of the newly purchased shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Funds, depending on the laws of your home
state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each Fund's annual notice to
shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital gain
distributions and shares purchased through the Future First Systematic
Investment Plan or through automatic investments).
An account statement will be sent to you monthly unless there has been
no activity in the account or you are purchasing shares only through the
Future First Systematic Investment Plan or through automatic investments,
in which case an account statement will be sent quarterly. Reports will be
sent to each Fund's shareholders at least semiannually showing its
portfolio and other information; the annual report for each Fund will
contain financial statements audited by its respective independent
accountants/auditors.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan with respect to that Fund. Please contact your Legg Mason
or affiliated financial advisor for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net
23
<PAGE>
asset value, plus the applicable sales charge, determined on the same
business day as redemption of the Fund shares you wish to redeem; except
that no sales charge will be imposed upon proceeds from the redemption of
Fund shares to be exchanged that were originally purchased by exchange
from a fund on which the same or higher initial sales charge previously
was paid. There is no charge for the exchange privilege, but each Fund
reserves the right to terminate or limit the exchange privilege of any
shareholder who makes more than four exchanges from that Fund in one
calendar year. To obtain further information concerning the exchange
privilege and prospectuses of other Legg Mason funds, or to make an
exchange, please contact your Legg Mason or affiliated financial advisor.
To effect an exchange by telephone, please call your Legg Mason or
affiliated financial advisor with the information described in "How You
Can Redeem Your Primary Shares," page 23. The other factors relating to
telephone redemptions described in that section apply also to telephone
exchanges. Please read the prospectus for the other fund(s) carefully
before you invest by exchange. Each Fund reserves the right to modify or
terminate the exchange privilege upon 60 days' notice to shareholders.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
ADVISER
Pursuant to separate advisory agreements with Value Trust, Total
Return Trust and Special Investment Trust (each an "Advisory Agreement"),
which were approved by each respective Fund's Board of Directors, the
Adviser, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to each of those Funds. The Adviser administers and
acts as the portfolio manager for each Fund and has responsibility for the
actual investment management of the Funds, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular
security. The Adviser acts as adviser, manager or consultant to eighteen
investment company portfolios which had aggregate assets under management
of approximately $ billion as of June 30, 1997. The Adviser's address is
111 South Calvert Street, Baltimore, Maryland 21202.
William H. Miller, III co-managed Value Trust from its inception in
1982 to November 1990, when he assumed primary responsibility for the
day-to-day management. Mr. Miller has been responsible for the day-to-day
management of Total Return Trust since November 1990. Nancy T. Dennin
joined Mr. Miller as co-manager of Total Return Trust on January 1, 1992.
Effective April 1, 1997, Mrs. Dennin assumed primary responsibility for
the day-to-day management of Total Return Trust. Mr. Miller has also been
primarily responsible for the day-to-day management of Special Investment
Trust since its inception in 1985.
Mr. Miller is a portfolio manager and President of the Adviser. Mr.
Miller has been employed by the Adviser since 1982. Mrs. Dennin is a
Senior Vice President of the Adviser and has been employed by the Adviser
since 1985. From 1985 through 1991, Mrs. Dennin analyzed various
industries for the Adviser including financial services, retail, apparel
and insurance.
The Adviser receives for its services a management fee from each Fund
attibutable to the net assets of Primary Shares, calculated daily and
payable monthly. The Adviser receives a fee at an annual rate of 1.0% of
Value Trust's average daily net assets for the first $100 million of
average net assets; 0.75% of average daily net assets between $100 million
and $1 billion; and 0.65% of average daily net assets exceeding $1
billion. The Adviser receives from Total Return Trust, a management fee at
an annual rate of 0.75% of the average daily net assets of the Fund. The
Adviser receives from Special Investment Trust, a management fee at an
annual rate of 1.0% of the average daily net assets of the Fund for the
first $100 million of average net assets; 0.75% of average daily net
assets between $100 million and $1 billion; and 0.65% of average daily net
assets exceeding $1 billion. The management fee paid by each Fund is
higher than fees paid by most other funds to their investment advisers.
For Total Return Trust, the Adviser has agreed to waive indefinitely its
fees in any month to the extent Total Return Trust's expenses related
24
<PAGE>
to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 1.95% of
the Fund's average daily net assets. During the fiscal year ended March
31, 1997, Value Trust paid a management fee of 0.72% of its average daily
net assets, Total Return Trust paid a management fee of 0.75% of its
average daily net assets, and Special Investment Trust paid a management
fee of 0.78% of its average daily net assets.
MANAGER
Pursuant to separate management agreements with American Leading
Companies and Balanced Trust (each a "Management Agreement"), which were
approved by the Investors Trust's Board of Directors, Legg Mason Fund
Adviser, Inc. ("Manager"), a wholly owned subsidiary of Legg Mason, Inc.,
a financial services holding company, serves as the Funds' manager. The
Funds pay the Manager, pursuant to the respective Management Agreements, a
management fee equal to an annual rate of 0.75% of each Fund's respective
average daily net assets. The management fees paid by the Funds are higher
than fees paid by most other equity funds. Each Fund pays all its other
expenses which are not assumed by the Manager. The Manager has agreed to
waive its fees for each Fund for expenses related to Primary Shares
(exclusive of taxes, interest, brokerage and extraordinary expenses) as
follows: for American Leading Companies, 1.95% of average net assets
attributable to Primary Shares indefinitely; and for Balanced Trust, 1.85%
of average net assets attributable to Primary Shares until July 31, 1997.
These agreements are voluntary and may be terminated by the Manager at any
time.
LMCM
LMCM, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to American Leading Companies pursuant to the terms of
an Investment Advisory Agreement with the Manager, which was approved by
the Trust's Board of Directors. LMCM manages the investment and other
affairs of the Fund and directs the investments of the Fund in accordance
with its investment objectives, policies and limitations. For these
services, the Manager (not the Fund) pays LMCM a fee, computed daily and
payable monthly, at an annual rate equal to 40% of the fee received by the
Manager, or 0.30% of the Fund's average daily net assets.
LMCM has not previously advised a registered investment company.
However, LMCM manages private accounts with a value as of June 30, 1997 of
approximately $ billion. The address of LMCM is 111 South Calvert Street,
Baltimore, MD 21202.
E. Robert Quasman is a Senior Investment Manager for LMCM and has been
primarily responsible for the day-to-day management of American Leading
Companies since October 1996. Prior to that, Mr. Quasman was Director of
Research for Legg Mason for over six years.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
BARTLETT
Bartlett, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to Balanced Trust pursuant to the terms of an
Investment Advisory Agreement with the Manager, which was approved by the
Trust's Board of Directors. Bartlett manages the investment and other
affairs of the Fund and directs the investments of the Fund in accordance
with its investment objectives, policies and limitations. For these
services, the Manager (not the Fund) pays Bartlett a fee, computed daily
and paid monthly, at an annual rate equal to 66 2/3% of the fee received
by the Manager, or 0.50% of the Fund's average daily net assets. Bartlett
acts as adviser to individuals, corporations, pension and profit sharing
plans and trust accounts, as well as to two investment company portfolios
which had aggregate assets under management of approximately $ billion as
of June 30, 1997. The address of Bartlett is 36 East Fourth Street,
Cincinnati, Ohio 45202.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage the
Fund. Both are senior portfolio managers of Bartlett. Mr. Rabiner has been
employed by Bartlett since 1983 and has served since then as Director of
its Fixed Income Group. He is a member of Bartlett's Management Committee
and Investment Policy Committee. Mr. Uible has been employed by Bartlett
since
25
<PAGE>
1980. He chairs Bartlett's Equity Investment Group, and is responsible for
Bartlett's equity investment processes. He is a member of Bartlett's
Management Committee and Investment Policy Committee.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares, including any compensation to its financial
advisors, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1997, Legg Mason received from BFDS $ , $ ,
$ , $ and $ for performing such services in connection
with Value Trust, Total Return Trust, Special Investment Trust, American
Leading Companies, and Balanced Trust, respectively.
The Board of Directors of each Fund has adopted a Distribution and
Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"). The Plan provides that as
compensation for its ongoing services to investors in Primary Shares and
its activities and expenses related to the sale and distribution of
Primary Shares, Legg Mason receives from each Fund an annual distribution
fee payable from the assets attributable to Primary Shares, of up to:
0.75% of the average daily net assets attributable to Primary Shares of
the Total Return Trust, Special Investment Trust and American Leading
Companies, 0.70% of the average daily net assets attributable to Primary
Shares of Value Trust and 0.50% of the average daily net assets
attributable to Primary Shares of Balanced Trust; and an annual service
fee equal to 0.25% of the average daily net assets attributable to Primary
Shares of each of the Funds. The distribution fee and service fee are
calculated daily and paid monthly. The fees received by Legg Mason during
any year may be more or less than its cost of providing distribution and
shareholder services for Primary Shares. Legg Mason has agreed to waive
indefinitely distribution fees in any month to the extent the Total Return
Trust's and American Leading Companies' expenses related to Primary Shares
(exclusive of taxes, interest, brokerage costs and extraordinary expenses)
exceed an annual rate of 1.95% each of Total Return Trust's and American
Leading Companies average daily net assets. Legg Mason has also agreed to
waive until July 31, 1998 distribution fees in any month to the extent the
Balanced Trust's expenses related to Primary Shares (exclusive of taxes,
interest, brokerage costs and extraordinary expenses) exceed an annual
rate of 1.85% of Balanced Trust's average daily net assets attributable to
Primary Shares.
NASD rules limit the amount of annual distribution and service fees
that may be paid by mutual funds and impose a ceiling on the cumulative
distribution and service fees received. Each Fund's Plan complies with
those rules.
The Chairman, President and Treasurer of each Fund are employed by
Legg Mason.
DESCRIPTION OF EACH CORPORATION/TRUST AND ITS SHARES
Value Trust, Total Return Trust, Special Investment Trust and Legg
Mason Investors Trust, Inc. were established as Maryland corporations on
January 20, 1982, May 22, 1985, October 31, 1985 and May 5, 1993,
respectively. Value Trust has authorized capital of 200 million shares of
common stock, par value $0.001 per share. Total Return Trust and Special
Investment Trust each have authorized capital of 100 million shares of
common stock, par value $0.001 per share. The Articles of Incorporation of
Investors Trust authorize issuance of one billion shares of par value
$.001 per share of American Leading Companies and 250 million shares of
par value $.001 per share of Balanced Trust. Each corporation may issue
additional series of shares. Each Fund currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken
26
<PAGE>
by a Class of Shares of a Fund if a matter affects just that Class of
Shares. Each Class of Shares may bear certain differing Class-specific
expenses. Salespersons and others entitled to receive compensation for
selling or servicing Fund shares may receive more with respect to one
Class than another.
Navigator Shares are currently offered for sale only to institutional
clients of Fairfield for investment of their own monies and monies for
which they act in a fiduciary capacity, to clients of Trust Company for
which Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. The initial and subsequent investment
minimums for Navigator Shares are $50,000 and $100, respectively.
Investments in Navigator Shares may be made through investment executives
of Fairfield Group, Inc., Horsham, Pennsylvania, or Legg Mason.
Each Fund pays no Rule 12b-1 fee with respect to Navigator Shares. The
per share net asset value of Navigator Shares, and dividends paid to
Navigator shareholders, are generally expected to be higher than those of
Primary Shares of the Funds, because of the lower expenses attributable to
Navigator Shares. The per share net asset value of the classes of shares
will tend to converge, however, immediately after the payment of ordinary
income dividends. Navigator Shares of the Funds may be exchanged for the
corresponding class of shares of certain other Legg Mason funds.
Investments by exchange into other Legg Mason funds are made at the per
share net asset value, determined on the same business day as redemption
of the Navigator Shares the investors wish to redeem.
The Boards of Directors of the Funds do not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). Each Fund will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
27
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
EQUITY FUNDS
----
Putting Your Future First
Growth
Navigator Class of Value Trust
Navigator Class of American
Leading Companies Trust
Growth & Income
Navigator Class of Total
Return Trust
Navigator Class of Balanced
Trust
Aggressive Growth
Navigator Class of Special
Investment Trust
Prospectus
July 31, 1997
This wrapper is not part of the
prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000 800 o 822 o 5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036-1800
Independent Accountants/Auditors:
[ ]
217 East Redwood Street
Baltimore, Maryland 21202
[ ]
One North Charles Street
Baltimore, Maryland 21202
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by the Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus does not
constitute an offering by the Fund or by the principal underwriter in any
jurisdiction in which such offering may not lawfully be made.
[LEGG MASON FUNDS LOGO]
<PAGE>
NAVIGATOR EQUITY FUNDS
PROSPECTUS
JULY 31, 1997
LEGG MASON VALUE TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON AMERICAN LEADING COMPANIES TRUST,
A SERIES OF LEGG MASON INVESTORS TRUST, INC.
LEGG MASON BALANCE TRUST,
A SERIES OF LEGG MASON INVESTORS TRUST, INC.
Shares of Navigator Value Trust, Navigator Total Return Trust, Navigator
Special Investment Trust, Navigator American Leading Companies and Navigator
Balanced Trust (collectively referred to as ("Navigator Shares") represent
separate classes ("Navigator Classes") of common stock in Legg Mason Value
Trust, Inc. ("Value Trust"), Legg Mason Total Return Trust, Inc. ("Total Return
Trust"), Legg Mason Special Investment Trust, Inc. ("Special Investment Trust"),
Legg Mason American Leading Companies Trust ("American Leading Companies") and
Legg Mason Balanced Trust ("Balanced Trust") (each separately referred to as a
"Fund" and collectively referred to as the "Funds"), respectively.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they act in
a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust Company")
for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients") and accounts of the customers with such Clients
("Customers") are referred to collectively as ("Customer Accounts"), to
qualified retirement plans managed on a discretionary basis and having net
assets of at least $200 million, and to The Legg Mason Profit Sharing Plan and
Trust. Navigator Shares may not be purchased by individuals directly, but
Institutional Clients may purchase shares for Customer Accounts maintained for
individuals.
SPECIAL INVESTMENT TRUST MAY INVEST UP TO 35% OF ITS NET ASSETS IN DEBT
SECURITIES RATED BELOW INVESTMENT GRADE (COMMONLY KNOWN AS "JUNK BONDS"), AND
MAY INVEST UP TO 20% OF ITS TOTAL ASSETS IN THE SECURITIES OF COMPANIES INVOLVED
IN ACTUAL OR ANTICIPATED RESTRUCTURINGS. BOTH TYPES OF INVESTMENTS INVOLVE AN
INCREASED RISK OF PAYMENT DEFAULT AND/OR LOSS OF PRINCIPAL.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Funds dated July 31, 1997 has been filed with the Securities and Exchange
Commission ("SEC") and, as amended or supplemented from time to time, is
incorporated herein by reference. The Statement of Additional Information is
available without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed on the
following page).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Navigator Shares are sold and redeemed without any purchase or redemption
charge imposed by the Funds, although Institutional Clients may charge their
Customer Accounts for services provided in connection with the purchase or
redemption of shares. See "How to Purchase and Redeem Shares." Each Fund will
pay management fees to Legg Mason Fund Adviser, Inc., but Navigator Shares pay
no distribution fees.
VALUE TRUST is a diversified, open-end management investment company seeking
long-term growth of capital. Value Trust invests principally in those equity
securities which its investment adviser, Legg Mason Fund Adviser, Inc.
("Adviser" or "Manager"), believes are undervalued and therefore offer
above-average potential for capital appreciation.
TOTAL RETURN TRUST is a diversified, open-end management investment company
seeking capital appreciation and current income in order to achieve an
attractive total investment return consistent with reasonable risk. In
attempting to achieve this objective, the Adviser selects a diversified
portfolio, composed of dividend-paying common stocks and securities convertible
into common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common stock
which do not pay current dividends but which offer prospects for capital
appreciation and future income; and debt instruments of various maturities.
Total Return Trust may write covered put and call options. Due to Total Return
<PAGE>
Trust's investment objective, however, investors should not expect capital
appreciation comparable to funds devoted solely to growth, or income comparable
to funds devoted to maximum current income.
SPECIAL INVESTMENT TRUST is a diversified, open-end management investment
company seeking capital appreciation. Special Investment Trust invests
principally in equity securities of companies with market capitalizations of
less than $2.5 billion which, in the opinion of the Adviser, have one or more of
the following characteristics: they are not closely followed by, or are out of
favor with, investors generally, and the Adviser believes they are undervalued
in relation to their long-term earning power or asset values; unusual
developments have occurred which suggest the possibility that the market value
of the securities will increase; or they are involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. Special Investment
Trust also invests in the securities of companies with larger capitalizations
which have one or more of these charac-teristics. Special Investment Trust may
invest up to 35% of its net assets in debt securities rated below investment
grade.
AMERICAN LEADING COMPANIES is a professionally managed portfolio seeking
long-term capital appreciation and current income consistent with prudent
investment risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Investors Trust"), a diversified open-end management
investment company. Under normal market conditions, American Leading Companies
will invest at least 75% of its total assets in a diversified portfolio of
dividend-paying common stocks of Leading Companies that have market
capitalizations of at least $2 billion. The Fund's investment adviser, Legg
Mason Capital Management, Inc. ("LMCM"), defines a "Leading Company" as a
company that, in the opinion of LMCM, has attained a major market share in one
or more products or services within its industry(ies), and possesses the
financial strength and management talent to maintain or increase market share
and profit in the future. Such companies are typically well known as leaders in
their respective industries; most are found in the top half of the Standard &
Poor's Composite Index of 500 Stocks ("S&P 500").
BALANCED TRUST is a professionally managed portfolio seeking long-term
capital appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. Balanced Trust is a separate
series of the Investors Trust. Under normal conditions, Balanced Trust will
invest no more than 75% of its assets in equity securities. The term "equity
securities" includes, without limitation, common stocks and convertible
securities of domestic issuers, securities of closed-end investment companies
and U.S. dollar-denominated securities of foreign issuers, including American
Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs"). Balanced
Trust will invest at least 25% of its portfolio in fixed income securities.
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objectives and Policies 7
How To Purchase and Redeem Shares 17
How Shareholder Accounts are
Maintained 18
How Net Asset Value is Determined 18
Dividends and Other Distributions 19
Tax Treatment of Dividends and
Other Distributions 19
Shareholder Services 20
The Funds' Management and Investment Advisers 20
The Funds' Distributor 22
Description of each Corporation/Trust
and its Shares 22
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
2
<PAGE>
EXPENSES
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. The expenses and fees set
forth in the tables are based on average net assets and annual Fund operating
expenses related to Navigator Shares of Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies for the year ended March 31,
1997. For Balanced Trust, other expenses are based on estimates for the initial
period of operations of Navigator Balanced Trust.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
---------------------------------------------------
Management fees
(after fee
waivers) 0.72% 0.75% 0.78% 0.64% 0.00%
12b-1 fees None None None None None
Other expenses 0.05% 0.11% 0.07% 0.22% 1.10%
---------------------------------------------------
Total operating
expenses (after
fee waivers) 0.77% 0.86% 0.85% 0.86% 1.10%
===================================================
(A) The Manager has voluntarily agreed to waive the management fee to the extent
necessary to limit total operating expenses relating to Navigator Shares
(exclusive of taxes, brokerage commissions, interest and extraordinary
expenses) as follows: for Total Return Trust and American Leading Companies,
0.95% of each Fund's average daily net assets attributable to Navigator
Shares indefinitely; and for Balanced Trust, 1.10% of average daily net
assets attributable to Navigator Shares until July 31, 1998. In the absence
of such waivers, the management fee, other expenses and total operating
expenses relating to Navigator Shares would have been as follows: for Total
Return Trust, the same as described above; for American Leading Companies,
0.75%, 0.22% and 0.97% of average net assets; and for Balanced Trust, 0.75%,
1.10% and 1.85% of average net assets.
For further information concerning the Funds' expenses, please see "The
Funds' Management and Investment Advisers," page 23.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming (1) a
5% annual rate of return and (2) redemption at the end of each time period. The
Funds charge no redemption fees of any kind.
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
-----------------------------------------------------------
1 Year $ 8 $ 9 $ 9 $ 9 $11
3 Years $25 $ 27 $ 27 $ 27 $35
5 Years $43 $ 48 $ 47 $ 48 N/A
10 Years $95 $106 $105 $106 N/A
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same over the time periods shown. The above tables and the
assumption in the example of a 5% annual return are required by regulations of
the SEC applicable to all mutual funds. THE ASSUMED 5% ANNUAL RETURN IS NOT A
PREDICTION OF, AND DOES NOT REPRESENT THE PROJECTED OR ACTUAL PERFORMANCE OF,
NAVIGATOR SHARES OF THE FUNDS. THE ABOVE TABLE AND EXAMPLE SHOULD NOT BE
CONSIDERED REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The actual expenses attributable to Navigator
Shares will depend upon, among other things, the level of average net assets,
the levels of sales and redemptions of shares, the extent to which the Manager
waives its fees and the extent to which Navigator Shares incur variable
expenses, such as transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. Navigator Shares pay no 12b-1 distribution fees and may pay lower
transfer agency fees. The information for Primary Shares reflects the 12b-1
fees paid by that Class.
The financial information in the tables that follow has been audited
for Value Trust, Total Return Trust and Special Investment Trust by [
], independent accountants and for American Leading
Companies and Balanced Trust, by [ ], independent auditors.
Each Fund's financial statements for the year ended March 31, 1997 and the
report of [ ] or [ ] thereon are
included in their respective combined annual reports and are incorporated
by reference in the Statement of Additional Information. The combined
annual report for each Fund is available to shareholders without charge by
calling your Legg Mason or affiliated financial advisor or Legg Mason's
Funds Marketing Department at 800-822-5544.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
<S> <C>
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Year (Loss) Investments Operations Income Investments Distributions
----------------------------------------------------------------------------------------------------------------------
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 26.99 $ .13 $ 8.68 $ 8.81 $ (.16) $ (1.53) $ (1.69)
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41)
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09)
1994 17.81 .08 .92 1.00 (.11) (.20) (.31)
1993 15.69 .18 2.12 2.30 (.18) -- (.18)
1992 13.38 .25 2.34 2.59 (.28) -- (.28)
1991 14.19 .32 (.74) (.42) (.36) (.03) (.39)
1990 14.16 .33 .77 1.10 (.33) (.74) (1.07)
1989 12.14 .21 1.99 2.20 (.18) -- (.18)
1988 15.07 .21 (1.54) (1.33) (.20) (1.40) (1.60)
-- Navigator Class
Years Ended Mar. 31,
1997 $ 27.08 $ 41 $ 8.75 $ 9.16 $ (.41) $ (1.53) $ (1.94)
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64)
1995(B) 18.76 .12 1.40 1.52 (.01) -- (.01)
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 25.09 $ (.23) $ 3.10 $ 2.87 $ -- $ (1.41) $ (1.41)
1996 19.96 -- 5.60 5.60 -- (.47) (.47)
1995 21.56 (.06) (1.31) (1.37) -- (.23) (.23)
1994 17.91 (.11) 3.93 3.82 (.03) (.14) (.17)
1993 17.00 .03 1.66 1.69 -- (.78) (.78)
1992 14.59 .12 2.83 2.95 (.14) (.40) (.54)
1991 13.58 .18 2.42 2.60 (.27) (1.32) (1.59)
1990 11.84 .12 1.70 1.82 (.08) -- (.08)
1989 10.14 .06 1.65 1.71 (.01) -- (.01)
1988 12.80 .13 (1.825) (1.695) (.075) (.89) (.965)
-- Navigator Class
Years Ended Mar. 31,
1997 $ 25.26 $ .02 $ 3.17 $ 3.19 $ -- $ (1.41) $ (1.41)
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64)
1995(B) 19.11 .07 .85 .92 -- -- --
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 16.45 $ .46 $ 3.47 $ 3.93 $ (.43) $ (.56) $ (.99)
1996 12.79 .48 3.69 4.17 (.51) -- (.51)
1995 13.54 .33 (.19) .14 (.29) (.60) (.89)
1994 13.61 .36 .24 .60 (.33) (.34) (.67)
1993 11.64 .39 1.89 2.28 (.31) -- (.31)
1992 9.64 .34 1.91 2.25 (.25) -- (.25)
1991 10.03 .28 (.31) (.03) (.29) (.07) (.36)
1990 10.06 .21 .15 .36 (.21) (.18) (.39)
1989 8.86 .15 1.18 1.33 (.13) -- (.13)
1988 11.63 .18 (1.35) (1.17) (.21) (1.39) (1.60)
-- Navigator Class
Years Ended Mar. 31,
1997 $ 16.52 $ .65 $ 3.48 $ 4.13 $ (.56) $ (.56) $ (1.12)
1996 12.83 .62 3.72 4.34 (.65) -- (.65)
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
<S> <C>
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Year Return Net Assets Net Assets Rate Paid(A) (in thousands)
-----------------------------------------------------------------------------------------------------------------
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 34.11 33.59% 1.77% .4% 10.5% $.0557 $2,236,400
1996 26.99 42.09% 1.82% .8% 19.6% -- 1,450,774
1995 20.21 9.77% 1.81% .5% 20.1% -- 986,325
1994 18.50 5.65% 1.82% .5% 25.5% -- 912,418
1993 17.81 14.76% 1.86% 1.1% 21.8% -- 878,394
1992 15.69 19.53% 1.90% 1.7% 39.4% -- 745,833
1991 13.38 (2.88)% 1.90% 2.5% 38.8% -- 690,053
1990 14.19 7.74% 1.86% 2.2% 30.7% -- 808,780
1989 14.16 18.33% 1.96% 1.6% 29.7% -- 720,961
1988 12.14 (8.42)% 1.97% 1.5% 47.8% -- 665,689
-- Navigator Class
Years Ended Mar. 31,
1997 $ 34.30 34.97% .77% 1.4% 10.5% $.0557 $ 83,752
1996 27.08 43.53% .82% 1.8% 19.6% -- 52,332
1995(B) 20.27 8.11%(C) .82%(D) 1.8%(D) 20.1% -- 36,519
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 26.55 11.58% 1.92% (.9)% 29.2% $.0514 $ 947,684
1996 25.09 28.47% 1.96% -- 35.6% -- 792,240
1995 19.96 (6.37)% 1.93% (.2)% 27.5% -- 612,093
1994 21.56 21.35% 1.94% (.6)% 16.7% -- 565,486
1993 17.91 10.50% 2.00% .2% 32.5% -- 322,572
1992 17.00 20.46% 2.10% 0.8% 56.9% -- 201,772
1991 14.59 21.46% 2.30% 1.4% 75.6% -- 106,770
1990 13.58 15.37% 2.30% 1.0% 115.9% -- 68,240
1989 11.84 16.99% 2.50% 0.7% 122.4% -- 44,450
1988 10.14 (14.18)% 2.50% 1.0% 158.9% -- 43,611
-- Navigator Class
Years Ended Mar. 31,
1997 $ 27.04 12.81% .85% .1% 29.2% $.0514 $ 41,415
1996 25.26 29.85% .88% 1.0% 35.6% -- 35,731
1995(B) 20.03 4.81%(C) .90%(D) 1.0%(D) 27.5% -- 26,123
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $ 19.39 24.33% 1.93% 2.6% 38.4% $.0528 $ 380,458
1996 16.45 33.23% 1.95% 3.2% 34.7% -- 267,010
1995 12.79 1.09% 1.93% 2.5% 61.9% -- 194,767
1994 13.54 4.57% 1.94% 2.7% 46.6% -- 184,284
1993 13.61 19.88% 1.95%(E) 3.1%(E) 40.5% -- 139,034
1992 11.64 23.59% 2.34% 3.1% 38.4% -- 52,360
1991 9.64 (0.05)% 2.50% 3.1% 62.1% -- 22,822
1990 10.03 3.48% 2.39% 2.0% 39.2% -- 26,815
1989 10.06 15.16% 2.40% 1.6% 25.7% -- 30,102
1988 8.86 (10.17)% 2.30% 1.9% 50.1% -- 35,394
-- Navigator Class
Years Ended Mar. 31,
1997 $ 19.53 25.67% .86% 3.7% 38.4% $.0528 $ 10,048
1996 16.52 34.67% .94% 4.2% 34.7% -- 7,058
1995(B) 12.83 2.28%(C) .86%(D) 3.6%(D) 61.9% -- 4,823
</TABLE>
(A) PURSUANT TO SEC REGULATIONS EFFETIVE 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 MARCH 31, 1997.
4
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
<S> <C>
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Year (Loss) Investments Operations Income Investments Distributions
----------------------------------------------------------------------------------------------------------------------
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1997 $ 12.23 $ .01(G) $ 3.00 $ 3.01 $ (.02) $ (.48) $ (.50)
1996 10.18 .07(G) 2.08 2.15 (.10) -- (.10)
1995 9.69 .12(G) .48 .60 (.11) -- (.11)
Sept. 1, 1993(A)-
Mar. 31, 1994 10.00 .06(G) (.34) (.28) (.03) -- (.03)
-- Navigator Class
Oct. 4, 1996(B) to
Mar. 31, 1997 $ 13.30 $ .07(H) $ 1.94 $ 2.01 $ (.12) $ (.48) $ (.60)
BALANCED TRUST
Oct. 1, 1996(C)-
Mar. 31, 1997 $ 10.00 $ .09(I) $ .11 $ .20 $ (.04) $ -- $ (.04)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
<S> <C>
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Year Return Net Assets Net Assets Rate Paid(F) (in thousands)
-----------------------------------------------------------------------------------------------------------------
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1997 $ 14.74 24.73% 1.95%(G) .05%(G) 55.7% $.0640 $ 104,812
1996 12.23 21.24% 1.95%(G) .69%(G) 43.4% -- 76,100
1995 10.18 6.24% 1.95%(G) 1.21%(G) 30.5% -- 59,985
Sept. 1, 1993(A)-
Mar. 31, 1994 9.69 (2.86)%(D) 1.95%(E,G) 1.14%(E,G) 21.0%(E) -- 55,022
-- Navigator Class
Oct. 4, 1996(B) to
Mar. 31, 1997 $ 14.71 15.16%(D) .86%(E,H) .98%(E,H) 55.7% $.0640 $ 55
BALANCED TRUST
Oct. 1, 1996(C)-
Mar. 31, 1997 $ 10.16 2.02%(D) 1.85%(E,I) 2.52%(E,I) 5.1%(E) $.0622 $ 17,948
</TABLE>
(A) FOR THE PERIOD SEPTEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1994.
(B) FOR THE PERIOD OCTOBER 4, 1996 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES)
TO MARCH 31, 1997.
(C) FOR THE PERIOD OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1997.
(D) NOT ANNUALIZED
(E) ANNUALIZED
(F) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY EACH FUND.
(G) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.95%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE ADVISER,
THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE
PERIOD SEPTEMBER 1, 1993 TO MARCH 31, 1994 AND FOR THE YEARS ENDED MARCH
31, 1995, 1996 AND 1997 WOULD HAVE BEEN 2.28%, 2.12%, 2.20%, AND 2.06%,
RESPECTIVELY.
(H) NET OF FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE LIMITATION OF 0.95% OF
AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE ADVISER, THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE PERIOD
OCTOBER 4, 1996 TO MARCH 31, 1997 WOULD HAVE BEEN 0.97%.
(I) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.85%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE ADVISER,
THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE
PERIOD OCTOBER 1, 1996 TO MARCH 31, 1997 WOULD HAVE BEEN 3.03%.
PERFORMANCE INFORMATION
From time to time the Funds may quote the TOTAL RETURN of each class of
shares in advertisements or in reports or other communications to shareholders.
A mutual fund's total return is a measurement of the overall change in value of
an investment in the fund, including changes in share price and assuming
reinvestment of dividends and other distributions. CUMULATIVE TOTAL RETURN shows
the fund's performance over a specific period of time. AVERAGE ANNUAL TOTAL
RETURN is the average annual compounded return that would have produced the same
cumulative total return if the fund's performance had been constant over the
entire period. Average annual returns, which differ from actual year-to-year
results, tend to smooth out variations in a fund's returns. For comparison
purposes, each Fund's total return is compared with total returns of the Value
Line Geometric Average, an index of approximately 1,700 stocks ("Value Line
Index"), and the S&P 500, two unmanaged indexes of widely held common stocks. No
adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in each Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns of each Fund would have been lower if the
Advisers and/or Legg Mason had not waived certain fees for the fiscal years
ended March 31, as follows: 1989 through 1997 for Value Trust; 1986 through 1995
for Total Return and 1986 through 1997 for Special Investment; 1994 through 1997
for American Leading Companies and 1997 for Balanced Trust.
5
<PAGE>
Performance figures reflect past performance only and are not intended
to and do not indicate future performance. Further information about each
Fund's performance is contained in its Annual Report to Shareholders, which
may be obtained without charge by calling your Legg Mason or affiliated
financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544.
Total returns as of March 31, 1997 are shown below.
<TABLE>
<CAPTION>
AMERICAN
TOTAL RETURN SPECIAL LEADING BALANCED VALUE LINE S&P STOCK
VALUE TRUST TRUST INVESTMENT TRUST COMPANIES TRUST INDEX INDEX
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year
Five Years
Ten Years
Life of Class --
Value Trust(A)
Life of Class --
Total Return Trust(B)
Life of Class --
Special Investment Trust(C)
Life of Class --
American Leading Companies(D)
Life of Class --
Balanced Trust(E)
Navigator Class:
One Year
Life of Class(F)
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year
Five Years
Ten Years
Life of Class --
Value Trust(A)
Life of Class --
Total Return Trust(B)
Life of Class --
Special Investment Trust(C)
Life of Class --
American Leading Companies(D)
Life of Class --
Balanced Trust(E)
Navigator Class:
One Year
Life of Class(F)
</TABLE>
(A) INCEPTION OF VALUE TRUST -- APRIL 16, 1982.
(B) INCEPTION OF TOTAL RETURN TRUST -- NOVEMBER 21, 1985.
(C) INCEPTION OF SPECIAL INVESTMENT TRUST -- DECEMBER 30, 1985.
(D) INCEPTION OF AMERICAN LEADING COMPANIES -- SEPTEMBER 1, 1993.
(E) INCEPTION OF BALANCED TRUST -- OCTOBER 1, 1996.
(F) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES
OF VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST) TO MARCH
31, 1997; AND FOR THE PERIOD OCTOBER 10, 1996 (COMMENCEMENT OF SALE OF
NAVIGATOR SHARES OF AMERICAN LEADING COMPANIES) TO MARCH 31, 1997.
The S&P 500 and Value Line Index figures assume reinvestment of
dividends paid by their component stocks. Unlike the figures presented for
the Funds, the S&P 500 and Value Line Index figures do not include
brokerage commissions and other costs of investing.
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Funds' Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. The Adviser
believes that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. The
Adviser believes, however, that purchasing securities depressed by
temporary factors will provide investment returns superior to those
obtained when premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
the Adviser believes the return on certain debt securities may equal or
exceed the return on equity securities. The Fund may invest in debt
securities of both foreign and domestic issuers of any maturity without
regard to rating, and may invest its assets in such securities without
regard to a percentage limit. The Adviser currently anticipates that under
normal market conditions, the Fund will invest no more than 25% of its
total assets in long-term debt securities. Up to 10% of its total assets
may be invested in debt securities not rated investment grade, i.e., not
rated at least BBB by Standard & Poor's ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's") or, if unrated by those entities,
deemed by the Adviser to be of comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which, in the Adviser's opinion,
offer prospects for capital appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may invest its assets in such securities without regard to a percentage
limit. The Adviser currently anticipates that under normal market
conditions, the Fund will invest no more than 50% of its total assets in
intermediate-term and long-term debt securities, and no more than 5% of
its total assets in debt securities not rated investment grade, i.e., not
rated at least BBB by S&P or Baa by Moody's or, if unrated by those
entities, deemed by the Adviser to be of comparable quality.
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SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities, and securities convertible into equity securities, of
companies with market capitalizations of less than $2.5 billion which the
Adviser believes have one or more of the following characteristics:
1. The companies generally are not closely followed by, or are out of
favor with, investors, and which appear to be undervalued in relation to
their long-term earning power or asset values. A security may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling, or actual or anticipated
developments affecting the issuer.
2. The companies are experiencing unusual and possibly non-repetitive
developments which, in the opinion of the Adviser, may cause the market
values of the securities to increase. Such developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. The companies are involved in actual or anticipated reorganizations
or restructurings under the Bankruptcy Code. No more than 20% of the
Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the Fund
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 at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities 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 sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
net assets may be invested in debt securities not rated at least BBB by
S&P, or Baa by Moody's, and securities unrated by those entities, deemed
by the Adviser to be of comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be in issuers whose long-term debt is rated in one of the
four highest rating categories by S&P or Moody's or, if unrated by S&P or
Moody's, deemed by the Adviser to be of comparable quality.
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AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMCM
defines a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMCM's goal is to invest in companies having what LMCM believes is a
reasonable price/earnings ratio, and it will favor those companies with
well established histories of dividends and dividend growth rates. The
Fund may also invest in companies having capitalizations above or below $2
billion which LMCM believes show strong potential for future market
leadership, and in companies which LMCM believes, because of corporate
restructuring or other changes, are undervalued based on their potential
for future growth. There is always a risk that LMCM will not properly
assess the potential for an issuer's future growth, or that an issuer will
not realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. The Fund's portfolio turnover rate is not
expected to exceed 100%. Under normal circumstances, the Fund expects to
own a minimum of 35 different securities. The Fund may also invest in
common stocks and securities convertible into common stocks which do not
pay current dividends but which offer prospects for capital appreciation
and future income. The Fund may invest in when-issued securities, which
may involve additional risks.
During periods when LMCM believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMCM to be of comparable quality.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities not rated at least Ba by Moody's or BB by S&P or, if unrated by
those entities, deemed by the Adviser to be of comparable quality.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. The Fund will invest in
a combination of equity, debt and money market securities in attempting to
achieve its objective. Under normal conditions, the Fund will invest no
more than 75% of its assets in equity securities. Bartlett & Co.
("Bartlett"), as investment adviser, will emphasize investments in
dividend-paying equity securities that, in the opinion of Bartlett, offer
the potential for long-term growth, and in common stocks or securities
convertible into common stock that do not pay current dividends but offer
prospects for capital appreciation and future income.
The Fund will invest at least 25% of its portfolio in fixed income
securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations and mortgage-related securities;
certificates of deposit; Treasury bills, notes, bonds and other
obligations of the U.S. Government, its agencies and instrumentalities;
commercial paper and other money market instruments rated not less than
A-1, P-1 or F-1 by Moody's,
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<PAGE>
S&P or Fitch Investors Services ("Fitch"), respectively; and repurchase
agreements. No more than 5% of the Fund's total assets may be invested in
fixed income or convertible securities not rated at least BBB or Baa at
the time of purchase, or comparable unrated securities. If an investment
grade security purchased by the Fund subsequently loses its investment
grade rating, Bartlett will determine whether to retain that security in
the Fund's portfolio. The Fund may invest in securities of any maturity,
but, under normal circumstances, expects to maintain its portfolio of
fixed income securities so as to have an average dollar-weighted maturity
of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity and
debt securities. This approach attempts to "balance" the potential for
growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common and
preferred stocks and the remaining 40% in various fixed income securities.
These percentages may vary in attempting to increase returns or reduce
risk.
The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and may purchase exchange-traded futures contracts
on stock indices and options thereon. The Fund may use derivatives, such
as options and futures, in its investment activities. No more than 15% of
the Fund's net assets may be invested in illiquid securities. The Fund may
also engage in reverse repurchase agreements.
The portfolio turnover rate for the equity portion of the Fund's
portfolio is estimated to be 50% and the portfolio turnover rate for the
fixed income portion is estimated to be 120%. The Fund's portfolio
turnover rate is not expected to exceed 80%.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS
FOR EACH FUND:
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in money market instruments,
including repurchase agreements 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 each 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. Each 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 Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust, Total Return Trust and Special Investment Trust) or 15% (for
American Leading Companies and Balanced Trust) of its net assets would be
invested in such agreements and other illiquid investments.
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its net assets.
For further information concerning securities lending, see the Statement
of Additional Information.
PREFERRED STOCK
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. 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
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entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or
is redeemed, converted or exchanged. Before conversion, convertible
securities ordinarily provide a stream of income with generally higher
yields than those of common stocks of the same or similar issuers, but
lower than the yield on non-convertible debt. Convertible securities are
usually subordinated to comparable-tier non-convertible securities but
rank senior to common stock in a corporation's capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. 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.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, its adviser reviews and
monitors the creditworthiness of each issuer and issue. The adviser also
analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA")); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Bank
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Fannie Mae ("FNMA") securities); and (4) solely the
creditworthiness of the issuer (e.g., Federal Home Loan Mortgage
Corporation ("FHLMC") securities). Neither the U.S. Government nor any of
its agencies or instrumentalities guarantees the market value of the
securities they issue. Therefore, the market value of such securities can
be expected to fluctuate in response to changes in interest rates.
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 make no cash interest payments but instead are
issued at a significant discount from face value. Each year, a portion of
the discount is attributed to bond holders as income. Because each Fund is
required to pay out substantially all of its income each year, including
income imputed to zero coupon bonds, a Fund may have to sell other
holdings to raise cash necessary to make the payout. Because zero coupon
bonds do not make periodic interest payments, their prices can be very
volatile when market interest rates change.
CLOSED-END INVESTMENT COMPANIES
Each 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. A
Fund will invest in such funds, when, in the adviser's judgment, the
potential benefits of such investment justify the payment of any
applicable premium or sales charge.
FOREIGN SECURITIES
Each 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
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accounting, auditing and financial reporting standards or to 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 Funds may also invest in ADRs, which are securities issued by
banks evidencing their ownership of specific foreign securities. 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. Although ADRs are denominated in
U.S. dollars, the underlying security often is not; thus, the value of the
ADR may be subject to exchange controls and variations in the exchange
rate. The Funds may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank
evidencing its ownership of the underlying foreign securities.
Although not a fundamental policy subject to shareholder vote, the
adviser currently anticipates that Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies will each invest
no more than 25% of its total assets in foreign securities. Bartlett
currently anticipates that Balanced Trust will not invest more than 10% of
its total assets in foreign securities, either directly or through ADRs or
GDRs.
ILLIQUID SECURITIES
Value Trust, Total Return Trust, and Special Investment Trust may each
invest up to 10% of its net assets in illiquid securities. American
Leading Companies and Balanced Trust may each invest up to 15% of its net
assets in illiquid securities. Illiquid securities are securities that
cannot be expected to be sold within seven days at approximately the price
at which they are valued. Due to the absence of an active trading market,
a Fund may have difficulty valuing or disposing of illiquid securities
promptly. Securities whose sale is legally restricted are often considered
illiquid. Foreign securities that are freely tradable in their country of
origin or in their principal market are not considered restricted
securities even if they are not registered for sale in the U.S.
WHEN-ISSUED SECURITIES
Each 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 a Fund purchases
securities on a when-issued basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at
the time of receipt. However, a Fund does not have to pay for the
obligations until they are delivered to it. This is normally 7 to 15 days
later, but could be considerably longer in the case of some
mortgage-backed securities. Use of this practice would have a leveraging
effect on a Fund. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations in an amount at least equal to the payment that will be
due. A Fund may sell the securities subject to a when-issued purchase,
which may result in a gain or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
Each of Value Trust, Total Return Trust, Special Investment Trust and
Balanced Trust can invest in futures and options transactions, including
puts and calls. Because such investments "derive" their value from the
value of the underlying security, index, or interest rate on which they
are based, they are sometimes referred to as "derivative" securities. Such
investments involve risks that are different from those presented by
investing directly in the securities themselves. While utilization of
options, futures contracts and similar instruments may be advantageous to
the Funds, if the adviser is not successful in employing such instruments
in managing a Fund's investments the Fund's performance will be worse than
if the Fund did not make such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. A Fund
may sell an interest rate futures contract to offset price
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changes of debt securities it already owns. This strategy is intended to
minimize any price changes in the debt securities a Fund owns (whether
increases or decreases) caused by interest rate changes, because the value
of the futures contract would be expected to move in the opposite
direction from the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be limited to the amount of
the premium it received. If stock prices remain the same over time, it is
likely that the Fund will also profit, because it should be able to close
out the option at a lower price. If stock prices fall, the Fund would
expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying index, with results similar to
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, when writing call
options the Fund would give up some ability to participate in security
price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the adviser in managing the Funds'
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate hedged positions. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase
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futures contracts or related options if, as a result, more than 20% of the
Fund's total assets would be so invested.
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract is an obligation to purchase or sell a
specific amount of a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
foreign currency contract, a Fund "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration
of the contract. A Fund may enter into these contracts for the purpose of
hedging against risk arising from its investment in securities denominated
in foreign currencies or when it anticipates investing in such securities.
Forward currency contracts involve certain costs and risks, including the
risk that anticipated currency movements will not be accurately predicted,
causing a Fund to sustain losses on these contracts.
AMERICAN LEADING COMPANIES:
Although American Leading Companies may not invest in futures
transactions, it may to a limited extent sell covered call options on any
security in which it is permitted to invest for the purpose of enhancing
income. American Leading Companies may not invest in any other form of
option transaction.
The Fund may sell covered call options on any security in which it is
permitted to invest for the purpose of enhancing income. A call option
gives the purchaser the right to purchase the underlying security from the
Fund at a specified price (the "strike price") during a specified period.
A call option is "covered" if, at all times the option is outstanding, the
Fund holds the underlying security or a right to obtain that security at
no additional cost. The Fund may purchase a call option for the purpose of
closing out a short position in an option.
The use of options involves certain risks. These risks include: (1)
the fact that use of these instruments can reduce the opportunity for
gain; (2) dependence on LMCM's ability to predict movements in the prices
of individual securities, fluctuations in the general securities markets
or in market sectors; (3) imperfect correlation between movements in the
price of options and movements in the price of the underlying securities;
(4) the possible lack of a liquid secondary market for a particular option
at any particular time; (5) the possibility that the use of cover
involving a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other
short-term obligations; and (6) the possible need to defer closing out
positions in these instruments in order to avoid adverse tax consequences.
There can be no assurance that the use of options by the Fund will be
successful. As a non-fundamental policy, the
Fund will not sell a covered call option if, as a result, the value of the
portfolio securities underlying all outstanding covered call options would
exceed 25% of the value of the equity securities held by the Fund. See the
Statement of Additional Information for a more detailed discussion of
options strategies.
THE FOLLOWING DISCUSSION OF INVESTMENTS AND RISKS APPLIES ONLY TO BALANCED
TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
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The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
Mortgage-related securities may be issued by governmental or government-
related entities or by non-governmental entities such as banks, savings
and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-related
security will influence the yield of that security. Increased prepayment
of principal may limit a Fund's ability to realize the appreciation in the
value of such securities that would otherwise accompany declining interest
rates. An increase in mortgage prepayments could cause the Fund to incur a
loss on a mortgage-related security that was purchased at a premium. On
the other hand, a decrease in the rate of prepayments, resulting from an
increase in market interest rates, among other causes, may extend the
effective maturities of mortgage-related securities, increasing their
sensitivity to changes in market interest rates. In determining the
average maturity of the fixed-income portion of the Fund, Bartlett must
apply certain assumptions and projections about the maturity and
prepayment of mortgage-related securities; actual prepayment rates may
differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-through securities are, however, subject to the same
market risk as comparable debt securities. Therefore, the effective
maturity and market value of the Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
FHLMC, a corporate instrumentality of the U.S. Government, issues
mortgage participation certificates ("PCs") which represent interests in
mortgages from FHLMC's national portfolio. The mortgage loans in FHLMC's
portfolio are not government backed; rather, the loans are either
uninsured with loan-to-value ratios of 80% or less, or privately insured
if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of
principal on FHLMC PCs.
FNMA is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of approved
seller/servicers, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
certificates issued by FNMA ("FNMA certificates") are guaranteed as to
timely payment of principal and interest by FNMA, not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage
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loans; mortgage-backed bonds which are consid-ered to be obligations of
the institution issuing the bonds and are collateralized by mortgage
loans; and bonds and collateralized mortgage obligations ("CMOs") which
are collateralized by mortgage-related securities issued by FHLMC, FNMA,
or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal payments and any prepayments from the collateral pool are paid
first to the "Class 1" bondholders. The principal payments are such that
the Class 1 obligations are scheduled to be completely repaid no later
than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds
until that class of bonds has been fully repaid. Although full payoff of
each class of bonds is contractually required by a certain date, any or
all classes of obligations may be paid off sooner than expected because of
an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND AS NOTED:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER-RATED DEBT SECURITIES
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. Debt securities rated C by Moody's and S&P are bonds on
which no interest is being paid and which can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
However, debt securities, regardless of their ratings, generally have a
higher priority in the issuer's capital structure than do equity
securities.
Lower-rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
Lower-rated debt securities are also sometimes referred to as "junk
bonds."
The market for lower-rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower-rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on
lower-rated debt securities rose dramatically, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur.
The market for lower-rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower-rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. 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. If
securities are rated investment grade by one rating organization and below
investment grade by the other, the adviser may rely on the rating that it
believes is more accurate. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed
by the adviser to determine, to the extent possible, that the planned
investment is sound.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting
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securities of the Fund. For these purposes a "vote of the holders of a
majority of the outstanding voting securities" of the Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. These investment
limitations are set forth in the Statement of Additional Information under
"Additional Information About Investment Limitations and Policies." Other
Fund policies, unless described as fundamental, can be changed by action
of the Board of Directors.
The fundamental restrictions applicable to American Leading Companies
include a prohibition on investing 25% or more of its total assets in the
securities of issuers having their principal business activities in the
same industry (with the exception of securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements with respect thereto).
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason.
Customers of certain Institutional Clients that maintain omnibus
accounts with the Funds' transfer agent may obtain shares through those
Institutions. Such Institutional Clients may receive payments from the
Funds' distributor for account servicing, and may receive payments from
their customers for other services performed. Investors otherwise eligible
to purchase Navigator Shares can purchase them from Legg Mason without
receiving or paying for such other services.
Institutional Clients purchasing or holding Navigator Shares on behalf
of their Customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to a Fund on a timely basis.
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after the
close of the Exchange or on days the Exchange is closed will be executed
at the net asset value determined as of the close of the Exchange on the
next day the Exchange is open. See "How Net Asset Value is Determined" on
page 21.
Each Fund reserves the right to reject any order for its shares or to
suspend the offering of shares for a period of time, or to waive any
minimum investment requirements. In addition to Institutional Clients
purchasing shares directly from Fairfield, Navigator Shares may be
purchased through procedures established by Fairfield in connection with
requirements of Customer Accounts of various Institutional Clients.
No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in a Fund. Information concerning
these services and any applicable charges will be provided by the
Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
Redemption of Shares
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
financial advisors at 1-800-822-5544. Callers should have available the
number of shares (or dollar amount) to be redeemed and their account
number.
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Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. The proceeds of redemption or
repurchase may be more or less than the original cost. If the shares to be
redeemed or repurchased were paid for by check (including certified or
cashier's checks) within 10 business days of the redemption or repurchase
request, the proceeds may not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
the adviser, that Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.)
Each Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable
procedures to identify the caller. Each Fund may request identifying
information from callers or employ identification numbers. Each Fund may
be liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders unless certificates have been
issued. Shareholders who do not wish to have telephone redemption
privileges should call their investment executive for further
instructions.
Because of the relatively high cost of maintaining small accounts, a
Fund may elect to close any account with a current value of less than $500
by redeeming all of the shares in the account and mailing the proceeds to
the investor. However, the Funds will not redeem accounts that fall below
$500 solely as a result of a reduction in net asset value per share. If a
Fund elects to redeem the shares in an account, the investor will be
notified that the account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having the
account closed.
HOW SHAREHOLDER ACCOUNTS ARE MAINTAINED
A shareholder account is established automatically for each investor.
Any shares the investor purchases or receives as a dividend or other
distribution will be credited directly to the account at the time of
purchase or receipt. Shares may not be held in, or transferred to, an
account with any brokerage firm other than Fairfield, Legg Mason or their
affiliates. The Funds no longer issue share certificates.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Securities owned by each Fund for
which market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by each Fund's Board of Directors.
Where a security is traded on more than one market, which may include
foreign markets, the securities are generally valued on the market
considered by each Fund's adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
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DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Navigator Shares out of its
investment company taxable income (which consists of net investment
income, net short-term capital gain and net gains from certain foreign
currency transactions) attributable to those shares. Value Trust, Total
Return Trust and Balanced Trust declare and pay dividends from net
investment income quarterly; they pay dividends from any net short-term
capital gains and net gains from foreign currency transactions annually.
Special Investment Trust and American Leading Companies declare and pay
dividends from investment company taxable income following the end of each
taxable year. Each Fund also distributes substantially all of its net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) after the end of the taxable year in which the gain is
realized. A second distribution of net capital gain may be necessary in
some years to avoid imposition of the excise tax described under the
heading "Additional Tax Information" in the Statement of Additional
Information. Shareholders may elect to:
1. Receive both dividends and other distributions in Navigator Shares
of the distributing Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in shares of another Navigator fund. Please contact a
financial advisor for additional information about this option. Qualified
retirement plans that obtained Navigator Shares through exchange generally
receive dividends and other distributions in additional shares.
If no election is made, both dividends and other distributions are
credited to the Institutional Client's account in Navigator Shares of the
distributing Fund at the net asset value of the shares determined as of
the close of the Exchange on the reinvestment date. Shares received
pursuant to any of the first three (reinvestment) elections above also are
credited to your account at that net asset value. If an investor elects to
receive dividends and/or other distributions in cash, a check will be
sent. Investors purchasing through Fairfield may elect at any time to
change the distribution option by notifying the applicable Fund in writing
at: [insert complete Fund name], c/o Fairfield Group, Inc., 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Those purchasing through Legg Mason
should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Code"), so that it will be relieved of federal income tax on that part
of its investment company taxable income and net capital gain that is
distributed to its shareholders.
Dividends from a Fund's investment company taxable income (whether
paid in cash or reinvested in Navigator Shares) are taxable to their
shareholders (other than qualified retirement plans and other tax-exempt
investors) as ordinary income to the extent of that Fund's earnings and
profits. Distributions of a Fund's net capital gain (whether paid in cash
or reinvested in Navigator Shares), when designated as such, are taxable
to those shareholders as long-term capital gain, regardless of how long
they have held their Fund shares.
Each Fund sends each shareholder a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. Each Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Navigator Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Navigator Shares for shares of any other Navigator
fund generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege," below. If Fund shares are purchased
within 30 days before or after redeeming at a loss other shares of the
same Fund (regardless of class), all or part of that loss will not
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be deductible and instead will increase the basis of the newly purchased
shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Navigator shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, an investor may also be subject to state, local or
foreign taxes on distributions from the Funds, depending on the laws of
its home state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each Fund's annual notice to
shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
Every shareholder of record will receive a confirmation of each new
share transaction with a Fund. In addition, Legg Mason clients will
receive a monthly statement, which will also show the total number of
shares being held in safekeeping by the Funds' transfer agent for the
account of the shareholder.
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends or other distributions) of Navigator Shares made
by Institutional Clients acting in a fiduciary, advisory, custodial, or
other similar capacity on behalf of persons maintaining Customer Accounts
at Institutional Clients will be sent to the Institutional Client by the
transfer agent. Beneficial ownership of shares by Customer Accounts will
be recorded by the Institutional Client and reflected in the regular
account statements provided by them to their customers.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by its respective
independent accountants/auditors.
Shareholder inquiries should be addressed to "[insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476," or "[insert complete Fund name], c/o Fairfield Group, Inc.,
200 Gibraltar Road, Horsham, Pennsylvania 19044."
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for a
corresponding class of shares of any of the Legg Mason Funds, the Legg
Mason Cash Reserve Trust, the Navigator Money Market Fund, Inc. and the
Navigator Tax-Free Money Market Fund, Inc., provided the shares to be
acquired are eligible for sale under applicable state securities laws.
Investments by exchange into other Navigator funds are made at the per
share net asset value next determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your financial
advisor. To effect an exchange by telephone, please call your financial
advisor with the information described in the section "How to Purchase and
Redeem Shares," page 20. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
ADVISER
Pursuant to separate advisory agreements with Value Trust, Total
Return Trust and Special Investment Trust (each an "Advisory Agreement"),
which were approved by each respective Fund's Board of Directors, the
Adviser, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to each of those Funds. The Adviser administers and
acts as the portfolio manager for each Fund and has responsibility for the
actual investment management of the Funds, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular
security. The Adviser acts as adviser, manager or consultant
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to eighteen investment company portfolios which had aggregate assets under
management of approximately $ billion as of . The Adviser's
address is 111 South Calvert Street, Baltimore, Maryland 21202.
William H. Miller, III co-managed Value Trust from its inception in
1982 to November 1990, when he assumed primary responsibility for the
day-to-day management. Mr. Miller has been responsible for the day-to-day
management of the Total Return Trust since November 1990. Nancy T. Dennin
joined Mr. Miller as co-manager of the Total Return Trust on January 1,
1992. Effective April 1, 1997, Mrs. Dennin assumed primary responsibility
for the day-to-day management of Total Return Trust. Mr. Miller has also
been primarily responsible for the day-to-day management of the Special
Investment Trust since its inception in 1985.
Mr. Miller is a portfolio manager and President of the Adviser. Mr.
Miller has been employed by the Adviser since 1982. Mrs. Dennin is a
Senior Vice President of the Adviser and has been employed by the Adviser
since 1985. From 1985 through 1991, Mrs. Dennin analyzed various
industries for the Adviser including financial services, retail, apparel
and insurance.
The Adviser receives for its services a management fee from each Fund
attributable to the net assets of Navigator Shares, calculated daily and
payable monthly. The Adviser receives a fee at an annual rate of 1.0% of
the Value Trust's average daily net assets for the first $100 million of
average net assets; 0.75% of average daily net assets between $100 million
and $1 billion; and 0.65% of average daily net assets exceeding $1
billion. The Adviser receives from Total Return Trust, a management fee at
an annual rate of 0.75% of the average daily net assets of the Fund. The
Adviser receives from Special Investment Trust, a management fee at an
annual rate of 1.0% of the average daily net assets of the Fund for the
first $100 million of average net assets; 0.75% of average daily net
assets between $100 million and $1 billion; and 0.65% of average daily net
assets exceeding $1 billion. The management fee paid by each Fund is
higher than fees paid by most other funds to their investment advisers.
For the Total Return Trust, the Adviser has agreed to waive indefinitely
its fees in any month to the extent the Total Return Trust's expenses
related to Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 0.95% of
the Fund's average daily net assets. During the fiscal year ended March
31, 1997, Value Trust paid a management fee of 0.72% of its average daily
net assets, Total Return Trust paid a management fee of 0.75% of its
average daily net assets, and Special Investment Trust paid a management
fee of 0.78% of its average daily net assets.
MANAGER
Pursuant to separate management agreements with American Leading
Companies and Balanced Trust (each a "Management Agreement"), which were
approved by the Investors Trust's Board of Directors, Legg Mason Fund
Adviser, Inc. ("Manager"), a wholly owned subsidiary of Legg Mason, Inc.,
a financial services holding company, serves as the Funds' manager. The
Funds pay the Manager, pursuant to the respective Management Agreements, a
management fee equal to an annual rate of 0.75% of each Fund's average
daily net assets attributable to Navigator Shares. The management fees
paid by the Funds are higher than fees paid by most other equity funds.
Each Fund pays all its other expenses which are not assumed by the
Manager. The Manager has agreed to waive its fees for each Fund for
expenses related to Navigator Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) as follows: for American Leading
Companies, 0.95% of average net assets attributable to Navigator Shares
indefinitely; and for Balanced Trust, 1.10% of average net assets
attributable to Navigator Shares until July 31, 1998. These agreements are
voluntary and may be terminated by the Manager at any time.
LMCM
LMCM, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to American Leading Companies pursuant to the terms of
an Investment Advisory Agreement with the Manager, which was approved by
the Trust's Board of Directors. LMCM manages the investment and other
affairs of the Fund and directs the investments of the Fund in accordance
with its investment objectives, policies and limitations. For these
services, the Manager (not the Fund) pays LMCM a fee, computed daily and
payable monthly, at an annual rate equal to 40% of the fee received by the
Manager, or 0.30% of the Fund's average daily net assets attributable to
Navigator Shares.
LMCM has not previously advised a registered investment company.
However, LMCM manages private accounts with a value as of , 1997 of
approximately $ billion. The address of LMCM is 111 South Calvert Street,
Baltimore, MD 21202.
E. Robert Quasman is a Senior Investment Manager for LMCM and has been
primarily responsible for the day-to-day management of American Leading
Companies since October 1996.
21
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Prior to that, Mr. Quasman was Director of Research for Legg Mason for
over six years.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
BARTLETT
Bartlett, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to Balanced Trust pursuant to the terms of an
Investment Advisory Agreement with the Manager, which was approved by the
Trust's Board of Directors. Bartlett manages the investment and other
affairs of the Fund and directs the investments of the Fund in accordance
with its investment objectives, policies and limitations. For these
services, the Manager (not the Fund) pays Bartlett a fee, computed daily
and paid monthly, at an annual rate equal to 66 2/3% of the fee received
by the Manager, or 0.50% of the Fund's average daily net assets. Bartlett
acts as adviser to individuals, corporations, pension and profit sharing
plans and trust accounts, as well as to two investment company portfolios
which had aggregate assets under management of approximately $ billion as
of June 30, 1997. The address of Bartlett is 36 East Fourth Street,
Cincinnati, Ohio 45202.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage the
Fund. Both are senior portfolio managers of Bartlett. Mr. Rabiner has been
employed by Bartlett since 1983 and has served since then as Director of
its Fixed Income Group. He is a member of Bartlett's Management Committee
and Investment Policy Committee. Mr. Uible has been employed by Bartlett
since 1980. He chairs Bartlett's Equity Investment Group, and is
responsible for Bartlett's equity investment processes. He is a member of
Bartlett's Management Committee and Investment Policy Committee.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares, including any compensation to its financial
advisors, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1997, Legg Mason received from BFDS $ , $ ,
$ and $ for performing such services in connection with Value
Trust, Total Return Trust, Special Investment Trust, American Leading
Companies and Balanced Trust, respectively.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
is a registered broker-dealer with principal offices located at 200
Gibraltar Road, Horsham, Pennsylvania 19044. Fairfield may sell Navigator
Shares pursuant to a Dealer Agreement with the Funds' Distributor, Legg
Mason. Neither Fairfield nor Legg Mason receives compensation from the
Funds for selling Navigator Shares.
The Chairman, President and Treasurer of each Fund are employed by
Legg Mason.
DESCRIPTION OF EACH CORPORATION / TRUST AND ITS SHARES
Value Trust, Total Return Trust, Special Investment Trust and Legg
Mason Investors Trust, Inc. were established as Maryland corporations on
January 20, 1982, May 22, 1985, October 31, 1985 and May 5, 1993,
respectively. Value Trust has authorized capital of 200 million shares of
common stock, par value $0.001 per share. Total Return Trust and Special
Investment Trust each have authorized capital of 100 million shares of
common stock, par value $0.001 per share. The Articles of Incorporation of
Investors Trust authorize issuance of one billion shares of par value
$.001 per share of American Leading Companies and 250 million shares of
par value $.001 per share of Balanced Trust. Each corporation may issue
additional series of shares. Each Fund currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. Each Class of Shares may bear
certain differing Class-specific expenses. Salespersons and others
entitled to receive compensation for selling or servicing Fund shares may
receive more with respect to one Class than another.
The initial and subsequent investment minimums for Primary Shares are
$1,000 and $100, respectively. Investments in Primary Shares may be made
through a Legg Mason or affiliated financial advisor, through the Future
First Systematic
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Investment Plan or through automatic investment arrangements.
Holders of Primary Shares bear distribution and service fees under
Rule 12b-1 at the rate of 1.0% of the net assets attributable to Primary
Shares of Special Investment Trust, Total Return Trust and American
Leading Companies and 0.95% of the net assets attributable to Primary
Shares of Value Trust. Investors in Primary Shares may elect to receive
dividends and/or other distributions in cash through the receipt of a
check or a credit to their Legg Mason account. The per share net asset
value of the Navigator Shares, and dividends paid to Navigator
shareholders, are generally expected to be higher than those of Primary
Shares of the Fund, because of the lower expenses attributable to
Navigator Shares. The per share net asset value of the Classes of Shares
will tend to converge, however, immediately after the payment of ordinary
income dividends. Primary Shares of the Funds may be exchanged for the
corresponding Class of Shares of other Legg Mason funds. Investments by
exchange into the Legg Mason funds sold with an initial sales charge are
made at the per share net asset value, plus the sales charge, determined
on the same business day as redemption of the Fund shares the investors in
Primary Shares wish to redeem.
The Boards of Directors of the Funds do not anticipate that there will
be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of each Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of each Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the Investment
Company Act of 1940 requires a shareholder vote on certain matters
(including the election of directors, approval of an advisory contract,
and approval of a plan of distribution pursuant to Rule 12b-1). Each Fund
will call a special meeting of the shareholders at the request of 10% or
more of the shares entitled to vote; shareholders wishing to call such a
meeting should submit a written request to the Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon. The address of BFDS is P.O. Box
953, Boston, Massachusetts 02103.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
23
<PAGE>
LEGG MASON EQUITY FUNDS
LEGG MASON VALUE TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON INVESTORS TRUST, INC.:
LEGG MASON AMERICAN LEADING COMPANIES TRUST
LEGG MASON BALANCED TRUST
PRIMARY SHARES
NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1997
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for Primary Shares or for Navigator
Shares (both dated July 31, 1997), as appropriate, which have been filed with
the Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Funds' distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason"), at (410) 539-0000.
The LEGG MASON VALUE TRUST, INC. ("Value Trust") is a mutual fund
seeking long-term growth of capital. Value Trust invests principally in those
equity securities which its investment adviser, Legg Mason Fund Adviser, Inc.
("Adviser" or "Manager"), believes are undervalued and therefore offer
above-average potential for capital appreciation. Other investors who seek
capital appreciation may also invest in Value Trust shares.
The LEGG MASON TOTAL RETURN TRUST, INC. ("Total Return Trust") is a
mutual fund seeking capital appreciation and current income in order to achieve
an attractive total investment return consistent with reasonable risk. In
attempting to achieve this objective, the Adviser selects a diversified
portfolio, composed of dividend-paying common stocks and securities convertible
into common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common stock
which do not pay current dividends but which offer prospects for capital
appreciation and future income; and debt instruments of various maturities.
Total Return Trust may write covered put and call options.
The LEGG MASON SPECIAL INVESTMENT TRUST, INC. ("Special Investment
Trust") is a mutual fund seeking capital appreciation. Special Investment Trust
invests principally in equity securities of companies with market
capitalizations of less than $2.5 billion which, in the opinion of the Adviser,
have one or more of the following characteristics: they are not closely followed
by, or are out of favor with, investors generally, and the Adviser believes they
are undervalued in relation to their long-term earning power or asset values;
unusual developments have occurred which suggest the possibility that the market
value of the securities will increase; or they are involved in actual or
anticipated reorganizations or restructurings under the Bankruptcy Code. Special
Investment Trust may also invest in the securities of companies with larger
capitalizations which have one or more of these characteristics.
The LEGG MASON AMERICAN LEADING COMPANIES TRUST ("American Leading
Companies"), a diversified, professionally managed portfolio, is a separate
series of Legg Mason Investors Trust, Inc., an open-end investment company
("Trust"). American Leading Companies seeks long-term capital appreciation
<PAGE>
and current income consistent with prudent investment risk. American Leading
Companies normally will seek to achieve its investment objective by investing
not less than 75% of its total assets in the dividend-paying common stocks of
Leading Companies that have market capitalizations of at least $2 billion.
American Leading Companies' investment adviser, Legg Mason Capital Management,
Inc. ("LMCM"), defines a "Leading Company" as a company that, in the opinion of
LMCM, has attained a major market share in one or more products or services
within its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies typically are well known as leaders in their respective industries;
most are found in the top half of the Standard & Poor's Composite Index of 500
Stocks ("S&P 500").
The LEGG MASON BALANCED TRUST ("Balanced Trust"), a diversified,
professionally managed portfolio, is a separate series of the Trust. Balanced
Trust seeks long-term capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk.
Under normal conditions, Balanced Trust will invest no more than 75% of its
assets in equity securities. The term "equity securities" includes, without
limitation, common stocks, and convertible securities of domestic issuers,
securities of closed-end investment companies and U.S. dollar-denominated
securities of foreign issuers, including American Depositary Receipts ("ADRs")
and Global Depositary Receipts ("GDRs"). Balanced Trust will invest at least 25%
of its portfolio in fixed income securities.
Shares of Navigator Value Trust, Navigator Total Return Trust,
Navigator Special Investment Trust, Navigator American Leading Companies and
Navigator Balanced Trust (collectively referred to as "Navigator Shares")
represent interests in Value Trust, Total Return Trust, Special Investment
Trust, American Leading Companies and Balanced Trust, respectively, that are
currently offered for sale only to institutional clients of the Fairfield Group,
Inc. ("Fairfield") for investment of their own monies and monies for which they
act in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with such Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust. The
Navigator Class of Shares may not be purchased by individuals directly, but
Institutional Clients may purchase shares for Customer Accounts maintained for
individuals.
The Primary Class of shares of Value Trust, Total Return Trust, Special
Investment Trust, American Leading Companies and Balanced Trust (collectively
referred to as "Primary Shares") is offered for sale to all other investors and
may be purchased directly by individuals.
Navigator and Primary Shares of Value Trust, Total Return Trust,
Special Investment Trust, American Leading Companies and Balanced Trust (each
separately referred to as a "Fund" and collectively referred to as the "Funds")
are sold and redeemed without any purchase or redemption charge, although
institutions may charge their Customer Accounts for services provided in
connection with the purchase or redemption of Navigator Shares. Each Fund pays
management fees to the Adviser/Manager. Primary Shares pay a 12b-1 distribution
fee, but Navigator Shares pay no distribution fees. See "The Funds'
Distributor."
LEGG MASON WOOD WALKER,
INCORPORATED
- -------------------------------------------------------------------------------
111 SOUTH CALVERT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21202
(410) 539-0000 (800) 822-5544
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of each Fund described in the
Prospectus, each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of its shareholders.
Value Trust, Total Return Trust and Special Investment Trust each may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes, in an aggregate amount not to exceed 10% of
the value of the total assets of the respective Fund at the time of borrowing;
provided that borrowings, including reverse repurchase agreements, in excess of
5% of such value will be only from banks (although not a fundamental policy
subject to shareholder approval, each Fund will not purchase securities if
borrowings, including reverse purchase agreements, exceed 5% of its total
assets);
2. With respect to 75% of total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, or its agencies and instrumentalities, or purchase more
than 10% of the voting securities of any one issuer;
3. Purchase securities on "margin", except for short-term credits
necessary for clearance of portfolio transactions and except that each Fund may
make margin deposits in connection with the use of futures contracts and options
on futures contracts;
4. Invest more than 25% of its total assets (taken at market value)
in any one industry;
5. Purchase or sell commodities and commodity contracts, but this
limitation shall not prevent each Fund from purchasing or selling options and
futures contracts;
6. Underwrite the securities of other issuers, except insofar as each
Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
7. Make loans, except loans of portfolio securities and except to the
extent that the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans;
8. Purchase or sell real estate, except that each Fund may invest in
securities collateralized by real estate or interests therein or in securities
issued by companies that invest in real estate or interests therein (as a
non-fundamental policy changeable without a shareholder vote, each Fund will not
purchase or sell interests in real estate limited partnerships);
9. Make short sales of securities or maintain a short position,
except that each Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box;" or
10. Issue senior securities, except as permitted under the Investment
Company Act of 1940 ("1940 Act").
American Leading Companies and Balanced Trust each may not:
1. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed 5% of the
value of its total assets at the time of borrowings. (Although not a fundamental
policy subject to shareholder approval, the Fund will repay any money borrowed
before any portfolio securities are purchased);
2
<PAGE>
2. Issue senior securities, except as permitted under the 1940 Act;
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. Buy or hold any real estate; provided, however, that instruments
secured by real estate or interests therein are not subject to this limitation;
5. With respect to 75% of its total assets, invest more than 5% of
its total assets (taken at market value) in securities of any one issuer, other
than the U.S. Government, its agencies and instrumentalities, or purchase more
than 10% of the voting securities of any one issuer;
6. Purchase or sell any commodities or commodities contracts, except
that the Fund may purchase or sell currencies, interest rate and currency
futures contracts, options on currencies, securities, and securities indexes and
options on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
The foregoing limitations may be changed with respect to a Fund by "the
vote of a majority of the outstanding voting securities" of that 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.
VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST:
As non-fundamental policies, changeable without shareholder vote, each
Fund will not: (i) not invest more than 5% of its total assets (taken at market
value) in securities of companies that, including their predecessors, have been
in operation less than three years; (ii) purchase or sell interests in oil and
gas or other mineral exploration or development programs or purchase or sell
oil, gas or mineral leases; (iii) invest in securities issued by other
investment companies, except in connection with a merger, consolidation,
acquisition or reorganization or by purchase in the open market of securities of
closed-end investment companies where no underwriter or dealer commission or
profit, other than a customary brokerage commission, is involved and only if
immediately thereafter not more than 10% of that Fund's total assets (taken at
market value) would be invested in such securities.
AMERICAN LEADING COMPANIES AND BALANCED TRUST:
The following are some of the non-fundamental limitations which
American Leading Companies and Balanced Fund currently observe. Each Fund may
not:
1. Purchase or sell any oil, gas or mineral exploration or
development programs;
3
<PAGE>
2. 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 permitted currency futures
contracts and options on currency futures contracts;
3. Make short sales of securities or maintain a short position,
except that the Fund may sell short "against the box". This limit does not apply
to short sales and short positions in connection with its use of options,
futures contracts and options on futures contracts (Neither Fund intends to make
short sales in excess of 5% of its net assets during the coming year);
4. Purchase or retain the securities of an issuer if, to the
knowledge of the Fund's management, those officers and directors of the Fund, of
Legg Mason Fund Adviser, Inc. and of LMCM (with respect to American Leading
Companies) and of Bartlett & Co. ("Bartlett") (with respect to Balanced Trust)
who individually own beneficially more than 0.5% of the outstanding securities
of that issuer own in the aggregate more than 5% of the securities of that
issuer;
5. Purchase any security if, as a result, more than 5% of the
Fund's total assets would be invested in securities of companies that together
with any predecessors have been in continuous operation for less than three
years;
6. Purchase a security restricted as to resale if, as a result
thereof, more than 10% of the Fund's total assets would be invested in
restricted securities. For purposes of this limitation, securities that can be
sold freely in the principal market in which they are traded are not considered
restricted, even if they cannot be sold in the United States.
7. Make investments in warrants if such investments, valued at
the lower of cost or market, exceed 5% of the value of its net assets, which
amount may include warrants that are not listed on the New York or American
Stock Exchanges, provided that such unlisted warrants, valued at the lower of
cost or market, do not exceed 2% of the Fund's net assets, and further provided
that this restriction does not apply to warrants attached to, or sold as a unit
with, other securities. For purposes of this restriction, the term "warrants"
does not include options on securities, stock or bond indices, foreign
currencies or futures contracts.
8. Acquire securities of other open-end investment companies,
except in connection with a merger, consolidation, reorganization or
acquisition.
9. Hold more than 10% of the outstanding voting securities of any
one issuer.
In addition, as a non-fundamental limitation, American Leading
Companies may not purchase or sell interest rate and currency futures contracts,
options on currencies, securities, and securities indexes and options on
interest rate and currency futures contracts, provided, however, that the Fund
may sell covered call options on securities and may purchase options to the
extent necessary to close out its position in one or more call options.
American Leading Companies and Balanced Trust each interprets
fundamental investment limitation (4) to prohibit investment in real estate
limited partnerships.
If a fundamental or non-fundamental percentage limitation set forth
above is complied with at the time an investment is made, a later increase or
decrease in percentage resulting from a change in value of portfolio securities,
in the net asset value of a Fund, or in the number of securities an issuer has
outstanding, will not be considered a violation of any limitation.
4
<PAGE>
Unless otherwise stated, the investment policies and limitations
contained in this Statement of Additional Information are not fundamental, and
can be changed without shareholder approval.
THE FOLLOWING INFORMATION APPLIES TO EACH FUND UNLESS OTHERWISE STATED:
Foreign Securities
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 a Fund are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems could cause a Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result in losses to a Fund due to subsequent declines in value of the portfolio
security or, if a Fund has entered into a contract to sell the security, could
result in liability to the purchaser.
Since each Fund may invest in securities denominated in currencies
other than the U.S. dollar and since each Fund may hold foreign currencies, a
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 each Fund's
shares, and also may affect the value of dividends and interest earned by that
Fund and gains and losses realized by that 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, each Fund may invest in
ADRs. Generally, ADRs, in registered form, are denominated in U.S. dollars and
are designed for use in the domestic market. Usually issued by a U.S. bank or
trust company, ADRs are receipts that demonstrate ownership of the underlying
securities. For purposes of each Fund's investment policies and limitations,
ADRs are considered to have the same classification as the securities underlying
them. Balanced Trust may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank evidencing
its ownership of the underlying foreign securities.
Illiquid Securities
Value Trust, Total Return Trust and Special Investment Trust each may
invest up to 10% of its net assets in illiquid securities. American Leading
Companies and Balanced Trust each may invest up to 15% of its net assets in
illiquid securities. For this purpose, "illiquid securities" are those that
cannot be disposed of within seven days for approximately the price at which the
Fund values the security. Illiquid securities include repurchase agreements with
terms of greater than seven days and restricted securities other than those the
Adviser/LMCM or Bartlett, investment adviser to Balanced Trust, has determined
are liquid pursuant to guidelines established by each Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the Securities
Act of 1933, or pursuant to an exemption from registration. A 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.
5
<PAGE>
SEC regulations permit the sale of certain restricted securities to
qualified institutional buyers. The investment adviser to each Fund, acting
pursuant to guidelines established by such 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 each Fund's portfolio may adversely affect that Fund's
liquidity.
Debt Securities
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's ("S&P") represent the opinions of those agencies. Such ratings are
relative and subjective, and are not absolute standards of quality. Unrated debt
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers. A description of the ratings assigned
to corporate debt obligations by Moody's and S&P is included in Appendix A.
In addition to ratings assigned to individual bond issues, each 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 a 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 each Fund's adviser to determine, to
the extent possible, that the planned investment is sound.
If a security rated A or above at the time of purchase by American
Leading Companies is subsequently downgraded to a rating below A, LMCM will
consider that fact in determining whether to dispose of the security, but will
dispose of it if necessary to insure that no more than 5% of net assets are
invested in debt securities rated below A. If one rating agency has rated a
security A or better and another agency has rated it below A, LMCM may rely on
the higher rating in determining to purchase or retain the security. Bonds rated
A may be given a "+" or "-" by the rating agency. The Fund considers bonds
denominated A, A+ or A- to be included in the rating A.
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.
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Many convertible securities are rated below investment grade or, if
unrated, are considered of comparable quality. American Leading Companies does
not intend to purchase any convertible securities rated below BB by S&P or below
Ba by Moody's or, if unrated, deemed by LMCM to be of comparable quality.
Moody's describes securities rated Ba as having "speculative elements; their
future cannot be considered well- assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class."
VALUE TRUST, TOTAL RETURN TRUST AND SPECIAL INVESTMENT TRUST:
If an investment grade security purchased by Value Trust, Total Return
Trust or Special Investment Trust is subsequently given a rating below
investment grade, the Adviser will consider that fact in determining whether to
retain that security in that Fund's portfolio, but is not required to dispose of
it.
AMERICAN LEADING COMPANIES AND BALANCED TRUST:
When-Issued Securities
Each Fund may enter into commitments to purchase securities on a
when-issued basis. When a 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.
American Leading Companies does not currently expect that its
commitment to purchase when-issued securities will at any time exceed, in the
aggregate, 5% of its net assets.
To meet its payment obligation under a when-issued commitment, a Fund
will establish a segregated account with its custodian and maintain cash or
appropriate liquid securities, in an amount at least equal in value to that
Fund's commitments to purchase when-issued securities.
A Fund may sell the securities underlying a when-issued purchase, which
may result in capital gains or losses.
AMERICAN LEADING COMPANIES:
Covered Call Options
The Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, the Fund might write covered call options on
securities generally when LMCM believes that the premium received by the Fund
will exceed the extent to which the market price of the underlying security will
exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by the Fund declines, the amount of such decline will be offset wholly or in
part by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. The Fund would give up the ability to sell the portfolio
securities used to cover the call option while the call option was outstanding.
In addition, the Fund could lose the ability to participate in an increase in
the value of such securities above the exercise price of the call option because
such an increase would likely be
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offset by an increase in the cost of closing out the call option (or could be
negated if the buyer chose to exercise the call option at an exercise price
below the securities' current market value).
If the Fund desires to close out its obligation under a call option it
has sold, it will have to purchase an offsetting option. The value of an option
position will reflect, among other things, the current market price of the
underlying security, futures contract or currency, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, and general market
conditions. Accordingly, when the price of the security rises toward the strike
price of the option, the cost of offsetting the option will negate to some
extent the benefit to the Fund of the price increase of the underlying security.
For this reason, the successful use of options as an income strategy depends
upon the Adviser's ability to forecast the direction of price fluctuations in
the underlying market or market sector.
The Fund may write exchange-traded options. The ability to establish
and close out positions on the exchange is subject to the maintenance of a
liquid secondary market. Although the Fund intends to write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. With respect to options written by the
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, because the Fund must maintain a covered
position with respect to any call option it writes on a security, the Fund may
not sell the underlying security during the period it is obligated under such
option. This requirement may impair the Fund's ability to sell a portfolio
security or make an investment at a time when such a sale or investment might be
advantageous.
The Fund will not enter into an options position that exposes it to an
obligation to another party unless it owns an offsetting ("covering") position
in securities or other options. The Fund will comply with guidelines established
by the SEC with respect to coverage of these strategies by mutual funds, and, if
the guidelines so require, will set aside cash and/or appropriate liquid
securities in a segregated account with its custodian in the amount prescribed,
as marked-to-market daily. Securities positions used for cover and securities
held in a segregated account cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
THE FOLLOWING INFORMATION APPLIES TO BALANCED TRUST:
Mortgage-Related Securities
Mortgage-related securities represent an ownership interest in a pool
of residential mortgage loans. These securities are designed to provide monthly
payments of interest, and in most instances, principal to the investor. The
mortgagor's monthly payments to his/her lending institution are "passed-through"
to investors such as the Fund. Most issuers or poolers provide guarantees of
payments, regardless of whether or not the mortgagor actually makes the payment.
The guarantees made by issuers or poolers are backed by various forms of credit,
insurance and collateral. They may not extend to the full amount of the pool.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in
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the pools. In addition, many mortgages included in pools are insured through
private mortgage insurance companies.
The majority of mortgage-related securities currently available are
issued by governmental or government-related organizations formed to increase
the availability of mortgage credit. The largest government-sponsored issuer of
mortgage-related securities is the Government National Mortgage Association
("GNMA"). GNMA certificates ("GNMAs") are interests in pools of loans insured by
the Federal Housing Administration or by the Farmer's Home Administration
("FHA"), or guaranteed by the Veterans Administration ("VA"). Fannie Mae
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") each issue
pass-through securities which are guaranteed as to principal and interest by
FNMA and FHLMC, respectively.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments, as well as
with market interest rates. For example, GNMAs tend to have a longer average
life than FHLMC participation certificates ("PCs") because there is a tendency
for the conventional and privately-insured mortgages underlying FHLMC PCs to
repay at faster rates than the FHA and VA loans underlying GNMAs. In addition,
the term of a security may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. The occurrence of mortgage
pre- payments is affected by various factors, including the level of interest
rates, general economic conditions, the location and age of the mortgaged
property and other social and demographic conditions.
In determining the dollar-weighted average maturity of the fixed income
portion of the portfolio, Bartlett will follow industry practice in assigning an
average life to the mortgage-related securities of the Fund unless the interest
rate on the mortgages underlying such securities is such that a different
prepayment rate is likely. For example, where a GNMA has a high interest rate
relative to the market, that GNMA is likely to have a shorter overall maturity
than a GNMA with a market rate coupon. Moreover, Bartlett may deem it
appropriate to change the projected average life for a Fund's mortgage-related
security as a result of fluctuations in market interest rates and other factors.
Quoted yields on mortgage-related securities are typically based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
average life yield. Reinvestment of the prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Fund. The compounding effect from the reinvestments of monthly payments received
by the Fund will increase the yield to shareholders compared to bonds that pay
interest semi-annually.
Like other debt securities, the value of mortgage-related securities
will tend to rise when interest rates fall, and fall when rates rise. The value
of mortgage-related securities may also change because of changes in the
market's perception of the creditworthiness of the organization that issued or
guaranteed them. In addition, the mortgage securities market in general may be
adversely affected by changes in governmental regulation or tax policies.
Municipal Obligations
The municipal obligations in which the Fund may invest include
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities, such as fire and sanitation
vehicles, telecommunications equipment and other capital assets. Rather than
holding such obligations directly, the Fund may purchase a participation
interest in a municipal lease obligation from a bank or other third party. A
participation interest gives the Fund a specified, undivided pro-rata interest
in the total amount of the obligation.
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Municipal lease obligations have risks distinct from those associated
with general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt. These
may include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. The debt- issuance limitations are deemed inapplicable because of the
inclusion in many leases and contracts of "non-appropriation" clauses providing
that the governmental user has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
In determining the liquidity of a municipal lease obligation, Bartlett
will distinguish between simple or direct municipal leases and municipal
lease-backed securities, the latter of which may take the form of a lease-backed
revenue bond or other investment structure using a municipal lease-purchase
agreement as its base. While the former may present special liquidity issues,
the latter are based on a well established method of securing payment of a
municipal obligation. The Fund's investment in municipal lease obligations and
participation interests therein will be treated as illiquid unless Bartlett
determines, pursuant to guidelines established by the Board of Directors, that
the security could be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the security.
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Code, and laws that may be enacted
by Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of issuers to meet their obligations for
the payment of interest and principal on their municipal obligations may be
materially and adversely affected.
The United States Supreme Court has held that Congress may subject the
interest on municipal obligations to federal income tax. It can be expected
that, as in the past, proposals will be introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. Proposals also may be introduced in state
legislatures which could affect the state tax treatment of the Fund's
distributions. If any such proposals were enacted, the availability of municipal
obligations for investment by the Fund and the value of its assets could be
materially and adversely affected. In such event, the Fund would re-evaluate its
investment objective and policies and consider changes in its structure or
possible dissolution.
The following information applies to VALUE TRUST, TOTAL RETURN TRUST, SPECIAL
INVESTMENT TRUST AND BALANCED TRUST:
Futures Contracts
Each Fund may from time to time purchase or sell futures contracts. In
the purchase of a futures contract, the purchaser agrees to buy a specified
underlying instrument at a specified future date. In the sale of a futures
contract, the seller agrees to sell the underlying instrument at a specified
future date. The price at which the purchase or sale will take place is fixed at
the time the contract is entered into. Some currently available contracts are
based on specific securities, such as U.S. Treasury bonds or notes, and some are
based on indexes of securities such as S&P 500. Futures contracts can be held
until their delivery dates, or can be closed out before then, if a liquid
secondary market is available. A futures contract is closed out by entering into
an opposite position in an identical futures contract (for example, by
purchasing a contract on the same instrument and with the same delivery date as
a contract the party had sold) at the current price as determined on the futures
exchange.
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As the purchaser or seller of a futures contract, a Fund would not be
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, the Fund would be required to deposit
with its custodian, in the name of the futures broker (known as a futures
commission merchant, or "FCM"), a percentage of the contract's value. This
amount, which is known as initial margin, generally equals 10% or less of the
value of the futures contract. Unlike margin in securities transactions, initial
margin on futures contracts does not involve borrowing to finance the futures
transactions. Rather, initial margin is in the nature of a good faith deposit or
performance bond, and would be returned to that Fund when the futures position
is terminated, after all contractual obligations have been satisfied. Initial
margin may be maintained either in cash or appropriate liquid securities.
The value of a futures contract tends to increase and decrease with the
value of the underlying instrument. The purchase of a futures contract will tend
to increase exposure to positive and negative price fluctuations in the
underlying instrument in the same manner as if the underlying instrument had
been purchased directly. By contrast, the sale of a futures contract will tend
to offset both positive and negative market price changes.
As the contract's value fluctuates, payments known as variation margin
or maintenance margin are made to or received from the FCM. If the contract's
value moves against the Fund, (i.e., the Fund's futures position declines in
value), the Fund may be required to make payments to the FCM, and, conversely,
the Fund may be entitled to receive payments from the FCM if the value of the
Fund's futures position increases. This process is known as "marking-to-market"
and takes place on a daily basis. Variation margin does not involve borrowing to
finance the futures transactions, but rather represents a daily settlement of
the Fund's obligations to or from a clearing organization.
Options on Securities, Indexed Securities and Futures Contracts
PURCHASING PUT OR CALL OPTIONS By purchasing a put (or call) option, a
Fund obtains the right (but not the obligation) to sell (or buy) the underlying
instrument at a fixed strike price. The option's underlying instrument may be a
specific security, an indexed security or a futures contract. The option may
give the Fund the right to sell (or buy) only on the option's expiration date,
or may be exercisable at any time up to and including that date. In return for
this right, the Fund pays the current market price for the option (known as the
option premium).
A Fund may terminate its position in an option it has purchased by
allowing the option to expire, closing it out in the secondary market at its
current price, if a liquid secondary market exists, or by exercising it. If the
option is allowed to expire, the Fund will lose the entire premium paid.
WRITING PUT OR CALL OPTIONS By writing a put (or call) option, a Fund
takes the opposite side of the transaction from the option's purchaser (or
seller). In return for receipt of the premium, the Fund assumes the obligation
to pay the strike price for the option's underlying instrument (or to sell or
deliver the option's underlying instrument) if the other party to the option
chooses to exercise it. When writing an option on a futures contract, a Fund
will be required to make margin payments to an FCM as described above for
futures contracts.
Before exercise, a Fund may seek to terminate its position in an option
it has written by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
Over-the-counter and Exchange-traded Options
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Each Fund may purchase and write both over-the-counter ("OTC") and
exchange-traded options. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between a Fund and its
contra-party with no clearing organization guarantee. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make/take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund, as well as the loss of the expected benefit of the transaction.
Currently, options on debt securities are primarily traded on the OTC market.
Exchange markets for options on debt securities exist, but the ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market.
Value Trust, Total Return Trust and Special Investment Trust each may
invest up to 10% and Balanced Trust may invest up to 15% of its assets in
illiquid securities. The term "illiquid securities" includes purchased OTC
options. Assets used as cover for OTC options written by the Fund also will be
deemed illiquid securities, unless the OTC options are sold to qualified dealers
who agree that the Fund may repurchase any OTC options it writes for a maximum
price to be calculated by a formula set forth in the option agreement. The cover
for an OTC option subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Cover for Options and Futures Strategies
Each Fund will not use leverage in its hedging strategies involving
options and futures contracts. Each Fund will hold securities, options or
futures positions whose values are expected to offset ("cover") its obligations
under the transactions. Each Fund will not enter into hedging strategies
involving options and futures contracts that expose the Fund to an obligation to
another party unless it owns either (i) an offsetting ("covered") position in
securities, options or futures contracts or (ii) has cash, receivables and
liquid debt securities with a value sufficient at all times to cover its
potential obligations. Each Fund will comply with guidelines established by the
SEC with respect to coverage of these strategies by mutual funds and, if the
guidelines so require, will set aside cash and/or appropriate liquid securities
in a segregated account with its custodian in the amount prescribed. Securities,
options or futures contracts used for cover and securities held in a segregated
account cannot be sold or closed out while the strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of a Fund's assets
could impede the portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
Risks of Futures and Related Options Trading
Successful use of futures contracts and related options depends upon
the ability of the adviser to assess movements in the direction of overall
securities and interest rates, which requires different skills and techniques
than assessing the value of individual securities. Moreover, futures contracts
relate not to the current price level of the underlying instrument, but to the
anticipated price level at some point in the future; trading of stock index
futures may not reflect the trading of the securities that are used to formulate
the index or even actual fluctuations in the index itself. There is, in
addition, the risk that movements in the price of the futures contract will not
correlate with the movements in the prices of the securities being hedged. Price
distortions in the marketplace, such as result from increased participation by
speculators in the futures market, may also impair the correlation between
movements in the prices of futures contracts and movements in the prices of the
hedged securities. If the price of the futures contract moves less than the
price of securities that are subject to the hedge, the hedge will not be fully
effective; however, if the price of the securities being hedged has moved in an
unfavorable direction, a Fund normally would be in a better position than if it
had not hedged at all. If the price of securities being hedged has moved in a
favorable direction, this advantage may be partially offset by losses on the
futures position.
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Options have a limited life and thus can be disposed of only within a
specific time period. Positions in futures contracts may be closed out only on
an exchange or board of trade that provides a secondary market for such futures
contracts. Although each Fund intends to purchase and sell futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market, there is no assurance that such a market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures position and, in the event of adverse price movements, the Fund would
continue to be required to make variation margin payments.
Purchasers of options on futures contracts pay a premium in cash at the
time of purchase which, in the event of adverse price movements, could be lost.
Sellers of options on futures contracts must post initial margin and are subject
to additional margin calls that could be substantial in the event of adverse
price movements. In addition, a Fund's activities in the futures markets may
result in a higher portfolio turnover rate and additional transaction costs in
the form of added brokerage commissions. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The exchanges may impose limits on the amount by which the price of a
futures contract or related option is permitted to change in a single day. If
the price of a contract moves to the limit for several consecutive days, a Fund
may be unable during that time to close its position in that contract and may
have to continue making payments of variation margin. A Fund may also be unable
to dispose of securities or other instruments being used as "cover" during such
a period.
Risks of Options Trading
The success of each Fund's option strategies depends on many factors,
the most significant of which is the adviser's ability to assess movements in
the overall securities and interest rate markets.
The exercise price of the options may be below, equal to or above the
current market value of the underlying securities or indexes. Purchased options
that expire unexercised have no value. Unless an option purchased by a Fund is
exercised or unless a closing transaction is effected with respect to that
position, the Fund will realize a loss in the amount of the premium paid and any
transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Although each
Fund intends to purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any specific
time. Closing transactions with respect to OTC options may be effected only by
negotiating directly with the other party to the option contract. Although each
Fund will enter into OTC options with dealers capable of entering into closing
transactions with the Fund, there can be no assurance that a Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
In the event of insolvency of the contra-party, a Fund may be unable to
liquidate or exercise an OTC option, and could suffer a loss of its premium.
Also, the contra-party, although solvent, may refuse to enter into closing
transactions with respect to certain options, with the result that a Fund would
have to exercise those options which it has purchased in order to realize any
profit. With respect to options written by a Fund, the inability to enter into a
closing transaction may result in material losses to that Fund. For example,
because each Fund must maintain a covered position with respect to any call
option it writes on a security or index, a Fund may not sell the underlying
security or currency (or invest any cash, government securities or short-term
debt securities used to cover an index option) during the period it is obligated
under the option. This requirement may impair a Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Options on indexes are settled exclusively in cash. If a Fund writes a
call option on an index, the Fund will not know in advance the difference, if
any, between the closing value of the index on the exercise
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date and the exercise price of the call option itself, and thus will not know
the amount of cash payable upon settlement. In addition, a holder of an index
option who exercises it before the closing index value for that day is available
runs the risk that the level of the underlying index may subsequently change.
Each Fund's activities in the options markets may result in higher
portfolio turnover rates and additional brokerage costs.
Additional Limitations on Futures and Options
As a non-fundamental policy, each Fund will write a put or call on a
security only if (a) the security underlying the put or call is permitted by the
investment policies of that Fund, and (b) the aggregate value of the securities
underlying the calls or obligations underlying the puts determined as of the
date the options are sold does not exceed 25% of that Fund's net assets.
Also as a non-fundamental policy, each Fund will purchase and write
puts and calls on securities, stock index futures or options on stock index
futures, or on financial futures, only if: (a) (i) such options or futures are
offered through the facilities of a national securities association approved by
the Commissioner under Rule 260.105.35 of the California Blue Sky Regulations or
are listed on a national securities or commodities exchange or (ii) such options
are OTC options and (A) the OTC options involved are not readily available on an
exchange market, (B) at the time of purchase of any OTC option there is, in the
judgment of the Fund's investment adviser, an active OTC market which will
provide liquidity and pricing for such options and (C) any dealer involved in
the purchase or sale of the OTC option has a net worth of at least $20 million
as reported on its most recent financial statement; (b) the aggregate premiums
paid on all such options which are held by the Fund at any time do not exceed
20% of that Fund's total net assets; and (c) the aggregate margin deposits
required on all such futures or options on futures contracts held at any time do
not exceed 5% of the Fund's total assets.
Under regulations adopted by the Commodity Futures Trading Commission
("CFTC"), futures contracts and related options may be used by each Fund (a) for
hedging purposes, without quantitative limits, and (b) for other purposes to the
extent that the amount of margin deposit on all such non-hedging futures
contacts owned by the Fund, together with the amount of premiums paid by that
Fund on all such non-hedging options held on futures contracts, does not exceed
5% of the market value of that Fund's net assets.
The foregoing limitations, as well as those set forth in the prospectus
regarding each Fund's use of futures and related options transactions, do not
apply to options attached to, or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options, such as rights, certain debt securities and indexed
securities.
The above limitations on each Fund's investments in futures contracts
and options may be changed as regulatory agencies permit. However, each Fund
will not modify the above limitations to increase its permissible futures and
options activities without supplying additional information, as appropriate, in
a current Prospectus or Statement of Additional Information.
Indexed Securities
Indexed securities are securities whose prices are indexed to the
prices of securities indexes, currencies or other financial statistics. Indexed
securities typically are debt securities or deposits whose value at maturity
and/or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities fluctuates (either directly or
inversely, depending upon the instrument) with the performance of the index,
security, currency or other instrument to which they are indexed and may also be
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
14
<PAGE>
if the issuer's creditworthiness deteriorates. Recent issuers of indexed
securities have included banks, corporations and certain U.S. government
agencies. The Funds will only purchase indexed securities of issuers which the
Adviser/Bartlett determines present minimal credit risks and will monitor the
issuer's creditworthiness during the time the indexed security is held. The
Adviser/Bartlett 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 each Fund's investment allocations, depending on the
individual characteristics of the securities. Each Fund currently does not
intend to invest more than 5% of its total assets in indexed securities. Indexed
securities may fluctuate according to a multiple of changes in the underlying
instrument and, in that respect, have a leverage-like effect on a Fund.
Forward Currency Contracts
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. Each Fund will not speculate
with forward currency contracts or foreign currencies.
Each Fund may enter into forward currency contracts with respect to
specific transactions. For example, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such payment, as the case
may be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. A Fund will thereby be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between the
date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
Each Fund also may use forward currency contracts in connection with
portfolio positions to lock-in the U.S. dollar value of those positions or to
shift the Fund's exposure to foreign currency fluctuations from one country to
another. For example, when the adviser believes that the currency of a
particular foreign country may suffer a substantial decline relative to the U.S.
dollar or another currency, it may enter into a forward currency contract to
sell the amount of the former foreign currency approximating the value of some
or all of a Fund's securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used.
At or before the maturity date of a forward currency contract requiring
a Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward currency contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Fund would
realize a gain or loss as a result of entering into such an offsetting forward
currency contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and the offsetting contract.
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the future value
of such securities in a foreign currency will change as a consequence of market
movements in the value of those securities between the date the forward currency
contract is entered into and the date it matures. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot (i.e.,
cash) market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver under the forward contract and the decision is made to sell the security
and make delivery of the foreign currency.
15
<PAGE>
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency a Fund is obligated to deliver under the
forward contract. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward currency contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing a Fund
to sustain losses on these contracts and transaction costs. Each Fund may enter
into forward contracts or maintain a net exposure to such contracts only if (1)
the consummation of the contracts would not obligate the Fund to deliver an
amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency or (2) the Fund
maintains cash, U.S. government securities or other appropriate liquid
securities in a segregated account in an amount not less than the value of the
Fund's total assets committed to the consummation of the contract.
The cost to a Fund of engaging in forward currency contracts varies
with factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. Each Fund will deal only with banks, broker/dealers or other financial
institutions which the adviser deems to be of high quality and to present
minimum credit risk. The use of forward currency contracts does not eliminate
fluctuations in the prices of the underlying securities each Fund owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Each Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
FOR EACH FUND:
Warrants
Although not a fundamental policy subject to shareholder vote, a Fund
may not invest more than 5% of the value of its net assets, taken at the lower
of cost or market value, in warrants or invest more than 2% of the value of such
net assets in warrants not listed on the New York or American Stock Exchanges.
Portfolio Lending
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized institutional
borrowers of securities, provided that cash or equivalent collateral, equal to
at least 100% of the market value of the securities loaned, is continuously
maintained by the borrower with 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. Each Fund
may pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. Each Fund 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
16
<PAGE>
securities lending are similar to those of repurchase agreements. Each Fund
presently does not intend to lend more than 5% of its portfolio securities at
any given time.
Repurchase Agreements
Repurchase agreements are usually for periods of one week or less, but
may be for longer periods. The Funds will not enter into repurchase agreements
of more than seven days' duration if more than 15% of net assets (with respect
to American Leading Companies and Balanced Trust) or more than 10% of net assets
(with respect to Value Trust, Total Return Trust and Special Investment Trust)
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, a Fund might suffer a loss. If
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon the collateral by a Fund could be delayed or limited. However,
each Fund has adopted standards for the parties with whom it may enter into
repurchase agreements, including monitoring by each fund's adviser of the
creditworthiness of such parties which the Fund's Board of Directors believes
are reasonably designed to assure that each party presents no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement.
When a 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 each Fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information and for information
regarding any federal, state or local taxes that might be applicable to them.
General
Each Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"). In order to continue to qualify for that treatment, each Fund must
distribute annually to its shareholders at least 90% of its investment company
taxable income (generally, net investment income plus any net short-term capital
gain and any net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
each Fund, these requirements include the following: (1) at least 90% of the
Fund's gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward currency contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months -- options or futures
contracts, or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to that Fund's principal business of
investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) 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 that Fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities; and (4) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of
17
<PAGE>
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.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Dividends and interest received by each Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield 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 a 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 each 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
for any Fund may not exceed the aggregate dividends received by that 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 alternative minimum tax. Distributions
of net capital gain (the excess of net long-term capital gain over net
short-term capital loss) made by each Fund do not qualify for the
dividends-received deduction.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Passive Foreign Investment Companies
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation 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, a Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of 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 that income is distributed
to its shareholders.
Pursuant to proposed regulations, open-end RICs, such as the Funds,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of such a
PFIC's stock over the adjusted basis in that stock (including mark-to-market
gain for each prior year for which an election was in effect).
Options, Futures, Forward Currency Contracts and Foreign Currencies
18
<PAGE>
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 character and timing of recognition of the gains and losses each Fund
realizes in connection therewith.
Gains from the dispostition of foreign currencies (except certain gains
that may be excluded by future regulations) -- and gains from options derived by
American Leading Companies or from options, futures and forward currency
contracts derived by Value Trust, Total Return Trust, Special Investment Trust
or Balanced Trust, with respect to its business of investing in securities or
foreign currencies -- will qualify as permissible income under the Income
Requirement. However, income from the disposition of options (other than those
on foreign currencies) (with respect to American Leading Companies) and options
and futures contracts (other than those on foreign currencies) (with respect to
Value Trust, Total Return Trust , Special Investment Trust and Balanced Trust)
will be subject to the Short-Short Limitation if they are held for less than
three months. For Value Trust, Total Return Trust, Special Investment Trust and
Balanced Trust, income from the disposition of foreign currencies and options,
futures and forward contracts thereon also will be subject to the Short-Short
Limitation if they are held for less than three months and are not directly
related to a Fund's principal business of investing in securities (or options
and futures with respect thereto). For American Leading Companies, income from
the disposition of foreign currencies that are not directly related to its
principal business of investing in securities (or options with respect thereto)
also will be subject to the Short-Short Limitation if they are held for less
than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. To the
extent this treatment is not available, a Fund may be forced to defer the
closing out of certain options, futures, forward currency contracts and foreign
currency positions beyond the time when it otherwise would be advantageous to do
so, in order for it to continue to qualify as a RIC.
Regulated futures contracts and options that are subject to section
1256 of the Code (collectively, "Section 1256 contracts") and are held by a Fund
at the end of each taxable year will be required to be "marked-to-market" for
federal income tax purposes (that is, treated as having been sold at that time
at market value). Any unrealized gain or loss recognized under this
mark-to-market rule will be added to any realized gains and losses on section
1256 contracts actually sold by the Fund during the year, and the resulting gain
or loss will be treated (without regard to the holding period) as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. These rules may
operate to increase the amount of dividends, which will be taxable to
shareholders, that must be distributed to meet the Distribution Requirement and
avoid imposition of the Excise Tax, without providing the cash with which to
make the distributions. Each Fund may elect to exclude certain transactions from
Section 1256, although doing so may have the effect of increasing the relative
proportion of short-term capital gain (taxable as ordinary income when
distributed to a Fund's shareholders).
FOR EACH FUND:
When a covered call option written (sold) by a Fund expires, the Fund
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When a Fund terminates its obligations under
such an option by entering into a closing transaction, the Fund realizes 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 a Fund is exercised, the Fund is
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
19
<PAGE>
upon the exercise plus the premium received when the option was written exceeds
or is less than the basis of the underlying security.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason and certain of
its affiliates. Navigator Shares are currently offered for sale only to
Institutional Clients , to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg Mason
Profit Sharing Plan and Trust. Navigator Shares may not be purchased by
individuals directly, but Institutional Clients may purchase shares for Customer
Accounts maintained for individuals. Primary Shares are available to all other
investors.
Future First Systematic Investment Plan and Transfer of Funds from Financial
Institutions
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy Primary Shares through the Future First Systematic
Investment Plan. Under this plan you may arrange for automatic monthly
investments in Primary Shares of $50 or more by authorizing Boston Financial
Data Services ("BFDS"), each Fund's transfer agent, to transfer funds each month
from your checking account to be used to buy Primary Shares at the per share net
asset value determined on the day the check is sent from your bank. You will
receive a quarterly account statement. You may terminate the Future First
Systematic Investment Plan at any time without charge or penalty. Forms to
enroll in the Future First Systematic Investment Plan are available from any
Legg Mason or affiliated office.
Investors in Primary Shares may also buy Primary Shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of a 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"),
Self-Employed Individual Retirement Plan ("Keogh Plan"), 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
20
<PAGE>
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. Each Fund, its
transfer agent, and Legg Mason also reserve the right to modify or terminate the
Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and distributions, the
amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund in
which you have an account if you maintain a Systematic Withdrawal Plan, because
you may incur tax liabilities in connection with such purchases and withdrawals.
Each Fund will not knowingly accept purchase orders from you for additional
shares if you maintain a Systematic Withdrawal Plan unless your purchase is
equal to at least one year's scheduled withdrawals. In addition, if you maintain
a Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
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 a 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 each 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.
Each Fund reserves the right, under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part 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. Each 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, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
As described in the Prospectuses, securities for which market quotations are
readily available are valued at current market value. Securities traded on an
exchange or NASD National Market System 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
21
<PAGE>
closing bid and asked prices. Short-term securities, except commercial paper,
are valued at cost. Commercial paper is 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 appropriate 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 a Fund will be subtracted from net
assets of each Class.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in each Fund at commencement of
operations of each class of Fund shares. The tables assume that all dividends
and other distributions are reinvested in each respective Fund. They include the
effect of all charges and fees applicable to the respective class of shares the
Fund has paid. (There are no fees for investing or reinvesting in the Funds
imposed by the Funds, and there are no redemption fees.) They do not include the
effect of any income tax that an investor would have to pay on distributions.
VALUE TRUST:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain Distributions Dividends Total Value
- -------------------------- --------------------------------- --------------------------------- --------------------------
<S> <C>
1983* $16,160 $ 241 $16,401
1984 18,870 555 19,425
1985 23,583 1,100 24,683
1986 32,556 1,954 34,510
1987 35,503 2,421 37,924
1988 32,268 2,461 34,729
1989 37,650 3,459 41,109
1990 39,891 4,399 44,290
1991 37,701 5,313 43,014
1992 44,210 7,204 51,414
1993 50,184 8,819 59,003
1994 52,789 9,548 62,337
1995 57,817 10,610 68,427
1996 82,356 14,870 97,226
1997
</TABLE>
* April 16, 1982 (commencement of operations) to March 31, 1983.
22
<PAGE>
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain Distributions Dividends Total Value
- -------------------------- --------------------------------- --------------------------------- --------------------------
<S> <C>
1995* $10,805 $ 6 $10,811
1996 15,249 268 15,517
1997
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1997 would have been $, and the investor would have
received a total of $ in distributions. With respect to Navigator Shares, if the
investor had not reinvested dividends and other distributions, the total value
of the hypothetical investment as of March 31, 1997 would have been $, and the
investor would have received a total of $ in distributions. If the Adviser had
not waived certain fees in the 1983-1997 fiscal years, returns would have been
lower.
TOTAL RETURN TRUST:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- -------------------------- ------------------------------------------ --------------------------------- -----------------
<S> <C>
1986* $10,780 - $10,780
1987 11,673 $ 211 11,884
1988 10,295 380 10,675
1989 11,690 603 12,293
1990 11,875 846 12,721
1991 11,499 1,216 12,715
1992 13,885 1,830 15,715
1993 16,234 2,605 18,839
1994 16,637 3,064 19,701
1995 16,593 3,482 20,075
1996 21,342 5,194 26,536
</TABLE>
23
<PAGE>
1997
* November 21, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain Distributions Dividends Total Value
- -------------------------- --------------------------------- --------------------------------- --------------------------
<S> <C>
1995* $10,203 $160 $10,363
1996 13,106 668 13,774
1997
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1997 would have been $, and the investor would have
received a total of $ in distributions. With respect to Navigator Shares, if the
investor had not reinvested dividends and other distributions, the total value
of the hypothetical investment as of March 31, 1997 would have been $, and the
investor would have received a total of $ in distributions. If the Adviser had
not waived certain fees in the 1986-1995 fiscal years, returns would have been
lower.
SPECIAL INVESTMENT TRUST:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Shares
Value of Original Shares Plus Shares Acquired Through
Obtained Through Reinvestment of Reinvestment of Income Total
Fiscal Year Capital Gain Distributions Dividends Value
- -------------------------- --------------------------------------------- ------------------------------- ---------------
<S> <C>
1986* $11,530 - $11,530
1987 13,051 $ 23 13,074
1988 11,107 113 11,220
1989 12,982 144 13,126
1990 14,890 253 15,143
1991 17,777 615 18,392
1992 21,249 905 22,154
1993 23,528 953 24,481
1994 28,511 1,197 29,708
1995 26,707 1,108 27,815
1996 34,291 1,442 35,733
1997
</TABLE>
24
* December 30, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of Income
Fiscal Year Capital Gain Distributions Dividends Total Value
- -------------------------- --------------------------------- --------------------------------- --------------------------
<S> <C>
1995* $10,481 - $10,481
1996 13,489 $121 13,610
1997
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1997 would have been $, and the investor would have
received a total of in distributions. With respect to Navigator Shares, if the
investor had not reinvested dividends and other distributions, the total value
of the hypothetical investment as of March 31, 1997 would have been $, and the
investor would have received a total of $ in distributions. If the Adviser had
not waived certain fees in the 1986-1997 fiscal years, returns would have been
lower.
AMERICAN LEADING COMPANIES:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- -------------------------- ----------------------------------------- ----------------------------- -----------------------
<S> <C>
1994* $9,690 $ 24 $9,714
1995 10,180 140 10,320
1996 12,230 283 12,513
1997
</TABLE>
* September 1, 1993 (commencement of operations) to March 31, 1994.
NAVIGATOR SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
- -------------------------- --------------------------------------- ------------------------------- -----------------------
<S> <C>
1997*
</TABLE>
* October 10, 1996 (commencement of operations) to March 31, 1997.
25
<PAGE>
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of March 31, 1997 would have been $, and the investor would have
received a total of in distributions. With respect to Navigator Shares, if the
investor had not reinvested dividends and other distributions, the total value
of the hypothetical investment as of March 31, 1997 would have been $, and the
investor would have received a total of $ in distributions. If the Adviser had
not waived certain fees in the 1994-1997 fiscal years, returns would have been
lower.
BALANCED TRUST:
PRIMARY SHARES
<TABLE>
<CAPTION>
Value of Original Shares Plus Value of Shares
Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of
Fiscal Year Distributions Income Dividends Total Value
- -------------------------- ----------------------------------------- ----------------------------- -----------------------
<S> <C>
1997* $ $ $
</TABLE>
* October 1, 1996 (commencement of operations) to March 31, 1997.
The table above is based only on Primary Shares of Balanced Trust. As
of the date of this Statement of Additional Information, Navigator Shares of
Balanced Trust have no performance history of their own.
Total Return Calculations
Average annual total return quotes used in each Fund's advertising and
other promotional materials ("Performance Advertisements") are calculated
separately for each Class according to the following formula:
P(1+T)/n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by a Fund are assumed to have been reinvested
at net asset value on the reinvestment dates during the period.
From time to time each 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 Funds invest in many securities that are not
included in the S&P 500.
Each 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
26
<PAGE>
rank the performance of investment companies. Each 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.
Each Fund may compare the investment return of a Class to the return on
certificates of deposit and other forms of bank deposits, and may quote from
organizations that track the rates offered on such deposits. Bank deposits are
insured by an agency of the federal government up to specified limits. In
contrast, Fund shares are not insured, the value of Fund shares may fluctuate,
and an investor's shares, when redeemed, may be worth more or less than the
investor originally paid for them. Unlike the interest paid on many certificates
of deposit, which remains at a specified rate for a specified period of time,
the return of each Class of Shares will vary.
Fund advertisements may reference the history of the distributor and
its affiliates, the education and experience of the portfolio manager, and the
fact that the portfolio manager engages in value investing. With value
investing, the Adviser invests in those securities it believes to be undervalued
in relation to the long-term earning power or asset value of their issuers.
Securities may be undervalued because of many factors, including market decline,
poor economic conditions, tax-loss selling, or actual or anticipated unfavorable
developments affecting the issuer of the security. The Adviser believes that the
securities of sound, well-managed companies that may be temporarily out of favor
due to earnings declines or other adverse developments are likely to provide a
greater total return than securities with prices that appear to reflect
anticipated favorable developments and that are therefore subject to correction
should any unfavorable developments occur.
In advertising, each 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. Each Fund may use other recognized
sources as they become available.
Each Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
Each 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.
Each Fund may also include in advertising biographical information on
key investment and managerial personnel.
Each 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 low price levels.
27
<PAGE>
Each Fund may discuss Legg Mason's tradition of service. Since 1899,
Legg Mason and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $43 billion as of March 31,
1997.
In advertising, each 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.
Lipper Analytical Services, Inc., an independent rating service which
measures the performance of most U.S. mutual funds, reported that Value Trust's
total return ranked among general equity funds it measured during the one year
ended June 30, 1997. For the five years ended June 30, 1997, Value Trust's total
return ranked among general equity funds and for the ten years ended June 30,
1997, Value Trust's total return ranked among general equity funds. Of course,
there can be no assurance that results similar to those achieved by Value Trust
in the past will be realized in future periods. From time to time, performance
rankings and ratings as reported in national financial publications such as
Money Magazine, Forbes and Barron's may be used in describing Value Trust's
performance.
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of such plans until the
income is distributed to them. Primary Share investors who are considering
establishing an IRA, Keogh Plan, SEP, SIMPLE or other qualified retirement plan
should consult their attorneys or other tax advisers with respect to individual
tax questions. The option of investing in these plans with respect to Primary
Shares through regular payroll deductions may be arranged with a Legg Mason or
affiliated financial advisor and your employer. Additional information with
respect to these plans is available upon request from any Legg Mason or
affiliated financial advisor.
Individual Retirement Account -- IRA
Certain Primary Share investors may obtain tax advantages by
establishing IRAs. Specifically, 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, 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. 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 neither
contribution exceeds $2,000. If your employer's plan permits voluntary
contributions and meets certain 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 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 or where the distribution is rolled over into another
qualified plan or certain other situations.
28
<PAGE>
Self-Employed Individual Retirement Plan -- Keogh Plan
Legg Mason makes available to self-employed individuals a Plan and
Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. Primary Share investors have the right to use a bank of their own
choice to provide these services at their own cost. There are penalties for
distributions from a Keogh Plan prior to age 59 1/2, except in the case of death
or disability.
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
Although a salary reduction SEP, or SARSEP, may no longer be
established after December 31, 1996, an employer with no more than 100 employees
that does not maintain another retirement plan instead may establish a SIMPLE
either as separate IRAs or as part of a Code section 401(k) plan. A SIMPLE,
which is not subject to the complicated nondiscrimination rules that generally
apply to qualified retirement plans, will allow certain employees to make
elective contributions of up to $6,000 per year and will require the employer to
make matching contributions up to 3% of each such employee's salary.
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.
THE FUNDS' DIRECTORS AND OFFICERS
Each Fund's officers are responsible for the operation of the Fund
under the direction of the Board of Directors. The officers and directors of the
Funds 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 Funds as defined by the 1940 Act. The business address of each
officer and director is 111 South Calvert Street, Baltimore, Maryland 21202,
unless otherwise indicated.
RAYMOND A. MASON* [9/28/36], Chairman of the Board and Director of
Value Trust, Total Return Trust and Special Investment Trust; Chairman of the
Board and President of Legg Mason, Inc. (financial services holding company);
Director of Environmental Elements Corporation (manufacturer of pollution
control equipment); Officer and/or Director of various other affiliates of Legg
Mason.
JOHN F. CURLEY, JR.* [7/24/39], President and Director of Value Trust,
Total Return Trust and Special Investment Trust; Chairman of the Board and
Director of the Trust; Vice Chairman and Director of Legg Mason, Inc. and Legg
Mason Wood Walker, Incorporated; Director of Legg Mason Fund Adviser, Inc. and
Western Asset Management Company (each a registered investment adviser); Officer
and/or Director of various other affiliates of Legg Mason, Inc.; Chairman of the
Board and Director of three Legg Mason funds; Chairman of the Board, President
and Trustee of one Legg Mason fund; Chairman of the Board and Trustee of one
Legg Mason fund.
RICHARD G. GILMORE [6/9/27], Director of each Fund; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company whose subsidiaries are engaged in the manufacture
and sale of decorative paper products, business forms, and specialty metal
packaging); Director of PECO Energy Company (formerly Philadelphia Electric
Company); Director of four other Legg Mason funds; and Trustee of two Legg Mason
funds. Formerly: Senior Vice President and Chief
29
<PAGE>
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.
CHARLES F. HAUGH [12/27/25], Director of each Fund; 14201 Laurel Park
Drive, Suite 104, Laurel, Maryland. Real Estate Developer and Investor;
President and Director of Resource Enterprises, Inc. (real estate brokerage);
Chairman of Resource Realty LLC (management of retail and office space); Partner
in Greater Laurel Health Park Ltd. Partnership (real estate investment and
development); Director of four other Legg Mason funds; and Trustee of two Legg
Mason funds.
ARNOLD L. LEHMAN [7/18/44], Director of each Fund; The Baltimore Museum
of Art, Art Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum
of Art; Director of four other Legg Mason funds; Trustee of two Legg Mason
funds.
JILL E. McGOVERN [8/29/44], Director of each Fund; 1500 Wilson
Boulevard, Arlington, Virginia. Chief Executive Officer of the Marrow
Foundation. Director of four other Legg Mason funds; Trustee of two Legg Mason
funds. Formerly: Executive Director of the Baltimore International Festival
(January 1991 - March 1993); and Senior Assistant to the President of The Johns
Hopkins University (1986-1991).
T. A. RODGERS [10/22/34], Director of each Fund; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director of four other Legg Mason funds; Trustee of two 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 of each Fund; President of
the Trust; Executive Vice President of Legg Mason, Inc. and Legg Mason Wood
Walker, Inc.; Vice Chairman and Director of Legg Mason Fund Adviser, Inc.;
President and Director of two Legg Mason funds; Trustee of two Legg Mason funds;
Vice President of Worldwide Value Fund, Inc. 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 Funds, other than those who also serve as
directors, are:
MARIE K. KARPINSKI* [1/1/49], Vice President and Treasurer of each
Fund; Treasurer of the Adviser; Vice President and Treasurer of six other Legg
Mason funds; and Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice
President of Legg Mason.
KATHI D. BAIR* [12/15/64], Secretary or Assistant Treasurer or
Assistant Secretary of each Fund; Secretary/Assistant Treasurer/Assistant
Secretary of four other Legg Mason funds.
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Haugh, Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of a Fund who are "interested persons" of the
Fund receive no salary or fees from the Fund. Each Director of a Fund who is not
an interested person of the Fund ("Independent
30
<PAGE>
Directors")receives an annual retainer and a per meeting fee based on the
average net assets of each Fund at December 31, as follows:
December 31 Annual Per Meeting
Avg. Net Assets Retainer Fee
--------------- -------- -----------
Up to $250 million $600 $150
$250 mill - $1 bill $1,200 $300
Over $1 billion $2,000 $400
On April 30, 1997, the directors and officers of each Fund beneficially
owned in the aggregate less than 1% of that Fund's outstanding shares.
On July [ ], 1997, the Legg Mason Profit Sharing Plan and Trust, 7 East
Redwood Street, Baltimore, MD 21202 owned of record and beneficially the
following percentages of the outstanding shares of the Navigator Classes:
Navigator Class of Value Trust %
Navigator Class of Total Return Trust %
Navigator Class of Special Investment Trust %
As of the same date, [ ] owned of record and beneficially 100%
of the outstanding shares of the Navigator Class of American Leading Companies.
The following table provides certain information relating to the
compensation of the Funds' directors for the fiscal year ended March 31, 1997.
None of the Legg Mason funds has any retirement plan for its directors.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
AGGREGATE AGGREGATE COMPENSATION AGGREGATE FROM EACH
NAME OF COMPENSATION COMPENSATION FROM SPECIAL COMPENSATION FUND AND FUND
PERSON AND FROM VALUE FROM TOTAL INVESTMENT FROM INVESTORS COMPLEX PAID TO
POSITION TRUST* RETURN TRUST* TRUST* TRUST* DIRECTORS**
<S> <C>
Raymond A.
Mason -
Chairman of the
Board
and Director None None None None None
John F. Curley,
Jr. -
President and
Director None None None None None
Edward A.
Taber, III -
Director None None None None None
Richard G.
Gilmore -
Director
Charles F.
Haugh -
Director
31
<PAGE>
Arnold L.
Lehman -
Director
Jill E.
McGovern -
Director
T. A. Rodgers-
Director
</TABLE>
* Represents fees paid to each director during the fiscal year ended March
31, 1997.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1996. There are nine open-end investment
companies in the Legg Mason Complex (with a total of seventeen funds).
THE FUNDS' INVESTMENT ADVISER/MANAGER
The Adviser, a Maryland Corporation, is located at 111 South Calvert
Street, Baltimore, Maryland 21202. The Adviser is a wholly owned subsidiary of
Legg Mason, Inc., which is also the parent of Legg Mason, Bartlett and LMCM. The
Adviser serves as investment adviser to Value Trust, Total Return Trust and
Special Investment Trust and as manager to American Leading Companies and
Balanced Trust under separate Investment Advisory and Management Agreements with
each Fund ("Advisory Agreement" with respect to Value Trust, Total Return Trust
and Special Investment Trust and "Management Agreement" with respect to American
Leading Companies and Balanced Trust). The Advisory Agreement for Value Trust
originally became effective as of April 19, 1982 and was approved by the
shareholders of Value Trust on July 20, 1984. The Advisory Agreement for Total
Return Trust originally became effective as of August 5, 1985 and was approved
by the shareholders of Total Return Trust on July 17, 1986. The Advisory
Agreement for Special Investment Trust originally became effective as of
December 10, 1985 and was approved by the shareholders of Special Investment
Trust on July 17, 1986. The Management Agreement for American Leading Companies
originally became effective as of August 2, 1993. The Management Agreement for
Balanced Trust became effective on July 31, 1996.
The Advisory Agreement (for Value Trust and Total Return Trust) and the
Management Agreement (for American Leading Companies and Balanced Trust) were
most recently approved by each Fund's Board of Directors, including a majority
of the directors who are not "interested persons" of the Fund or the
Adviser/Manager, on November 15, 1996. On the same date, the Board of Directors
of Special Investment Trust, including a majority of the directors who are not
"interested persons" of the Fund or the Adviser, approved an amendment to the
Fund's Advisory Agreement with respect to the compensation paid to the Adviser
(see below).
Each Advisory Agreement and Management Agreement provides that, subject
to overall direction by the Fund's Board of Directors, the Adviser/Manager
manages or oversees the investment and other affairs of each Fund. The
Adviser/Manager is responsible for managing each Fund consistent with the Fund's
investment objective and policies described in its Prospectuses and this
Statement of Additional Information. The Adviser/Manager also is obligated to
(a) furnish the Fund with office space and executive and other personnel
necessary for the operation of each Fund; (b) supervise all aspects of each
Fund's operations; (c) bear the expense of certain informational and purchase
and redemption services to each 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 each Fund's officers and directors. In addition, the Adviser
paid Value Trust's, Total Return Trust's and Special Investment Trust's
organizational expenses and has agreed to reimburse Value Trust and Special
Investment Trust for auditing fees and compensation of those Funds' independent
directors. The Adviser/Manager and its affiliates pay all compensation of
directors and officers of each Fund who are officers, directors or employees of
the Adviser. Each Fund pays all of its expenses which are not expressly assumed
by the Adviser/Manager. These
32
<PAGE>
expenses include, among others, interest expense, taxes, brokerage fees and
commissions, expenses of preparing and printing prospectuses, proxy statements
and reports to shareholders and of distributing them to existing shareholders,
custodian charges, transfer agency fees, distribution fees to Legg Mason, each
Fund's distributor, compensation of the independent directors, legal and audit
expenses, insurance expense, shareholder meetings, proxy solicitations, expenses
of registering and qualifying Fund shares for sale under federal and state law,
governmental fees and expenses incurred in connection with membership in
investment company organizations. Each Fund also is liable for such nonrecurring
expenses as may arise, including litigation to which the Fund may be a party.
Each Fund may also have an obligation to indemnify its directors and officers
with respect to litigation.
The Adviser/Manager receives for its services to each Fund a management
fee, calculated daily and payable monthly. The Adviser receives from Value Trust
a management fee at an annual rate of 1% of the average daily net assets of that
Fund for the first $100 million of average daily net assets, 0.75% of average
daily net assets between $100 million and $1 billion, and 0.65% of average daily
net assets exceeding $1 billion. The Adviser receives from Total Return Trust a
management fee at an annual rate of 0.75% of the average daily net assets of
that Fund. The Adviser receives from Special Investment Trust a management fee
at an annual rate of 1% of the average daily net assets of that Fund for the
first $100 million of average daily net assets, 0.75% of average daily net
assets between $100 million and $1 billion, and 0.65% of average daily net
assets exceeding $1 billion. The Manager receives from American Leading
Companies and Balanced Trust management fees at an annual rate of 0.75% of the
average daily net assets of each Fund. The Manager has agreed to waive its fees
for Total Return Trust, American Leading Companies and Balanced Trust for
expenses related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) in excess of the following amounts: for Total Return
Trust and American Leading Companies, 1.95% of average net assets attributable
to Primary Shares indefinitely; and for Balanced Trust, 1.85% of average net
assets attributable to Primary Shares until July 31, 1998. The Manager has
agreed to waive its fees for Total Return Trust, American Leading Companies and
Balanced Trust for expenses related to Navigator Shares (exclusive of taxes,
interest, brokerage and extraordinary expenses) in excess of the following
amounts: for Total Return Trust and American Leading Companies, 0.95% of average
net assets attributable to Navigator Shares indefinitely; and for Balanced
Trust, 1.10% of average net assets attributable to Navigator Shares until July
31, 1998.
For the fiscal years ended March 31, 1997, 1996 and 1995, management
fees of $[ ], $9,588,819 and $7,519,155, respectively were received from Value
Trust; $[ ], $1,768,271 and $1,502,358, respectively were received from Total
Return Trust; and $[ ], $5,696,555 and $4,849,166, respectively were received
from Special Investment Trust.
For the fiscal years ended March 31, 1997, 1996 and 1995, the Manager
received management fees of $[ ] (prior to fees waived of $[ ]), $515,120 (prior
to fees waived of $170,819) and $431,577 (prior to fees waived of $94,444),
respectively, from American Leading Companies.
For the period October 1, 1996 (commencement of operations) to March
31, 1997, the Manager received management fees of $[ ] (prior to fees waived of
$[ ]), from Balanced Trust.
33
<PAGE>
Under each Advisory Agreement or (with respect to American Leading
Companies and Balanced Trust) Management Agreement, each Fund has the
non-exclusive right to use the name "Legg Mason" until that Agreement is
terminated, or until the right is withdrawn in writing by the Adviser/Manager.
LMCM, 111 South Calvert Street, Baltimore, MD 21202, an affiliate of
Legg Mason, serves as investment adviser to American Leading Companies pursuant
to an Investment Advisory Agreement dated August 2, 1993, between LMCM and the
Manager ("Advisory Agreement"). The Advisory Agreement was most recently
approved by the Board of Directors, including a majority of the directors who
are not "interested persons" (as that term is defined in the 1940 Act) of the
Trust, the Adviser or the Manager, on November 15, 1996. The Advisory Agreement
was approved by Legg Mason Fund Adviser, Inc., as the Fund's sole shareholder,
on August 2, 1993.
Under the Advisory Agreement, LMCM is responsible, subject to the
general supervision of the Manager and the Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
LMCM's services to the Fund, the Manager (not the Fund) pays LMCM a fee,
computed daily and payable monthly, at an annual rate equal to 40% of the fee
received by the Manager from the Fund, net of any waivers by the Manager.
For the fiscal years ended March 31, 1997, 1996 and 1995, the Manager
paid $[ ], $137,720 and $134,853, respectively to LMCM on behalf of the
Fund.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, an affiliate
of Legg Mason, serves as investment adviser to Balanced Trust pursuant to an
Investment Advisory Agreement dated July 31, 1996, between Bartlett and the
Manager ("Advisory Agreement"). The Advisory Agreement was most recently
approved by the Board of Directors, including a majority of the directors who
are not "interested persons" (as that term is defined in the 1940 Act) of the
Trust, Bartlett or the Manager, on November 15, 1996. The Advisory Agreement was
approved by Legg Mason Fund Adviser, Inc., as the Fund's sole shareholder, on
July 31, 1996.
Under the Advisory Agreement, Bartlett is responsible, subject to the
general supervision of the Manager and the Trust's Board of Directors, for the
actual management of the Fund's assets, including responsibility for making
decisions and placing orders to buy, sell or hold a particular security. For
Bartlett's services to the Fund, the Manager (not the Fund) pays Bartlett a fee,
computed daily and payable monthly, at an annual rate equal to 662/3% of the fee
received by the Manager from the Fund, net of any waivers by the Manager.
For the period October 1, 1996 (commencement of operations) to March
31, 1997, the Manager paid $[ ] to Bartlett on behalf of Balanced Trust.
Under each Advisory Agreement and (with respect to American Leading
Companies and Balanced Trust) Management Agreement, the
Adviser/Manager/LMCM/Bartlett will not be liable for any error of judgment or
mistake of law or for any loss by a Fund in connection with the performance of
the Advisory Agreement or Management Agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard of its obligations or duties under the respective Agreement.
Each Advisory Agreement and (with respect to American Leading Companies
and Balanced Trust) Management Agreement terminates automatically upon
assignment and is terminable at any time without penalty by vote of the
respective Fund's Board of Directors, by vote of a majority of the Fund's
outstanding voting securities, or by the Adviser/Manager/LMCM/Bartlett, on not
less than 60 days' notice to the other party
34
<PAGE>
to the Agreement, and may be terminated immediately upon the mutual written
consent of all parties to the Agreement.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, each Corporation and the Adviser/Manager have adopted
policies that restrict securities trading in the personal accounts of portfolio
managers and others who normally come into advance possession of information on
portfolio transactions. These policies comply, in all material respects, with
the recommendations of the Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the fiscal years ended March 31, 1997 and 1996, the
portfolio turnover rates for Value Trust were 10.5% and 19.6%, respectively; the
portfolio turnover rates for Total Return Trust were 38.4% and 34.7%,
respectively; the portfolio turnover rates for Special Investment Trust were
29.2% and 35.6%, respectively; and the portfolio turnover rates for American
Leading Companies were 55.7% and 43.4%, respectively. For the period October 1,
1996 (commencement of operations) to March 31, 1997, the annualized portfolio
turnover rate for Balanced Trust was 5.1%.
Under the Advisory Agreement with each Fund, each 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. Each Fund may not always pay the lowest
commission or spread available. Rather, in placing orders for a Fund each 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, each
fund's adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to each fund's adviser for its use, may
place orders with brokers who provide supplemental investment and market
research and securities and economic analysis and may pay to these brokers a
higher brokerage commission than may be charged by other brokers. Such services
include, without limitation, advice as to the value of securities; the
advisability of investing in, purchasing, or selling securities; advice as to
the availability of securities or of purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Such research and analysis may be useful to each fund's adviser in connection
with services to clients other than the Fund whose brokerage generated the
service. The Adviser's/LMCM's/Bartlett's fee is not reduced by reason of its
receiving such brokerage and research services.
From time to time each 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, each Fund generally deals with responsible primary market-makers unless
a more favorable execution can otherwise be obtained.
For the fiscal years ended March 31, 1997, 1996 and 1995, Legg Mason
received no brokerage commissions from Value Trust, no brokerage commissions
from Total Return Trust, and $[ ], $16,563 and $0, respectively, from Special
Investment Trust. Value Trust paid total brokerage commissions of $[ ], $347,670
and $397,268, respectively; Total Return Trust paid total brokerage commissions
of $[ ], $235,364
35
<PAGE>
and $360,860, respectively; and Special Investment Trust paid total brokerage
commissions of $[ ], $698,545 and $883,607, respectively, during the fiscal
years ended March 31, 1997, 1996 and 1995.
For the fiscal years ended March 31, 1997, 1996 and 1995, American
Leading Companies paid total brokerage commissions of $[ ], $61,067 and $75,165,
respectively. Legg Mason received no brokerage commissions from American Leading
Companies for the same periods.
For the period October 1, 1996 (commencement of operations) to March
31, 1997, Balanced Trust paid total brokerage commissions of $[ ]. Legg Mason
received no brokerage commissions from Balanced Trust for the same period.
Except as permitted by SEC rules or orders, each Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated persons as
principal. Each 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
each 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: (i) a Fund together with all other registered
investment companies advised by each fund's adviser, may not purchase more than
4% of the principal amount of the offering of such class or $500,000 in
principal amount, whichever is greater, but in no event greater than 10% of the
principal amount of the offering; and (ii) the consideration to be paid by a
Fund in purchasing the securities being offered may not exceed 3% of the total
assets of that Fund. In addition, a 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
Funds, unless the affiliate expressly consents by written contract. Each Fund's
Advisory Agreement expressly provides such consent.
Among the broker-dealers regularly used by each respective Fund during
the fiscal year ended March 31, 1997, Value Trust at that date owned shares of
the following parent companies: 1,654,000 shares of The Bear Stearns Companies,
Inc. at a market value of $43,411,000; Total Return Trust at that date owned
shares of the following parent companies: 407,000 shares of The Bear Stearns
Companies, Inc. at a market value of $10,677,000; Special Investment Trust at
that date owned shares of the following parent companies: 551,000 shares of The
Bear Stearns Companies, Inc. at a market value of $14,470,000; American Leading
Companies at that date owned shares of the following parent companies: 18,000
shares of J.P. Morgan & Co. Incorporated at a market value of $1,769,000; and
Balanced Trust at that date owned shares of the following parent companies:
6,000 shares of Salomon, Inc. at a market value of $289,000.
Investment decisions for each Fund are made independently from those of
other funds and accounts advised by the Adviser, LMCM or Bartlett. 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 FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of the Funds' shares pursuant to a
separate Underwriting Agreement with each 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.
36
<PAGE>
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
with principal offices at 200 Gibraltar Road, Horsham, Pennsylvania, may act as
a dealer for Navigator Shares pursuant to a Dealer Agreement with Legg Mason.
Neither Legg Mason nor Fairfield receives any compensation from the Fund for its
activities in selling Navigator Shares.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits the Fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. Payments are made
only from assets attributable to Primary Shares. Under the Plans, the aggregate
fees may not exceed an annual rate of each Fund's average daily net assets
attributable to Primary Shares as follows: 1.00% for Total Return Trust, Special
Investment Trust and American Leading Companies; 0.75% for Balanced Trust and
0.95% for Value Trust. Distribution activities for which such payments may be
made include, but are not limited to, compensation to persons who engage in or
support distribution and redemption of Shares, printing of prospectuses and
reports for persons other than existing shareholders, advertising, preparation
and distribution of sales literature, overhead, travel and telephone expenses,
all with respect to Primary Shares only.
The Plan was most recently approved by the shareholders of Value Trust
on July 20, 1984 and on July 17, 1986 for both the Total Return Trust and
Special Investment Trust. The Plan was approved by Legg Mason Fund Adviser,
Inc., as sole shareholder of American Leading Companies, on August 2, 1993. The
Plan has been amended, effective July 1, 1993, to make clear that, of the
aggregate 1.00% fees with respect to Total Return Trust, Special Investment
Trust and American Leading Companies, 0.75% is paid for distribution services
and 0.25% is paid for ongoing services to shareholders; with respect to Balanced
Trust, 0.50% is paid for distribution services and 0.25% is paid for ongoing
services to shareholders; and with respect to Value Trust, 0.70% is paid for
distribution services and 0.25% is paid for ongoing services to shareholders.
The amendments also specify that each Fund may not pay more in cumulative
distribution fees than 6.25% of total new gross assets attributable to Primary
Shares, plus interest, as specified in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD"). Legg Mason may pay
all or a portion of the fee to its investment executives. Continuation of the
Plans was most recently approved on November 15, 1996 by the Board of Directors
of each respective Fund including a majority of the directors who are not
"interested persons" of each Fund as that term is defined in the 1940 Act and
who have no direct or indirect financial interest in the operation of the Plan
or the Underwriting Agreement ("12b-1 Directors").
With respect to Primary Shares, Legg Mason has also agreed to waive its
fees for Total Return Trust, American Leading Companies and Balanced Trust as
described under "The Funds' Investment Adviser/Manager."
In approving the continuation of the Plan, in accordance with the
requirements of Rule 12b-1, the directors determined that there was a reasonable
likelihood that each Plan would benefit the respective 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 outweighed 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 each Fund's Primary Shares would be likely to
maintain or increase the amount of compensation paid by that Fund to the
Adviser/Manager.
In considering the costs of the Plans, the directors gave particular
attention to the fact that any payments made by a Fund to Legg Mason under the
Plan would increase the Fund's level of expenses in the amount of such payments.
Further, the directors recognized that the Adviser/Manager would earn greater
management fees if a Fund's assets were increased, because such fees are
calculated as a percentage of a 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
Plans were implemented.
37
<PAGE>
Among the potential benefits of the Plans, 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
each Fund's Primary Shares and to maintain and enhance the level of services
they provide to each Fund's Primary Class shareholders. These efforts, in turn,
could lead to increased sales and reduced redemptions, eventually enabling each
Fund to achieve economies of scale and lower per share operating expenses. Any
reduction in such expenses would serve to offset, in whole or in part, the
additional expenses incurred by each Fund in connection with its Plan.
Furthermore, the investment management of each 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.
Each Plan will continue in effect only so long as it is approved at
least annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. Each 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 a Plan that would materially increase the
distribution cost to a 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, each Plan provides that Legg Mason will
submit to the Fund's Board of Directors, and the directors will review, at least
quarterly, a written report of any amounts expended pursuant to the Plan and the
purposes for which expenditures were made. In addition, as long as the Plan is
in effect, the selection and nomination of the Independent Directors will be
committed to the discretion of such Independent Directors.
For the fiscal years ended March 31, 1997, 1996 and 1995, Value Trust
paid Legg Mason $[ ], $11,760,195 and $8,917,520, respectively in distribution
and service fees under the Plan, from assets attributable to Primary Shares. For
the same fiscal years, Total Return Trust paid Legg Mason $[ ], $2,297,095 and
$1,964,257, respectively; Special Investment Trust paid Legg Mason $[ ],
$6,955,948 and $5,917,557, respectively; and American Leading Companies paid
Legg Mason $[ ], $686,826 and $575,436, respectively, in fees under the Plan.
For the period October 1, 1996 (commencement of operations) to March 31,1 997,
Legg Mason waived all distribution and service fees for Balanced Trust.
During the year ended March 31, 1997, Legg Mason incurred the following
expenses with respect to Primary Shares:
<TABLE>
<CAPTION>
Special American
Total Return Investment Leading Balanced
Value Trust Trust Trust Companies Trust
------------------ ------------------ ------------------ ------------------ -----------------
<S> <C>
Compensation to
sales personnel
Advertising
Printing and mailing
of prospectuses to
prospective
shareholders
Other
------------------ ------------------ ------------------ ------------------ -----------------
Total expenses
================== ================== ================== ================== =================
</TABLE>
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Primary
Shares.
38
<PAGE>
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of each Fund's assets. Boston Financial
Data Services, P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and
dividend-disbursing agent, and administrator of various shareholder services.
Legg Mason 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. Each Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative costs.
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036, serves as counsel to each Fund.
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS
[ ], 217 East Redwood Street, Baltimore, Maryland
21202, has been selected by the Directors to serve as independent accountants
for Value Trust, Total Return Trust and Special Investment Trust. [
] One North Charles Street, Baltimore, Maryland 21201, has been selected by
the Directors to serve as independent auditors for American Leading Companies
and Balanced Trust.
FINANCIAL STATEMENTS
To be filed by amendment.
39
<PAGE>
Appendix A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS:
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca-Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS:
AAA-This is the highest rating assigned by S&P to an obligation and
indicates an extremely strong capacity to pay principal and interest.
40
<PAGE>
AA -Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
D-Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
41
<PAGE>
TABLE OF CONTENTS
PAGE
Additional Information About
Investment Limitations and Policies
Additional Tax Information
Additional Purchase and Redemption
Information
Valuation of Fund Shares
Performance Information
Tax-Deferred Retirement Plans
The Funds' Directors and Officers
The Funds' Investment Adviser/Manager
Portfolio Transactions and Brokerage
The Funds' Distributor
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent
The Funds' Legal Counsel
The Funds' Independent Accountants/Auditors
Financial Statements
Appendix A
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by any Fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by the
Funds or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
LEGG MASON WOOD WALKER, INCORPORATED
- ------------------------------------------------------------------------------
111 SOUTH CALVERT STREET
P.O. BOX 1476
BALTIMORE, MARYLAND 21203-1476
(410)539-0000 (800)822-5544
42
<PAGE>
Legg Mason Value Trust, Inc.
Part C. Other Information
<TABLE>
<CAPTION>
Item 24. Financial Statements and Exhibits
<S> <C>
(a) Financial Statements: to be filed by amendment
(b) Exhibits
(1) (a) Charter1/
(b) Amendment to Charter (dated April 24, 1992)6/
(c) Articles Supplementary (dated August 1, 1994)8/
(2) (a) By-Laws as Amended and Restated2/
(b) Amendment to By-Laws (effective February 19, 1992)6/
(3) Voting Trust Agreement - none
(4) Specimen Security -- not applicable
(5) (a) Investment Advisory and Management Agreement4/
(6) (a) Underwriting Agreement9/
(b) Dealer Agreement with respect to Navigator Shares9/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement1/
(a) Addendum dated February 9, 19882/
(b) Addendum dated February 25, 19882/
(c) Addendum dated August 12, 1988 -- to be filed
(d) Addendum dated May 28, 1996 -- to be filed
(9) Transfer Agency and Service Agreement4/
(10) Opinion of Counsel3/
(11) Other opinions, appraisals, rulings and consents - Accountant's
consent -- to be filed
(12) Financial statements omitted from Item 23 - none
(13) Agreements for providing initial capital4/
(14) (a) Prototype IRA Plan4/
(b) Prototype Corporate Simplified Employee
Pension Plan4/
(c) Prototype Keogh Plan4/
(15) (a) Plan pursuant to Rule 12b-19/
(16) Schedule for Computation of Performance Quotations
-- to be filed
(17) Financial Data Schedule -- to be filed
(18) Plan Pursuant to Rule 18f-3 -- none
</TABLE>
1/Incorporated herein by reference to corresponding Exhibit of the initial
Registration Statement, SEC File No. 2-75766.
2/Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 8 to the initial Registration Statement, SEC File No. 2-75766.
3/Incorporated herein by reference to corresponding Exhibit of Pre-Effective
Amendment No. 1 to the initial Registration Statement, SEC File No. 2-75766.
<PAGE>
4/Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 12 to the initial Registration Statement, SEC File No. 2-75766.
5/Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 8 to the initial Registration Statement of Legg Mason Income
Trust, Inc., SEC File No. 33-12092, filed April 28, 1991.
6/Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 16 to the initial Registration Statement, SEC File No. 2-75766.
7/Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 17 to the initial Registration Statement, SEC File No. 2-75766.
8/Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 19 to the initial Registration Statement, SEC File No. 2-75766.
9/Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 22 to the initial Registration Statement, SEC File No. 2-75766.
Item 25. Persons Controlled By or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class (as of July 15, 1997)
- -------------- ---------------------
Shares of Capital Stock,
($.001 par value)
Legg Mason Value Trust, Inc. -
Primary Shares
Navigator Value Trust
Item 27. Indemnification
This item is incorporated by reference to Item 27 of Part C of
Post-Effective Amendment No. 1 to Registration Statement, SEC File No. 2-75766.
Item 28. Business and Other Connections of Manager and Investment
Adviser
I. Legg Mason Fund Adviser, Inc. ("Adviser"), the Registrant's investment
adviser, is a registered investment adviser incorporated on January 20, 1982.
The Adviser is engaged primarily in the investment advisory business. The
Adviser serves as investment adviser or manager to seventeen open-end investment
companies or portfolios and as investment consultant for one closed-end
investment company. Information as to the officers and directors
<PAGE>
of the Adviser is included in its Form ADV filed on June 28, 1996 with the
Securities and Exchange Commission (registration number 801-16958) and is
incorporated herein by reference.
Item 29. Principal Underwriters
(a) Legg Mason Cash Reserve Trust
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal
underwriter, Legg Mason Wood Walker, Incorporated ("LMWW").
<TABLE>
<CAPTION>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
<S> <C>
Raymond A. Mason Chairman of the Chairman of the
Board Board and Director
John F. Curley, Jr. Vice Chairman President and
of the Board Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice Director
President and
Director
Robert A. Frank Executive Vice None
<PAGE>
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
<PAGE>
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Seth J. Lehr Senior Vice None
1735 Market St. President
Philadelphia, PA 19103
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
<PAGE>
Cheryl Allen Vice President None
221 West Sixth St.
Austin, TX 78701
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
John R. Gilner Vice President None
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Anne S. Morse Vice President None
1735 Market St.
Philadelphia, PA 19103
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Carl W. Riedy, Jr. Vice President None
<PAGE>
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
F. James Tennies Vice President, None
Asst. Secretary &
Asst. General Counsel
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
</TABLE>
* All addresses are 111 South Calvert Street, Baltimore, Maryland 21202,
unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not
an affiliated person of the Registrant or an affiliated
person of such an affiliated person.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services
None.
<PAGE>
Item 32. Undertakings
Registrant hereby undertakes to provide each person to whom a
prospectus is delivered with a copy of its latest annual report to shareholders
upon request and without charge.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore and State of Maryland, on the 26 th day of
May, 1997.
LEGG MASON VALUE TRUST, INC.
by:/s/ John F. Curley, Jr.
------------------------
John F. Curley, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 23 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/Raymond A. Mason Chairman of the Board May 26, 1997
- --------------------------------- and Director
Raymond A. Mason
/s/ John F. Curley, Jr. President and Director May 26, 1997
- ---------------------------------
John F. Curley, Jr.
/s/ Edward A. Taber, III Director May 26, 1997
- ---------------------------------
Edward A. Taber, III
/s/ Richard G. Gilmore* Director May 26, 1997
- ---------------------------------
Richard G. Gilmore
/s/ Charles F. Haugh* Director May 26, 1997
- ---------------------------------
Charles F. Haugh
/s/ Arnold L. Lehman* Director May 26, 1997
- ---------------------------------
Arnold L. Lehman
/s/ Jill E. McGovern* Director May 26, 1997
- ---------------------------------
Jill E. McGovern
/s/ T. A. Rodgers* Director May 26, 1997
- ---------------------------------
T.A. Rodgers
/s/ Marie K. Karpinski Vice President May 26, 1997
- --------------------------------- and Treasurer
Marie K. Karpinski
</TABLE>
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated
May 18, 1992, incorporated herein by reference to Post-Effective Amendment No.
16, SEC File No. 2-75766, filed June 2, 1992.
