<PAGE>
Semi-Annual Report
September 30, 1999
Legg Mason
Value Trust, Inc.
Special Investment Trust, Inc.
Total Return Trust, Inc.
Navigator Class
[LOGO APPEARS HERE]
The Art of Investing/SM/
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To Our Shareholders,
The following table summarizes key statistics for the Navigator Class of
shares of the Legg Mason Value Trust, Special Investment Trust and Total Return
Trust, as of September 30, 1999:
<TABLE>
<CAPTION>
Total Returns/1/
-----------------------------------------
3 Months 9 Months 12 Months
---------------- --------- ----------
<S> <C> <C> <C>
Value Trust -9.5% +7.4% +46.2%
Lipper Large-Cap Growth Funds/2/ -3.6% +8.8% +37.9%
Standard & Poor's 500 Composite Index -6.3% +5.4% +27.8%
Special Investment Trust -2.9% +11.4% +56.5%
Lipper Mid-Cap Core Funds/2/ -3.7% +5.3% +30.8%
Russell 2000 Index -6.3% +2.4% +19.1%
Total Return Trust -10.9% -3.2% +10.5%
Lipper Multi-Cap Value Funds/2/ -9.6% +0.0% +16.4%
</TABLE>
As the table indicates, over the past twelve months, Value Trust and Special
Investment Trust have significantly outperformed the average of funds in their
Lipper categories as well as relevant stock market indices, although Value
Trust's performance in the September quarter fell short of those benchmarks.
Total Return Trust's performance has trailed that of the average fund in its
Lipper category during the three comparison periods. Detailed comments on each
fund appear in the portfolio managers' comments on the following pages.
With less than three months to go until the end of the century, attention
continues to focus on the Year 2000 issue. As you know, the Year 2000 issue is a
computer programming problem that affects the ability of computers to correctly
process dates of January 1, 2000, and beyond. We believe the Year 2000 date
change will have no adverse impact on Legg Mason's ability to service its
clients. We are on target to complete this important project. Industry-wide
testing sponsored by the Securities Industry Association ("SIA") was conducted
in March and April of 1999, with Legg Mason, its brokerage subsidiaries and
primary vendors actively participating and achieving positive results.
- --------------
/1/ Total return measures investment performance in terms of appreciation or
depreciation in net asset value per share plus dividends and any capital
gain distributions. It assumes that dividends and distributions were
reinvested at the time they were paid.
/2/ Lipper Analytical Services, Inc. recently revised its methods of
categorizing mutual funds. Value Trust is now included in Lipper's "Large-
Cap Growth Fund" category (funds which normally invest in larger-
capitalization issues with earnings expected to grow significantly faster
than earnings of stocks included in Standard & Poor's 500 stock index).
Special Investment Trust is included in the "Mid-Cap Core Fund" category
(funds which normally invest in mid-sized capitalization issues, with wide
latitude in the companies in which they invest). Total Return Trust is
included in the "Multi-Cap Value Fund" category (funds which normally invest
in issues with a variety of market capitalization sizes, which are
considered to be undervalued relative to stocks in Standard & Poor's 500
stock index).
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Legg Mason's Year 2000 Project has four phases. The Inventory Phase and the
Assessment Phase are already complete. The Remediation Phase and the Testing
Phase are currently underway and on target. Renovation and replacement of
existing internal systems, where necessary, is also complete, and all of our
critical vendors have certified their Year 2000 compliance. Most noncritical
vendors have also certified their Year 2000 compliance, and we expect the
remaining vendors to certify their compliance shortly. Although individual
customer testing will not be available, we have successfully tested models
representing all forms of accounts maintained at Legg Mason, including the
Funds' shareholder accounts.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
October 27, 1999
2
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Portfolio Managers' Comments
Third Quarter 1999
Market Commentary
"If you can look into the seeds of time and say which grain will grow and
which will not, speak then to me . . . ."
Macbeth
"It is wrong always, everywhere, and for everyone to believe anything upon
insufficient evidence."
W.K. Clifford
The Ethics of Belief
". . . [A] rule of thinking which would absolutely prevent me from
acknowledging certain kinds of truths if those . . . truths were really there,
would be an irrational rule."
William James
The Will to Believe
Amazon and the Ethics of Belief
One of the most common questions we get is, "How do you value Internet
stocks?" This question is not usually asked of momentum investors, sector
rotators, thematic investors, or even garden variety growth stock investors, all
of whom employ stock selection techniques that ignore, or at least minimize,
valuation. It is a legitimate question, though, for value investors whose
strategy rests on the purchase of stocks whose price is below some calculation
of value.
Some would claim that you can't value Internet stocks, most of which have
minimal sales, no earnings, negative cash flow, and unknown business prospects.
These critics say the Internet is a classic bubble, a psychological phenomenon
born of irrational enthusiasm for the economic potential of online activity.
Such things end badly, and those who are participating in the madness are either
dupes or gamblers betting against the odds. In any case, it is no place for the
value investor.
Others are not so dogmatic, but point out that the early stage nature of these
businesses precludes analysis based on traditional metrics such as price to
earnings, book value, or cash flow. Companies which have reached the stage where
they are making money, such as Yahoo or America Online, sport market
capitalizations larger than any number of great American businesses including
General Motors, Caterpillar and Sears. Applying standard metrics to these "new
economy" companies does not yield anything approaching reasonable valuations. On
these bases they look wildly overpriced (and many good investors believe they
are).
Traditional metrics, when they work at all, work best with traditional
businesses. The value of these analytical tools is usually a function of the
historical data supporting their effectiveness. We have a lot of data about how
the market has valued long-standing businesses whose economics are well
understood, for example, foods and beverages, the big drug companies, retail
stores, and newspapers. We know which groups have performed well early in an
economic cycle, which have been the most recession resistant, what historically
attractive and unattractive valuations have been, and how current profitability
compares with past results. All of this is absent from most Internet-related
businesses, leaving the value investor at an apparent disadvantage to others who
employ less rigorous methods to select securities.
It's important to distinguish this situation from the related issue of valuing
technology companies. Many value investors have chosen to ignore technology
companies or to maintain minimal exposure
3
<PAGE>
to them, despite long data trails and compelling evidence that this sector has
had the ability to create substantial, long-lasting shareholder wealth. The
reasons typically given are that technology is difficult to understand, that it
changes rapidly, and that the stocks are usually too expensive according to
standard valuation methods. All of these reasons are weak.
Ben Graham once denied that reward and risk were correlated in the stock
market. (He was wrong.) He correctly said that reward was, or should be, related
to the amount of work one was willing to do. If technology is difficult, it is
not incomprehensible. Investors who rule out the largest sector of the stock
market, and the most important driver of economic growth and progress, because
it takes work to figure it out have little to cavil about when others get the
rewards. Although technology changes reasonably rapidly, it doesn't follow that
such change is random or unpredictable. In many cases, it follows well-defined
paths. The economics of technology and information-based businesses have been
explored by economists such as Brian Arthur and Hal Varian. Their work is
accessible to anyone who will take the time to study it.
Moreover, technology companies often create change and instability in other
unrelated businesses that are not themselves involved in technology. Amazon is
roiling the traditional book business; online brokers have forced even Merrill
Lynch to dramatically alter long-standing business practices. Ignoring
technology often leads to making bad investment decisions by not understanding
the risks to your non-technologically based, but vulnerable, businesses. Warren
Buffett found the pricing structure and demand dynamics of the encyclopedia
business totally upended by Microsoft's Encarta and CD-ROMs. Nobody wants the
traditional World Book anymore, a business he thought had an enduring franchise.
It is true that some of the best technology companies have rarely looked
attractive on traditional valuation methods, but that speaks more to the
weakness of those methods than to the fundamental risk-reward relationships of
those businesses. Had we understood valuation better we would have owned
Microsoft and Cisco. Microsoft has gone up about 1% per week on average since it
has been public. Companies don't outperform year in and year out for over a
decade unless they were mispriced to begin with, that is, undervalued. Paul
Johnson, a prominent networking analyst, wrote an open letter to Warren Buffett
a few years ago showing how Cisco met the criteria Buffett has so often
enumerated for his investments. There is no evidence Buffett read the letter,
but we read it and didn't buy Cisco. Johnson was right and we were wrong; not
because the stock went up a lot, but because it was significantly undervalued
and we missed that.
Undervaluation is not determined by a stock's price in relation to existing or
trailing earnings, book value, or cash flow, although these metrics may be
evidence of a price that is below intrinsic value. Undervaluation is determined
by the relation between a stock price and the present value of the free cash the
underlying business will generate over one's forecast time horizon.
The past is known, and the future is not, and the only guide to the future is
the past. That is why historical price-to-value relationships play such a
dominant role in most value investors' strategies. If one invested backward,
instead of forward, or if the world never changed, those past relationships
would be dispositive. One would not have to think about, analyze, or assess the
probabilities of change in order to generate satisfactory investment returns.
The stock market is a discounting mechanism. Its prices reflect the expected
value of the future, a future which at best will resemble, but not replicate,
the past. Potentially disruptive technologies such as the Internet may change
long-established economic relationships, providing an opportunity for those who
correctly discern the changing economic patterns before they are reflected in
market prices.
4
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Portfolio Managers' Comments -- Continued
This, of course, is fiendishly difficult. Each individual possesses only the
tiniest fraction of the information available to the market. The regulators try
to assure that no one has material information before anyone else. Large changes
result in large opportunities for profit, attract large interest and often
generate enthusiasms that outrun prudence. In these cases, risk far outstrips
the probability of reward. Such appears to be the case with most Internet
securities today. Most, not all.
The value of the publicly traded Internet securities is just over $500
billion, about 10% more than the market value of Microsoft, and about 6% of GDP.
It seems reasonable that if the Internet really does "change everything," as its
enthusiasts assert, the investment opportunity is probably greater than a single
digit percent of GDP.
The market believes it knows where a lot of the opportunity is: the combined
market value of AOL, Yahoo, and Amazon is about 40% of the total value of all
Internet stocks. Two questions come to mind: first, do these values overstate or
understate the intrinsic value of the businesses; second, how would you know?
The second question is logically prior to the first. Answering it is easy in
theory. If the present value of, e.g., Amazon's future free cash flow is greater
than $30 billion, Amazon is undervalued; if not, it is overvalued. How should
one go about figuring this out?
W.K. Clifford, and many others, would say you shouldn't. Clifford, a brilliant
mathematician who died at 34 in 1879, argued that making decisions without
adequate justification was not just ill-advised, but wrong. If Clifford were a
portfolio manager, he would argue that there is insufficient evidence on which
to make a judgment about Amazon. Its business model is unproven (some would say
unknown); it does nothing but report losses. The book business is mature, slow
growing, and fiercely competitive. Amazon's new initiatives, into toys,
electronics, and online auctions, are certain to add to the losses through
start-up costs. The company is spending heavily to build warehouses, which carry
both capital costs and execution risk. The new zShops effort, while promising,
further fragments management's attention. Finally, the value of Amazon not only
exceeds that of Borders by 30 times, and Barnes and Noble by almost 20 times, it
is greater than that of Sears, Federated, Saks, and K Mart combined! Such
evidence as there is would indicate one's efforts to find value are better
employed elsewhere.
Another 19th century thinker, William James, wrote an essay to counter
Clifford called "The Will to Believe." James argued in this seminal work that in
many cases one was justified in believing something well in advance of what
others may consider sufficient evidence. His argument carried the day
philosophically, which is why no one reads Clifford anymore, while every
competently trained student of the theory of knowledge has read and assimilated
James.
James's argument was rich and detailed, but one of his points apposite to
Amazon was that the level of evidence one needs to believe something is a
function of how important it is not to be wrong. The evidence bar will be set
higher the more important it is not to make a mistake. If being right has high
value, and being wrong has low value, then the evidence needed for belief can be
a lot lower since being wrong is not very costly, and being right has a high
payoff.
This is why people play the lottery, why they buy insurance, and why both are
reasonable. Some insurance events are so unlikely paying anything is usually not
advised, for example, flight insurance. The lottery always has more players the
higher the payoff, since different people have different thresholds for betting
on unlikely events.
5
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With Amazon, we believe the payoff for being right is high. We arrive at this
view by developing a model of each of Amazon's businesses, adjusting for capital
employed and time to maturity. We project free cash flows using a variety of
scenarios, and try to assess the relative probabilities of each. This gives a
range of possible values for the business. We then try to discern which scenario
most closely fits the current evidence. That gives the most probable current
intrinsic value.
The most you can lose is your purchase price. What is the threshold of
evidence necessary to make such a bet? How will you know if you're likely to win
or lose as Amazon's business develops? These are all epistemological questions.
James notes that for one type of thinker, the crux of such decisions is in their
principles or origin, while for another the importance is in the outcome.
One type of value investor requires the authority of the past in order to make
a bet on the future. Like Clifford, they have a high threshold of evidence and
wish to avoid the inevitable errors that attend trying to assess the expected
value of the future. The theory of value would indicate that all of an asset's
value derives from the future. Avoiding the analysis of possible futures, their
probabilities and expected payoffs, may constitute the greatest error of all.
Bill Miller, CFA
October 15, 1999
DJIA 10019.71
-------------------
Value Trust
In the third calendar quarter, the U.S. stock market declined, as did our
portfolio. The cumulative total returns are summarized below:
<TABLE>
<CAPTION>
Third Year-
Quarter to-Date 1 Year 3 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Value Trust -9.46% +7.36% +46.17% +155.08%
Lipper Large-Cap Growth Funds -3.64% +8.75% +37.86% +96.48%
Lipper Diversified Equity Funds -5.37% +5.23% +27.19% +57.19%
S&P 500 Composite Index -6.25% +5.36% +27.80% +95.73%
Dow Jones Industrial Average* -5.39% +13.97% +34.01% +85.18%
</TABLE>
- --------------
*Dividends reinvested daily.
Our results, as you may know, bounce around quarter to quarter and don't
correlate terribly closely with those of the major indices, nor should they.
Investors who want index-type results can always buy index funds. We hope to
provide better long-term returns through active management. Although we have
been able to achieve that over the life of the Fund, past results are no
guarantee that we will succeed in our objective going forward.
This is the second consecutive quarter we have lagged the major indices after
handily exceeding them the prior two quarters. Deconstructing near-term results
has little predictive value in our opinion; the market is too efficient and the
results of long-term investment decisions are only evident long-term.
6
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Portfolio Managers' Comments -- Continued
The sensitivity of returns to initial measuring points is clear by comparing
our nine-month gain of 7.36% to our one-year return of 46.17%. Just looking at
nine months, one could say we were moderately ahead of the market and the
average diversified equity fund, but trailed the Dow, and that our absolute
returns were modest. Move the starting point back 90 days and our results are
extremely strong on both a relative and an absolute basis, which speaks to both
how good our returns were in the fourth quarter of last year, and how depressed
the market was.
We believe it is extremely important for shareholders to have realistic
expectations about what might constitute reasonable returns from investing in
stocks. Since good data have been available, roughly beginning in the mid-1920s,
stocks have returned about 7% per year after inflation. They have also returned
about 350 basis points/1/ more than Treasury bonds measured from similar
beginning valuations./2/
Inflation expectations are now running about 2%, calculated by the difference
between Treasuries and the Treasury inflation-indexed bonds. With 30-year
Treasury bonds yielding 6.25%, both measurements would imply a projected average
long-term return in the 9% range going forward, assuming no decline in the
market's average price earnings ratio. This is not a trivial assumption, since
that ratio hovers around all-time highs, and is substantially above the long-
term average of around 15x.
Returns of 9% are dramatically below what the Value Trust Primary Class has
achieved since its inception in 1982. That starting point was fortuitous, since
equity valuations were depressed by high inflation and recession. Today low
inflation, record profits and profitability have combined to produce near-record
prices and valuations. (The Primary Class and Navigator Class of shares have
different fees and expenses. Please refer to page 13 for information.)
This is not to suggest that we are bearish, or even cautious about the
opportunities in stocks. We think stocks are likely to continue to provide the
highest rates of return among the major asset classes. It's just that the
nominal value of those returns is likely to be considerably lower than what has
been earned on average since the early 1980s.
This year the market's returns have been dominated by the big technology
stocks, such as those in the NASDAQ 100, and the snap-back in the cyclicals from
the deeply oversold conditions of late last year. The NASDAQ 100 is up over 35%
this year, almost seven times the return of the S&P 500, which itself includes
the major contributors to the NASDAQ. Most chemical, aluminum and paper stocks
have also handily outperformed, as have most of the big oil, gas and energy
service names.
Looking at the S&P 500 as a whole, over 60% of the stocks are down for the
year. The median return in the index this year is -5.9%. The market remains
quite narrow. We are not complaining about this; as one strategist noted, the
market is a meritocracy, not a democracy. Our job is to identify attractive
long-term investment opportunities; it is not to try to guess near-term stock
price movements.
We have solid exposure to technology, none to deep cyclicals, and heavy
exposure to financials, a group whose long-term performance has been splendid,
but which has struggled this year as interest rates have risen. Until interest
rates peak, financials are likely to remain under pressure. Since the beginning
of the year, the NYSE financial index has declined 10.3%, creating a substantial
drag on our results. Financials remain a core holding, as we believe they have
faster growth, higher returns on equity, and much lower valuations than the
market as a whole. Those characteristics are why the group has outperformed over
the decade, and why we are optimistic about its continued long-term performance.
- --------------
/1/ 100 basis points = 1%.
/2/ This historical difference in the returns of stocks relative to bonds, known
as the equity risk premium, is generally regarded as the amount necessary to
compensate investors for the greater perceived risk of owning stocks.
7
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We don't have any special insight into when the market weakness that began
several months ago will end. Rising energy and gold prices, coupled with
continued strong economic growth, have raised concerns about growing
inflationary pressure. The Fed has raised interest rates and threatens to do so
again. These factors have rightly dampened investor enthusiasm, which is
unlikely to reverse until these conditions change.
As equity prices decline, opportunities emerge, so we are not distressed at
this turn of events. We are changing some of the relative weightings in the
portfolio to try to optimize future returns and are always on the lookout for
new names.
We added Amazon to the portfolio in the quarter, a subject discussed more
fully elsewhere. We sold Hilton, Mirage, and Western Digital. Hilton made what
we believed was a poor acquisition in buying Promus. They spent a lot and paid
fair value; we believe the deal is unlikely to substantially add to value.
Mirage's results continue to lag those of other Las Vegas operators, and we were
disturbed by the departure of CFO Dan Lee, who attempted to provide much needed
financial discipline. Western Digital was a small position whose turnaround did
not materialize. The resources could be better employed elsewhere.
As always, we appreciate your support and welcome your comments.
Bill Miller, CFA
October 15, 1999
DJIA 10019.71
-------------------
Special Investment Trust
Our cumulative results for the various periods ended September 30, 1999, were
as follows:
<TABLE>
<CAPTION>
Third Year-
Quarter to-Date 1 Year 3 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Special Investment Trust -2.93% +11.38% +56.45% +85.75%
Lipper Mid-Cap Core Funds -3.66% +5.28% +30.78% +41.35%
Lipper Diversified Equity Funds -5.37% +5.23% +27.19% +57.19%
S&P 500 Composite Index -6.25% +5.36% +27.80% +95.73%
Russell 2000 -6.32% +2.37% +19.07% +28.43%
</TABLE>
Special Investment Trust outperformed all relevant benchmarks for the third
quarter, including the Lipper index of other mid-cap funds, the Lipper index of
all diversified equity funds, the Russell 2000 index of smaller companies, and
the S&P 500 index of larger companies. We are also beating these benchmarks for
the year-to-date and one-year periods. Looking longer term, we outperformed the
Russell 2000 and the Lipper indices of mid-cap funds and of all diversified
equity funds over the three-year time frame, though we trail the S&P 500 for
this period.
Our performance in the quarter was led by three of our top six holdings,
Gateway, Symantec and Orion Capital. Orion Capital agreed to be acquired by
Royal & Sun Alliance for $50 per share. Both Gateway and Symantec are in the
midst of noticeable fundamental improvement as a result of changes in
management. Now that the two new management teams have begun to show results, we
believe the market is starting to recognize the value inherent in each company's
brands, products, and competitive positions.
8
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Portfolio Managers' Comments -- Continued
Other leaders in the Fund for the third quarter included long-time holdings
Cell Genesys, Cabletron, and Cott Corporation, as well as two of our newer
holdings, TALK.com, purchased in the second quarter, and our Amazon.com
convertible preferred bonds, purchased in the first quarter.
We thought it would be useful in addition to our usual comments on individual
companies to look at how we structure and conceptualize the portfolio as a
whole. The impact of that thought process is as critical to our returns as the
description of our individual holdings. So, this quarter we're going to address
three portfolio-oriented issues: the importance of relative weightings, the
effect of correlation amongst the different names, and the limitations of
aggregate measures.
Our returns do not depend solely on our identifying undervalued companies that
we expect to outperform over a long-term time horizon. It is also important that
we maximize the impact of our winners and minimize our errors. Not every one of
our holdings is going to work out as we think. The key is that we need to have a
larger percent invested in the ones that work than in the ones that don't. While
this sounds very obvious, it is often not well understood. As George Soros once
remarked, it is not how often you are right or wrong, what is important is how
much money you make when you are right less how much you lose when you are
wrong. There are many times that people ask us how we can own a certain name or
why did this or that go down. The answer, simply, is that sometimes we're wrong
or the timing of events does not work to our advantage. However, that is why we
have a portfolio of companies, not just one or two. Our effort is focused on
getting the largest percentage of the Fund into names where we are right.
This is also why we're reluctant to talk too much about a single one of our
ideas. Individuals may try to take one or two of our ideas and buy them instead
of the Fund or instead of a properly diversified portfolio. While sometimes this
may work out, often it does not. Many times, an investor will put a far greater
percent of their net worth in a name than we would, so any negative outcomes are
felt more severely.
Another interesting portfolio issue is what the academics call correlation,
which can magnify or lessen our exposure to certain events. For each investment,
circumstances or trends need to be in place or certain events need to happen in
order for our analysis to be correct. We call these value drivers. For some, our
probabilistically-predicted outcomes may depend on the economic environment, for
others on the development (or continuation) of a particular technology or
consumer market. Our goal in structuring the portfolio is to have a diversity of
value drivers. As an extreme example, a portfolio of twenty companies may move
as one if every one of those companies' success depends on one trend, such as
the demand for personal computers. The entire portfolio would suffer if
assumptions about the PC market turn out to be wrong, with no offsetting upside
from other securities driven by other trends. Although we are looking for the
most attractive individual companies overall, given similar risk/return
characteristics, risk-adjusted returns in this example are enhanced by adding a
company in a sector unrelated to personal computers.
Within the Fund, we have a diversity of value drivers. For example, within our
technology holdings there are many similar and opposing crosscurrents. AOL's
value is mainly driven by the emergence of the Internet as a mass market, and
that emergence is in turn driven partly by the continuing penetration of the
personal computer into U.S. households. However, AOL could also succeed
extremely well if consumers' preferred method of accessing the Internet switched
to cell phones, televisions and other dedicated appliances. Gateway, a consumer
PC provider, has some value drivers in common with AOL, but would most likely be
disadvantaged if consumers moved from PCs to other appliances for Internet
access. So, while on the surface it seems AOL and Gateway have their value tied
to the same
9
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trends, there are many nuances that could cause them to behave differently.
Other holdings within the technology sector have further differences in value
drivers. For some holdings undergoing restructuring, such as Micron Electronics,
Sybase and Silicon Graphics, outcomes depend partly on management and expense
control. Others have new products or markets emerging, such as Cabletron and
Symantec. There are examples like this throughout the Fund, both within and
between industry groups.
The third angle on portfolios we'll discuss is what we call the fallacy of
aggregation. A portfolio is an aggregate, and the characteristics of the
individual holdings may not be the same as those of the aggregate. To understand
and analyze our portfolio, we look at the independent securities and how they
interact with each other, not just at the aggregate portfolio statistics. These
statistics often are not very useful, and sometimes are even misleading. This is
partly why we do not use portfolio statistics like P/E to describe our
investment style. While we have detailed many times before why a P/E ratio is
not necessarily indicative of the value of an investment, let's leave that
argument aside momentarily. In analyzing a portfolio, an aggregate measure
cannot be used as it would be used to analyze a single security. Often just the
math itself is misleading. For example, a manager may trumpet that his or her
fund's P/E is only 15x. This may be interpreted as a sign that the portfolio is
undervalued, assuming for now that a stock trading at 15x is undervalued.
However, there are many possible combinations that can create a portfolio with a
P/E of 15x, and each would act differently. A portfolio with a 15x P/E could be
a series of stocks each with a P/E of exactly 15x, or it may be half in stocks
with P/Es of 25x and half in stocks with P/Es of 5x, or it could hold a
continuum of P/Es from very low to very high. The aggregate P/E is not
illustrative of the portfolio at all, and a far more complex representation of
what the manager holds is necessary to demonstrate whether it is or is not a
collection of undervalued companies that has a likelihood of outperforming over
time.
We added one security in the quarter, Manpower, Inc. Manpower is the second
largest temporary staffing supplier in the world. The company has recently had
low margins and fairly low revenue growth due to a large exposure to the poor
economy in France and some bad judgment on the part of management. There has
also been a general dislike for staffing companies in the market, so the
company's stock price was down to levels not seen since 1994. However, they
installed a new CEO earlier this year who is looking at the business from a
return on capital standpoint. In addition, Manpower's French business and the
French economy as a whole have both begun to improve, the company is buying back
shares and improving their cash flow characteristics, and there is tremendous
operating expense leverage. Though up 35% from our purchase price, we continue
to believe the company is undervalued on a multi-year basis.
We eliminated four positions in the quarter. General Nutrition, a position we
established in the first quarter, was taken over by the Dutch vitamin company
Royal Numico. We sold three small positions, Laser Mortgage, Mego Financial and
the ICO Global Bonds. All three represented positions of less than a half
percent of the Fund. We intend to continue to work toward eliminating very small
positions in order to concentrate our efforts and capital into the names where
our confidence is high and our analysis can make more of a difference to the
overall performance.
As always, we appreciate your support and welcome your comments.
Lisa O. Rapuano, CFA
Bill Miller, CFA
October 15, 1999
DJIA 10019.71
10
<PAGE>
Portfolio Managers' Comments -- Continued
Total Return Trust
Cumulative results for various periods ended September 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Third Year-
Quarter to-Date 1 Year 3 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Trust -10.88% -3.20% +10.45% +52.80%
Lipper Multi-Cap Value Funds -9.60% -0.02% +16.39% +48.33%
Lipper Diversified Equity Funds -5.37% +5.23% +27.19% +57.19%
S&P 500 Composite Index -6.25% +5.36% +27.80% +95.73%
Dow Jones Industrial Average* -5.39% +13.97% +34.01% +85.18%
</TABLE>
- --------------
*Dividends reinvested daily.
The above comparisons reflect Lipper Analytical's new category
classifications. In September, Lipper completely overhauled its classification
system with the objective to better group funds based on what they own. As you
can see, your Fund is now classified as a multi-cap value fund. Regardless of
the Fund's category classification, our objective is the same: to provide our
shareholders with attractive risk-adjusted returns over time.
The bull market of the 1980s and 1990s has been fueled largely by falling
interest rates, which has lead to significant P/E multiple expansion. Since the
1982 bottom, S&P 500 earnings per share are up 229% through the end of August,
while the S&P 500 price is up 1,216%, resulting in the market's P/E ratio
hovering around all-time highs. Going forward, we believe earnings growth, not
multiple expansion, will be the primary determinant of stock prices, resulting
in equity returns reverting to their long-term yearly average of around 9%. We
don't believe the market's climb will be a straight one, though; but will be
marked by periodic sell-offs, as seen in the third quarter.
This is not to suggest that we are cautious about the opportunities in stocks.
We believe stocks are likely to continue to provide the highest rates of return
among the major asset classes, and that periodic sell-offs in the equity market
will provide very attractive buying opportunities.
As our long-term shareholders are aware, we have focused most of the Fund's
holdings on securities with relatively high current yields. However, tax law
changes and changing management philosophies have resulted in a shift in the
universe of high yielding stocks to those with relatively slow growth prospects
and generally stagnant dividends. As a result, we have expanded the universe of
companies in which we invest from those with relatively high current dividend
yields to companies returning capital to shareholders through dividends and
share repurchases.
Dividend income is tax disadvantaged. It's taxed first at the corporate level
and then at the individual level. Reduced capital gains taxes over the last
several years have widened the tax advantage of share repurchases. More
profoundly, though, has been a shift in the philosophy of many managements
regarding their dividend policies.
Many managements prefer the flexibility to use their free cash flow generation
to buy back stock rather than aggressively grow their dividends. For example,
Merck & Co., Inc. (a stock we recently purchased) spent $3.6 billion in 1998, up
38% from 1997's level, to repurchase company stock, while the company's dividend
growth rate slowed from 20% in 1997 to 12% last year. Likewise, Sara Lee
Corporation (another recent purchase) spent $1.3 billion on share repurchases in
its fiscal year ended July 3, 1999, up over threefold from the $393 million
spent in its 1997 fiscal year. In contrast, dividend growth was only 4% per
annum.
11
<PAGE>
The recent sell-off in the market (as this is being written, the S&P 500 is
off more than 10% from its high, the Wall Street definition of a "correction")
has provided the opportunity to invest in a number of companies with current
yields greater than the market, and with growth prospects greater than the
prospects for some of the companies already held in the Fund. A list of the
securities purchased and sold during the quarter is shown elsewhere in this
report.
The result of the portfolio changes made in the quarter is broader industry
representation, an expanded number of holdings (to around fifty), and a
portfolio with, in our opinion, greater risk-adjusted return potential.
Four of the securities added in the third quarter, Albertson's Inc., Mattel
Inc., UnumProvident Corporation, and Waste Management Inc. have several things
in common: all went through major acquisitions in the last twelve months, all
have recently missed their earnings numbers, most Wall Street analysts are
recommending investors avoid the stocks, all are significantly off their year
highs, and, perversely, all are perceived to be riskier investments today than
they were just a few months ago.
Albertson's is now the nation's fourth largest retailer in sales, and globally
the sixth largest food chain, after completing its acquisition of American
Stores in June 1999. Albertson's stock has declined 40% from its high, as
analysts and investors began worrying about integration risk, and second quarter
earnings slightly missed investors' expectations. At our average purchase price
of $40, the stock trades at 6.7x this year's enterprise value to operating cash
flow (EV/EBITDA), and 6.2x next, a level which we believe adequately reflects
potential integration risk.
Mattel Inc., a manufacturer of well-known children's toys including Barbie,
Fischer-Price and Hot Wheels, has come under significant pressure this year as
investors worry about a myriad of issues, culminating in the company's recent
announcement regarding difficulties at its newest division, The Learning
Company. From its $41 high in the last twelve months, the stock has collapsed to
the low teens. On a discounted cash flow basis, we believe the stock is worth
$17 to $20, significantly above its current price.
As the name implies, UnumProvident was recently formed by the combination of
UNUM Corp., the largest provider of group disability insurance, and Provident
Corp., the largest writer of individual disability insurance. The deal closed at
the end of the second quarter, and shortly thereafter, management announced they
will be taking a charge in order to strengthen UNUM's group disability reserves.
The announcement precipitated a 42% drop in the company's share price. Over the
next twelve months, we expect to see significant cost savings and operating
efficiencies emerge, as the two companies are combined.
Waste Management Inc. is the largest provider of solid waste services in the
U.S. The company's stock has collapsed in the last six months, declining from
$60 to $17, wiping out $28 billion of market value. Within six months, we
believe the company will be generating earnings at a $2.00 run rate. More
importantly, free cash flow should approximate earnings, allowing the company to
pay down debt and repurchase stock.
The result of the changes undertaken in the Fund in the third quarter is a
portfolio trading at just 14.5x 1999 and 12.0x 2000 earnings, compared to 25.5x
and 23.5x for the S&P 500.
As always, we appreciate your support and welcome your comments.
Nancy Dennin, CFA
October 15, 1999
DJIA 10019.71
12
<PAGE>
Performance Information
Total Returns for One Year and Life of Class, as of September 30, 1999
The returns shown are based on historical results and are not intended to
indicate future performance. Total return measures investment performance in
terms of appreciation or depreciation in a Fund's net asset value per share
plus dividends and any capital gain distributions. It assumes that dividends
and distributions were reinvested at the time they were paid. The investment
return and principal value of an investment in any of these Funds will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. Average annual returns tend to smooth out
variations in a Fund's return, so they differ from actual year-to-year
results. No adjustment has been made for any income taxes payable by
shareholders.
Each Fund has two classes of shares: Primary Class and Navigator Class. The
Navigator Class, offered only to certain institutional investors, pays Fund
expenses similar to those paid by the Primary Class, except that transfer
agency fees and shareholder servicing expenses are determined separately for
each class and the Navigator Class does not incur Rule 12b-1 distribution
fees. Information about the Primary Class, offered to retail investors, is
contained in a separate report to its shareholders.
Average annual total returns as of September 30, 1999, were as follows:
<TABLE>
<CAPTION>
S&P 500
Value Special Investment Total Return Composite
Trust Trust Trust Index
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return
Navigator Class:
One Year +46.17% +56.45% +10.45% +27.80%
Life of Class--Value Trust/A/ +36.40 +18.41
Life of Class--Special Investment Trust/A/ +23.25 +17.16
Life of Class--Total Return Trust/A/ +18.72 +17.50
Cumulative Total Return
Navigator Class:
One Year +46.17% +56.45% +10.45% +27.80%
Life of Class--Value Trust/A/ +348.63 +1,809.40
Life of Class--Special Investment Trust/A/ +174.77 +782.20
Life of Class--Total Return Trust/A/ +129.27 +834.53
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Navigator Class inception date is December 1, 1994, for all Funds.
13
<PAGE>
Value Trust--Navigator Class
Illustration of an Assumed Investment of $50,000 made on December 1, 1994
(inception of the Value Trust Navigator Class)
<TABLE>
<CAPTION>
Value of shares Value of original
acquired through shares purchased
reinvestment of plus shares acquired
income dividends through reinvestment
<S> <C> <C>
12/1/94 $ 50,000 $ 50,000
3/31/95 $ 54,053 $ 54,025
6/30/95 $ 62,026 $ 61,684
9/30/95 $ 68,900 $ 68,228
12/31/95 $ 72,225 $ 70,980
3/31/96 $ 77,583 $ 76,245
6/30/96 $ 80,633 $ 78,886
9/30/96 $ 87,938 $ 85,699
12/31/96 $100,987 $ 98,001
3/31/97 $104,712 $101,616
6/30/97 $123,907 $119,820
9/30/97 $144,718 $139,695
12/31/97 $139,859 $134,982
3/31/98 $164,295 $158,566
6/30/98 $173,338 $167,408
9/30/98 $153,463 $148,214
12/31/98 $208,943 $201,850
3/31/99 $248,629 $240,189
6/30/99 $247,755 $239,636
9/30/99 $224,314 $216,963
</TABLE>
Selected Portfolio Performance*
Strong performers for the 3rd quarter 1999
---------------------------------------------------------------------
1. Gateway, Inc. +50.5%
2. Nextel Communications, Inc. +35.1%
3. Amgen Inc. +33.9%
4. Dell Computer Corporation +13.0%
5. WPP Group plc +10.0%
6. MGM Grand, Inc. +4.5%
7. Koninklijke (Royal) Philips
Electroncis N.V. +0.1%
8. MGIC Investment Corporation -1.8%
9. Nokia Oyj -1.9%
10. Metro-Goldwyn-Mayer, Inc. -4.1%
* Securities held for the entire quarter.
Weak performers for the 3rd quarter 1999
---------------------------------------------------------------------
1. Waste Management Inc. -64.2%
2. Aetna Inc. -44.9%
3. Bank One Corporation -41.6%
4. Foundation Health Systems, Inc. -37.1%
5. Mattel, Inc. -28.1%
6. MBIA, Inc. -28.0%
7. Toys "R" Us, Inc. -27.5%
8. Starwood Hotels &
Resorts Worldwide, Inc. -27.0%
9. MBNA Corporation -25.5%
10. Bank of America Corporation -24.0%
Portfolio Changes
Securities added during the 3rd quarter 1999
---------------------------------------------------------------------
Amazon.com Inc.
Amazon.com written option
Securities sold during the 3rd quarter 1999
---------------------------------------------------------------------
Hilton Hotels Corporation
Mirage Resorts, Incorporated
Western Digital Corporation
14
<PAGE>
Performance Information -- Continued
Special Investment Trust--Navigator Class
Illustration of an Assumed Investment of $50,000 made on December 1, 1994
(inception of the Special Investment Trust Navigator Class)
<TABLE>
<CAPTION>
Value of shares Value of original
acquired through shares purchased
reinvestment of plus shares acquired
income dividends through reinvestment
<S> <C> <C>
12/1/94 $ 50,000 $ 50,000
3/31/95 $ 52,407 $ 52,407
6/30/95 $ 56,588 $ 56,588
9/30/95 $ 61,671 $ 61,671
12/31/95 $ 61,718 $ 61,671
3/31/96 $ 68,049 $ 67,446
6/30/96 $ 72,009 $ 71,393
9/30/96 $ 73,962 $ 73,329
12/31/96 $ 80,258 $ 79,583
3/31/97 $ 76,766 $ 76,120
6/30/97 $ 89,194 $ 86,477
9/30/97 $102,950 $102,123
12/31/97 $ 99,070 $ 98,278
3/31/98 $110,868 $109,981
6/30/98 $110,221 $109,406
9/30/98 $ 87,815 $ 87,166
12/31/98 $123,342 $122,431
3/31/99 $130,835 $129,868
6/30/99 $141,529 $140,648
9/30/99 $137,384 $136,529
</TABLE>
Selected Portfolio Performance*
Strong performers for the 3rd quarter 1999
---------------------------------------------------------------------
1. Cell Genesys, Inc. +75.0%
2. Gateway, Inc. +50.5%
3. Symantec Corporation +41.1%
4. Orion Capital Corporation +32.1%
5. Cott Corporation +20.7%
6. Cabletron Systems, Inc. +20.7%
7. Amazon.com Inc., 4.75%, due 2/1/09 +20.6%
8. TALK.com, Inc. +14.7%
9. WPP Group plc +10.0%
10. Hadco Corp. +8.8%
* Securities held for the entire quarter.
Weak performers for the 3rd quarter 1999
---------------------------------------------------------------------
1. CKE Restaurants, Inc. -55.4%
2. PhyCor, Inc. -40.9%
3. Silicon Graphics, Inc. -33.2%
4. The FINOVA Group Inc. -30.6%
5. InaCom Corp. -27.2%
6. ICG Communications -27.2%
7. Magellan Health Services, Inc. -26.9%
8. Caremark Rx, Inc. -25.6%
9. Hollywood Entertainment Corp. -23.3%
10. Consolidated Stores Corporation -18.3%
Portfolio Changes
Securities added during the 3rd quarter 1999
---------------------------------------------------------------------
Manpower Inc.
Securities sold during the 3rd quarter 1999
---------------------------------------------------------------------
General Nutrition Companies, Inc.
ICO Global Communications, 15%, due 8/1/05
LASER Mortgage Management, Inc.
Mego Financial Corp.
15
<PAGE>
Total Return Trust--Navigator Class
Illustration of an Assumed Investment of $50,000 made on December 1, 1994
(inception of the Total Return Trust Navigator Class)
<TABLE>
<CAPTION>
Value of shares Value of original
acquired through shares purchased
reinvestment of plus shares acquired
income dividends through reinvestment
<S> <C> <C>
12/1/94 $ 50,000 $ 50,000
3/31/95 $ 51,141 $ 50,894
6/30/95 $ 56,690 $ 55,813
9/30/95 $ 62,090 $ 60,455
12/31/95 $ 63,825 $ 60,732
3/31/96 $ 68,870 $ 65,532
6/30/96 $ 70,672 $ 66,643
9/30/96 $ 75,015 $ 70,134
12/31/96 $ 84,645 $ 78,186
3/31/97 $ 86,551 $ 79,947
6/30/97 $ 98,691 $ 90,710
9/30/97 $112,671 $103,096
12/31/97 $117,620 $106,711
3/31/98 $124,583 $113,028
6/30/98 $123,002 $110,997
9/30/98 $103,782 $ 92,599
12/31/98 $118,411 $105,002
3/31/99 $115,638 $102,543
6/30/99 $128,613 $113,509
9/30/99 $114,626 $100,523
</TABLE>
Selected Portfolio Performance*
Strong performers for the 3rd quarter 1999
---------------------------------------------------------------------
1. Eastman Kodak Company +11.3%
2. Washington Federal, Inc. +3.3%
3. Walden Residential Properties, Inc. +1.5%
4. Northrop Grumman Corporation -4.1%
5. Regency Realty Corporation -4.3%
6. General Motors Corporation -4.6%
7. International Business Machines
Corporation -6.1%
8. IPC Holdings Limited -6.3%
9. Mid-America Apartment
Communities, Inc. -7.0%
10. Citigroup Inc. -7.4%
* Securities held for the entire quarter.
Weak performers for the 3rd quarter 1999
---------------------------------------------------------------------
1. Bank One Corporation -41.6%
2. J.C. Penney Company, Inc. -29.2%
3. Toys "R" Us, Inc. -27.5%
4. Tupperware Corporation -20.6%
5. LaSalle Re Holdings Limited -18.4%
6. The Bear Stearns Companies, Inc. -17.8%
7. American Financial Group Inc. -17.6%
8. Washington Mutual, Inc. -17.3%
9. United Asset Management
Corporation -15.4%
10. Delphi Automotive Systems
Corporation -13.5%
Portfolio Changes
Securities added during the 3rd quarter 1999
---------------------------------------------------------------------
AT&T Corp.
Albertson's Inc.
Exxon Corporation
First Union Corporation
Eli Lilly and Company
Mattel, Inc.
Merck & Co., Inc.
Philip Morris Companies, Inc.
Sara Lee Corporation
UnumProvident Corporation
Waste Management Inc.
Xerox Corporation
XL Capital Ltd.
Securities sold during the 3rd quarter 1999
---------------------------------------------------------------------
ConAgra, Inc.
Fleet Financial Group, Inc.
Illinova Corporation
Millennium Chemicals Inc.
Nabisco Holdings Corp.
Olin Corporation
Orion Capital Corporation
Unocal Corporation
Wyndham International Incorporated
16
<PAGE>
Statement of Net Assets
September 30, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Value Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks and Equity Interests -- 97.8%
Advertising -- 2.6%
WPP Group plc 30,890 $ 287,328
-----------
Automotive -- 2.0%
Delphi Automotive Systems Corporation 2,253 36,187
General Motors Corporation 3,000 188,813
-----------
225,000
-----------
Banking -- 15.1%
Bank One Corporation 9,000 313,312
Bank of America Corporation 3,200 178,200
BankBoston Corporation 5,100 221,213
Citigroup Inc. 7,100 312,400
Fleet Financial Group, Inc. 1,438 52,678
Lloyds TSB Group plc 15,513 192,823
The Chase Manhattan Corporation 4,600 346,725
Zions Bancorporation 1,313 72,379
-----------
1,689,730
-----------
Computer Services and Systems -- 15.1%
Dell Computer Corporation 15,000 627,187/A/
First Data Corporation 2,100 92,138
Gateway, Inc. 11,400 506,588/A/
International Business Machines Corporation 2,550 309,506
Storage Technology Corporation 8,000 154,000/A,B/
-----------
1,689,419
-----------
Consumer Cyclicals -- 1.5%
Mattel, Inc. 8,600 163,400
-----------
Electrical Equipment and Electronics -- 2.1%
Koninklijke (Royal) Philips Electronics N.V. 2,323 234,623/A/
-----------
Entertainment -- 1.9%
Mandalay Resort Group 7,000 138,250/A,B/
MGM Grand, Inc. 1,552 79,464/A/
-----------
217,714
-----------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance -- 6.4%
Fannie Mae 5,000 $ 313,438
Freddie Mac 2,600 135,200
MBNA Corporation 6,400 146,000
The Bear Stearns Companies, Inc. 3,150 121,078
-----------
715,716
-----------
Food, Beverage and Tobacco -- 1.8%
PepsiCo, Inc. 2,700 81,675
Philip Morris Companies Inc. 3,400 116,238
-----------
197,913
-----------
Food-Retail -- 1.0%
The Kroger Co. 5,000 110,313/A/
-----------
Health Care -- 5.8%
Foundation Health Systems, Inc. 11,000 103,812/A,B/
McKesson HBOC, Inc. 9,600 278,400
United HealthCare Corporation 5,600 272,650
-----------
654,862
-----------
Hotels and Motels -- 1.8%
Starwood Hotels & Resorts Worldwide, Inc. 8,900 198,581
-----------
Insurance -- 5.7%
Aetna Inc. 1,011 49,792
Ambac Financial Group, Inc. 651 30,841
Berkshire Hathaway Inc. -- Class A 4 225,445/A/
MBIA, Inc. 442 20,622
MGIC Investment Corporation 6,500 310,375/B/
-----------
637,075
-----------
Manufacturing -- 1.1%
Danaher Corporation 2,400 126,450
-----------
Media -- 12.9%
America Online, Inc. 13,900 1,445,600/A/
-----------
Motion Pictures and Services -- 0.4%
Metro-Goldwyn-Mayer, Inc. 2,747 48,069/A/
-----------
</TABLE>
18
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Value Trust, Inc. -- Continued
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-Hazardous Waste Disposal -- 2.4%
Waste Management Inc. 14,150 $ 272,387
-----------
Pharmaceuticals -- 2.3%
Amgen Inc. 3,100 252,650/A/
-----------
Retail Sales -- 2.0%
Toys "R" Us, Inc. 14,600 219,000/A,B/
-----------
Retail-Internet -- 1.4%
Amazon.com Inc. 2,000 159,500/A/
-----------
Savings and Loan -- 2.6%
Washington Mutual, Inc. 10,000 292,500
-----------
Telecommunications -- 9.9%
MCI WorldCom, Inc. 4,300 309,062/A/
Nextel Communications, Inc. 6,200 420,437/A/
Nokia Oyj 3,000 269,438
Telefonos de Mexico S.A. ADR 1,600 114,000
-----------
1,112,937
-----------
Total Common Stocks and Equity Interests
(Identified Cost -- $6,944,575) 10,950,767
-------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 3.7%
Bank of America
5.48%, dated 9/30/99, to be repurchased at $205,660 on 10/1/99
(Collateral: $199,536 Freddie Mac mortgage-backed securities,
6%, due 9/1/28-12/1/28, value $187,032; Fannie Mae mortgage-
backed securities, 6%, due 9/1/28-1/1/29, value $24,245) $205,629 205,629
Goldman, Sachs & Company
5.40%, dated 9/30/99, to be repurchased at $205,659 on 10/1/99
(Collateral: $226,725 Fannie Mae mortgage-backed securities,
6-6.50%, due 8/1/02-5/1/29, value $213,710) 205,628 205,628
-----------
Total Repurchase Agreements (Identified Cost -- $411,257) 411,257
-------------------------------------------------------------------------------------------------------------------------
Total Investments -- 101.5% (Identified Cost -- $7,355,832) 11,362,024
Other Assets Less Liabilities -- (1.5)% (168,484)
-----------
Net assets -- 100.0% $11,193,540
===========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
Net assets consisting of:
Accumulated paid-in capital applicable to:
163,252 Primary shares outstanding $ 6,646,467
13,238 Navigator shares outstanding 665,664
Accumulated net investment loss (30,164)
Accumulated net realized gain/(loss) on investments (94,663)
Unrealized appreciation/(depreciation) of investments and
foreign currency transactions 4,006,236
-----------
Net assets -- 100.0% $11,193,540
===========
Net asset value per share:
Primary Class $63.30
======
Navigator Class $64.88
======
Actual Appreciation/
Expiration Contracts (Depreciation)
--------------------------------------------------------------------------------------------------------------------------------
Options Written
Amazon.com, put, strike price $75 November 99 10,000 $ 0
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Non-income producing.
/B/ Affiliated Company--As defined in the Investment Company Act of 1940, an
"Affiliated Company" represents Fund ownership of at least 5% of the
outstanding voting securities of an issuer. At September 30, 1999, the
total market value of Affiliated Companies was $925,437 and the
identified cost was $1,091,257.
See notes to financial statements
20
<PAGE>
Statement of Net Assets
September 30, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Special Investment Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks and Equity Interests -- 95.7%
Advertising - 5.8%
WPP Group plc 13,250 $123,246
--------
Apparel - 1.9%
Liz Claiborne, Inc. 1,288 39,913
--------
Banking -- 1.3%
Peoples Heritage Financial Group, Inc. 1,600 26,600
--------
Biotechnology -- 0.6%
Cell Genesys, Inc. 1,557 12,258/A/
--------
Business Services -- 5.3%
Manpower Inc. 1,805 52,556
Modis Professional Services, Inc. 4,525 59,956/A/
--------
112,512
--------
Computer Services and Systems -- 15.6%
Bell & Howell Company 1,000 36,687/A/
Gateway, Inc. 3,600 159,975/A/
InaCom Corp. 2,555 23,471/A,B/
Micron Electronics, Inc. 3,250 34,125/A/
Silicon Graphics, Inc. 3,000 32,813/A/
Storage Technology Corporation 2,200 42,350/A/
--------
329,421
--------
Computer Software -- 7.7%
Remedy Corporation 347 9,835/A/
Sybase, Inc. 3,700 43,706/A/
Symantec Corporation 3,015 108,446/A,B/
--------
161,987
--------
Electronic/Semiconductor -- 2.6%
Hadco Corp. 1,265 54,711/A,B/
--------
Energy -- 4.4%
Midamerica Energy Holdings Company 1,625 47,937
Northeast Utilities System 2,500 45,938/A/
--------
93,875
--------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Entertainment -- 4.8%
Hollywood Park, Inc. 2,515 $ 38,668/A,B/
Mandalay Resort Group 2,300 45,425/A/
Players International, Inc. 2,290 16,960/A,B/
--------
101,053
--------
Finance -- 4.6%
The FINOVA Group Inc. 1,600 58,400
United Asset Management Corporation 2,000 38,500
--------
96,900
--------
Food, Beverage and Tobacco -- 1.2%
Cott Corporation 6,000 26,250/B/
--------
Health Care -- 2.4%
Magellan Health Services, Inc. 2,746 20,078/A,B/
PhyCor, Inc. 7,185 31,434/A,B/
--------
51,512
--------
Insurance -- 9.5%
Enhance Financial Services Group, Inc. 3,000 53,062/B/
Orion Capital Corporation 1,525 72,245/B/
Radian Group Inc. 1,737 74,580
--------
199,887
--------
Media -- 10.3%
America Online, Inc. 2,100 218,400/A/
--------
Miscellaneous -- 0.1%
Olsen & Associates AG 300 1,997/A,C/
--------
Networking Products -- 2.7%
Cabletron Systems, Inc. 3,600 56,475/A/
--------
Pharmaceuticals -- 2.4%
Caremark Rx, Inc. 8,933 50,249/A/
--------
Real Estate -- 0.2%
Dynex Capital, Inc 464 3,134
--------
Restaurants -- 1.4%
CKE Restaurants, Inc. 4,000 29,000/B/
--------
Specialty Retail -- 5.5%
Consolidated Stores Corporation 3,000 66,187/A/
Hollywood Entertainment Corp. 3,384 50,760/A,B/
--------
116,947
--------
</TABLE>
22
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Special Investment Trust, Inc. -- Continued
<TABLE>
<CAPTION>
Shares/Par Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications -- 5.4%
ICG Communications 2,800 $ 43,575/A,B/
TALK.com, Inc. 5,500 70,985/A,B/
----------
114,560
----------
Total Common Stocks and Equity Interests (Identified Cost -- $1,536,379) 2,020,887
-----------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 1.1%
Amazon.com Inc., 4.75%, due 2/1/09 $20,000 23,400/D/
----------
Total Corporate Bonds and Notes (Identified Cost -- $20,000) 23,400
-----------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 3.2%
Bank of America
5.48%, dated 9/30/99, to be repurchased at $33,877 on
10/1/99 (Collateral: $37,106 Fannie Mae
mortgage-backed securities, 6%, due 7/1/29, value $34,757) 33,872 33,872
Goldman, Sachs & Company
5.40%, dated 9/30/99, to be repurchased at $33,877 on
10/1/99 (Collateral: $36,529 Fannie Mae
mortgage-backed securities, 6.50%, due 5/1/29, value $35,191) 33,872 33,872
----------
Total Repurchase Agreements (Identified Cost -- $67,744) 67,744
-----------------------------------------------------------------------------------------------------------------------
Total Investments -- 100.0% (Identified Cost -- $1,624,123) 2,112,031
Other Assets Less Liabilities -- N.M. (226)
----------
Net assets consisting of:
Accumulated paid-in
capital applicable to:
59,449 Primary shares outstanding $1,433,819
2,801 Navigator shares outstanding 75,891
Accumulated net investment loss (9,444)
Accumulated net realized gain/(loss) on investments 123,631
Unrealized appreciation/(depreciation) of investments 487,908
----------
Net assets -- 100.0% $2,111,805
----------
Net asset value per share:
Primary Class $33.84
======
Navigator Class $35.80
======
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Non-income producing.
/B/ Affiliated Company--As defined in the Investment Company Act of 1940 an
"Affiliated Company" represents Fund ownership of at least 5% of the
outstanding voting securities of an issuer. At September 30, 1999, the total
market value of Affiliated Companies was $639,645 and the identified cost
was $763,518.
/C/ Private placement and an illiquid security valued at fair value under
procedures adopted by the Board of Directors. This security represents 0.1%
of net assets.
/D/ Rule 144a security--A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. This security represents 1.1% of net
assets.
N.M. -- Not meaningful.
See notes to financial statements
23
<PAGE>
Statement of Net Assets
September 30, 1999 (Unaudited)
(Amounts in Thousands)
Legg Mason Total Return Trust, Inc.
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks and Equity Interests -- 95.3%
Aerospace/Defense -- 2.8%
Northrop Grumman Corporation 244 $ 15,478
--------
Automotive -- 5.6%
Delphi Automotive Systems Corporation 367 5,889
Ford Motor Company 100 5,019
General Motors Corporation 310 19,511
--------
30,419
--------
Banking -- 18.7%
Bank One Corporation 550 19,147
Citigroup Inc. 388 17,050
First Union Corporation 182 6,472
Lloyds TSB Group plc 2,584 32,113
The Chase Manhattan Corporation 360 27,135
--------
101,917
--------
Computer Services and Systems -- 7.8%
International Business Machines Corporation 350 42,481
--------
Consumer Cyclicals -- 0.2%
Mattel, Inc. 50 950
--------
Consumer Products -- 2.3%
Brunswick Corporation 238 5,913
Tupperware Corporation 333 6,747
--------
12,660
--------
Electric Utilities -- 3.3%
Edison International 740 17,991
--------
Finance -- 5.4%
The Bear Stearns Companies, Inc. 371 14,271
United Asset Management Corporation 786 15,136
--------
29,407
--------
Food, Beverage and Tobacco -- 2.2%
Albertson's Inc. 25 989
Philip Morris Companies, Inc. 150 5,128
Sara Lee Corporation 260 6,094
--------
12,211
--------
</TABLE>
24
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Total Return Trust, Inc.--Continued
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance -- 10.8%
American Financial Group, Inc. 440 $ 12,334
Enhance Financial Services Group, Inc. 1,216 21,504
IPC Holdings Limited 463 8,681
Lasalle Re Holdings Limited 403 5,591
UnumProvident Corporation 235 6,918
XL Capital Ltd. 81 3,645
--------
58,673
--------
Medical Supplies/Services -- 2.8%
Eli Lilly and Company 90 5,760
Merck & Co., Inc. 145 9,398
--------
15,158
--------
Non-Hazardous Waste Disposal -- 3.2%
Waste Management Inc. 900 17,325
--------
Office Automation and Equipment -- 1.2%
Xerox Corporation 150 6,291
--------
Oil and Gas -- 1.0%
Exxon Corporation 75 5,695
--------
Photo Equipment and Supplies -- 3.5%
Eastman Kodak Company 250 18,859
--------
Real Estate -- 10.6%
Mid-America Apartment Communities, Inc. 663 14,250
National Golf Properties, Inc. 446 10,026
Nationwide Health Properties, Inc. 675 11,222
Regency Realty Corporation 568 11,924
Tanger Factory Outlet Centers, Inc. 247 5,632
Walden Residential Properties, Inc. 203 4,430
--------
57,484
--------
Retail Sales -- 7.5%
J.C. Penney Company, Inc. 514 17,655
Toys "R" Us, Inc. 1,550 23,250/A/
--------
40,905
--------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Shares/Par Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Savings and Loan -- 4.8%
Washington Federal, Inc. 527 $ 12,223
Washington Mutual, Inc. 468 13,675
--------
25,898
--------
Telecommunications -- 1.6%
AT&T Corp. 200 8,700
--------
Total Common Stocks and Equity Interests (Identified Cost -- $466,358) 518,502
----------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 4.9%
Bank of America
5.48%, dated 9/30/99, to be repurchased at $13,343 on 10/1/99
(Collateral: $13,901 Fannie Mae mortgage-backed securities,
7%, due 9/1/29, value $13,728) $13,341 13,341
Goldman, Sachs & Company
5.40%, dated 9/30/99, to be repurchased at $13,343 on 10/1/99
(Collateral: $14,388 Fannie Mae mortgage-backed securities,
6.50%, due 5/1/29, value $13,861) 13,340 13,340
--------
Total Repurchase Agreements (Identified Cost -- $26,681) 26,681
----------------------------------------------------------------------------------------------------------
Total Investments -- 100.2% (Identified Cost -- $493,039) 545,183
Other Assets Less Liabilities -- (0.2)% (1,147)
--------
Net assets consisting of:
Accumulated paid-in capital applicable to:
26,650 Primary shares outstanding $430,763
793 Navigator shares outstanding 13,283
Undistributed net investment income 2,396
Accumulated net realized gain/(loss) on investments 45,442
Unrealized appreciation/(depreciation) of investments and
foreign currency transactions 52,152
--------
Net assets -- 100.0% $544,036
========
Net asset value per share:
Primary Class $19.82
======
Navigator Class $19.97
======
----------------------------------------------------------------------------------------------------------
</TABLE>
/A/Non-income producing.
See notes to financial statements.
26
<PAGE>
Statements of Operations
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 9/30/99
---------------------------------------------------------
Value Special Investment Total Return
Trust Trust Trust
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Dividends:
Affiliated companies $ 306 $ 614 $ --
Other securities/A/ 43,989 6,441 9,416
Interest 18,850 1,729 982
----------- -------- --------
Total income 63,145 8,784 10,398
----------- -------- --------
Expenses:
Investment advisory fee 38,479 7,314 2,273
Distribution and service fees 50,983 9,901 2,947
Transfer agent and shareholder servicing expense 1,671 506 174
Audit and legal fees 128 53 38
Custodian fee 889 222 99
Directors' fees 7 7 5
Registration fees 764 34 15
Reports to shareholders 259 118 46
Other expenses 92 92 11
----------- -------- --------
93,272 18,247 5,608
Less expenses reimbursed (38) (23) --
----------- -------- --------
Total expenses, net of reimbursement 93,234 18,224 5,608
----------- -------- --------
Net Investment Income/(Loss) (30,089) (9,440) 4,790
----------- -------- --------
Net Realized and Unrealized Gain/(Loss) on Investments:
Realized gain/(loss) on investments
and foreign currency transactions/B/ (92,553) 123,315 45,479
Change in unrealized appreciation/(depreciation)
of investments and foreign currency translations (1,150,988) (29,984) (56,892)
----------- -------- --------
Net Realized and Unrealized Gain/(Loss) on Investments (1,243,541) 93,331 (11,413)
--------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $(1,273,630) $ 83,891 $ (6,623)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Net of foreign taxes withheld of $488, $41 and $42, respectively.
/B/Includes net realized gains of $ 4,372 for Special Investment Trust on sale
of shares of Affiliated Companies. Value Trust and Total Return Trust did not
sell any shares of Affiliated Companies during the period.
See notes to financial statements.
27
<PAGE>
Statements of Changes in Net Assets
(Amounts in Thousands)
<TABLE>
<CAPTION>
Value Special Investment Total Return
Trust Trust Trust
-------------------------- ---------------------- ---------------------
Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended
9/30/99 3/31/99 9/30/99 3/31/99 9/30/99 3/31/99
---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Change in Net Assets:
Net investment income/(loss) $ (30,089) $ (22,075) $ (9,440) $ (14,981) $ 4,790 $ 11,315
Net realized gain/(loss) on investments
and foreign currency transactions (92,553) 448,566 123,315 336,374 45,479 39,998
Change in unrealized appreciation/
(depreciation) of investments
and foreign currency translations (1,150,988) 2,834,373 (29,984) (48,661) (56,892) (111,047)
---------------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations (1,273,630) 3,260,864 83,891 272,732 (6,623) (59,734)
Distributions to shareholders:
From net investment income:
Primary Class -- -- -- -- (5,330) (11,139)
Navigator Class -- -- -- -- (263) (484)
From net realized gain on investments:
Primary Class (366,235) (150,596) (323,884) (116,290) (22,720) (34,968)
Navigator Class (30,951) (7,843) (11,915) (4,400) (615) (897)
Change in net assets from Fund share
transactions:
Primary Class 1,778,494 2,429,161 403,974 149,813 (2,695) (30,622)
Navigator Class 173,932 390,271 37,958 1,291 1,690 109
---------------------------------------------------------------------------------------------------------------------------------
Change in net assets 281,610 5,921,857 190,024 303,146 (36,556) (137,735)
Net Assets:
Beginning of period 10,911,930 4,990,073 1,921,781 1,618,635 580,592 718,327
---------------------------------------------------------------------------------------------------------------------------------
End of period $11,193,540 $10,911,930 $2,111,805 $1,921,781 $ 544,036 $ 580,592
---------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(loss) $ (30,164) $ (75) $ (9,444) $ (4) $ 2,396 $ 3,199
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
28
<PAGE>
Financial Highlights
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions
-------------------------------------- ---------------------------------------------
From
Net Asset Net Net Realized Total From Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Period (Loss) Investments Operations Income Investments Distributions
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Value Trust
--Navigator Class
Six Months Ended
Sept. 30, 1999* $74.49 $.07 $(7.22) $(7.15) $ -- $(2.46) $(2.46)
Years Ended Mar. 31,
1999 50.57 .20 25.13 25.33 -- (1.41) (1.41)
1998 34.30 .35 18.55 18.90 (.31) (2.32) (2.63)
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/A/ 18.76 .12 1.40 1.52 (.01) -- (.01)
Special Investment Trust
--Navigator Class
Six Months Ended
Sept. 30, 1999* $40.51 $ -- $ 1.99 $ 1.99 $ -- $(6.70) $(6.70)
Years Ended Mar. 31,
1999 37.12 .03 6.02 6.05 -- (2.66) (2.66)
1998 27.04 -- 11.58 11.58 -- (1.50) (1.50)
1997 25.26 .02 3.17 3.19 -- (1.41) (1.41)
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64)
1995/A/ 19.11 .07 .85 .92 -- -- --
Total Return Trust
--Navigator Class
Six Months Ended
Sept. 30, 1999* $21.27 $.28 $ (.36) $ (.08) $(.36) $ (.86) $(1.22)
Years Ended Mar. 31,
1999 24.87 .61 (2.36) (1.75) (.65) (1.20) (1.85)
1998 19.53 .66 7.29 7.95 (.58) (2.03) (2.61)
1997 16.52 .65 3.48 4.13 (.56) (.56) (1.12)
1996 12.83 .62 3.72 4.34 (.65) -- (.65)
1995/A/ 12.66 .15 .25 .40 (.06) (.17) (.23)
--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income (Loss) Portfolio End of
End of Total to Average to Average Turnover Period
Period Return Net Assets Net Assets Rate (in thousands)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value Trust
--Navigator Class
Six Months Ended
Sept. 30, 1999* $64.88 (9.78)%/B/ .70%/C/ .4%/C/ 7.9%/C/ $858,878
Years Ended Mar. 31,
1999 74.49 51.33% .72% .6% 19.3% 814,403
1998 50.57 56.90% .73% .9% 12.9% 179,664
1997 34.30 34.97% .77% 1.4% 10.5% 83,752
1996 27.08 43.53% .82% 1.8% 19.6% 52,332
1995/A/ 20.27 8.11%/B/ .82%/C/ 1.8%/C/ 20.1%/C/ 36,519
Special Investment Trust
--Navigator Class
Six Months Ended
Sept. 30, 1999* $35.80 5.01%/B/ .76%/C/ .1%/C/ 21.6%/C/ $100,277
Years Ended Mar. 31,
1999 40.51 18.01% .78% .1% 47.8% 71,492
1998 37.12 44.42% .80% -- 29.8% 63,299
1997 27.04 12.81% .85% .1% 29.2% 41,415
1996 25.26 29.85% .88% 1.0% 35.6% 35,731
1995/A/ 20.03 4.81%/B/ .90%/C/ 1.0%/C/ 27.5%/C/ 26,123
Total Return Trust
--Navigator Class
Six Months Ended
Sept. 30, 1999* $19.97 (.88)%/B/ .83%/C/ 2.6%/C/ 66.0%/C/ $ 15,838
Years Ended Mar. 31,
1999 21.27 (7.18)% .82% 2.7% 44.2% 15,275
1998 24.87 43.94% .83% 3.1% 20.6% 17,792
1997 19.53 25.67% .86% 3.7% 38.4% 10,048
1996 16.52 34.67% .94% 4.2% 34.7% 7,058
1995/A/ 12.83 2.28%/B/ .86%/C/ 3.6%/C/ 61.9%/C/ 4,823
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/For the period December 1, 1994 (commencement of sale of Navigator Class
shares) to March 31, 1995.
/B/Not annualized.
/C/Annualized.
* Unaudited.
See notes to financial statements.
29
<PAGE>
Notes to Financial Statements
Value Trust
Special Investment Trust
Total Return Trust
(Amounts in Thousands) (Unaudited)
---------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Value Trust, Inc. ("Value Trust"), the Legg Mason Special
Investment Trust, Inc. ("Special Investment Trust") and the Legg Mason Total
Return Trust, Inc. ("Total Return Trust") (each a "Fund") are registered
under the Investment Company Act of 1940, as amended, each as an open-end,
diversified investment company.
Each Fund consists of two classes of shares: Primary Class, offered since
1982 for Value Trust, and since 1985 for Special Investment Trust and Total
Return Trust; and Navigator Class, offered to certain institutional investors
since December 1, 1994, for each Fund. Information about the Primary Class,
offered to retail investors, is contained in a separate report to its
shareholders. The income and expenses of each of these Funds are allocated
proportionately to the two classes of shares based on daily net assets,
except for Rule 12b-1 distribution fees, which are charged only on Primary
Class shares, and transfer agent and shareholder servicing expenses, which
are determined separately for each class.
Security Valuation
Securities traded on national securities exchanges are valued at the last
quoted sales price, or if no sales price is available, at the mean between
the latest bid and asked prices. Over the counter securities are valued at
the mean between the latest bid and asked prices as furnished by dealers who
make markets in such securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued
at fair value as determined by management and approved in good faith by the
Board of Directors. Fixed income securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
Foreign Currency Translation
The books and records of the Funds are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the
closing daily rate of exchange, and
(ii) purchases and sales of investment securities, interest income and
expenses at the rate of exchange prevailing on the respective date of such
transactions.
The effect of changes in foreign exchange rates on realized and unrealized
security gains or losses is reflected as a component of such gains or losses.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized for financial reporting and federal income tax purposes.
Dividend income and distributions to shareholders are allocated at the class
level and are recorded on the ex-dividend date. Dividends from net investment
income, if available, will be paid quarterly for Value Trust and Total Return
Trust, and annually for Special Investment Trust. Net capital gain
distributions, which are calculated at the Fund level, are declared and paid
after the end of the tax year in which the gain is realized. Distributions
are determined in accordance with federal income tax regulations, which may
differ from those determined in accordance with generally accepted accounting
principles; accordingly, periodic reclassifications are made within the
Fund's capital accounts to reflect income and gains available for
distribution under federal income tax regulations.
30
<PAGE>
Notes to Financial Statements -- Continued
-------------------------------------------------------------------------
Security Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis
for both financial reporting and federal income tax purposes. At September
30, 1999, receivables for securities sold and payables for securities
purchased for each of the Funds were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
---------------------------------------------------------------------------
Value Trust $26,954 $195,182
Special Investment Trust 335 --
Total Return Trust 1,247 2,160
Federal Income Taxes
No provision for federal income or excise taxes is required since each
Fund intends to continue to qualify as a regulated investment company and
distribute substantially all of its taxable income to its shareholders.
Use of Estimates
Preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
2. Investment Transactions:
For the six months ended September 30, 1999, investment transactions
(excluding short-term investments) were as follows:
Purchases Proceeds From Sales
-------------------------------------------------------------------
Value Trust $2,662,218 $424,659
Special Investment Trust 351,417 215,957
Total Return Trust 184,727 194,895
At September 30, 1999, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for each Fund were as follows:
<TABLE>
<CAPTION>
Net Appreciation
Cost Appreciation Depreciation (Depreciation)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Value Trust $7,355,832 $4,984,147 $(977,955) $4,006,192
Special Investment Trust 1,624,123 680,427 (192,519) 487,908
Total Return Trust 493,039 111,175 (59,031) 52,144
</TABLE>
3. Repurchase Agreements:
All repurchase agreements are fully collateralized by obligations issued
by the U.S. Government or its agencies, and such collateral is in the
possession of the Funds' custodian. The value of such collateral includes
accrued interest. Risks arise from the possible delay in recovery or
potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Funds' investment adviser, acting
under the supervision of its Board of Directors, reviews the value of the
collateral and the creditworthiness of those banks and dealers with which the
Funds enter into repurchase agreements to evaluate potential risks.
31
<PAGE>
----------------------------------------------------------------------------
4. Transactions With Affiliates:
Each Fund has an investment advisory and management agreement with Legg
Mason Fund Adviser, Inc. ("LMFA"). Pursuant to their respective agreements,
LMFA provides the Funds with investment advisory, management and
administrative services for which each Fund pays a fee, computed daily and
payable monthly at annual rates of each Fund's average daily net assets.
LMFA has agreed to waive indefinitely its fees in any month to the extent
Total Return Trust's expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during that month an annual rate of 0.95% of
average daily net assets for Navigator Class shares. The Funds' agreements
with LMFA provide that expense reimbursements be made to Value Trust and
Special Investment Trust for audit fees and compensation of the Funds'
independent directors. The following chart shows the annual rate of advisory
fees and audit and director fee reimbursements for each Fund:
<TABLE>
<CAPTION>
Six Months Ended At
September 30, 1999 September 30, 1999
------------------ ------------------
Audit and
Advisory Asset Expense Director Fee Advisory
Fund Fee Breakpoint Limitation Reimbursement Fee Payable
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value Trust 1.00% $0-$100 million NA $29 $6,229
0.75% $100 million-$1 billion
0.65% in excess of $1 billion
Special Investment Trust same as above same as above NA 23 1,227
Total Return Trust 0.75% all assets 0.95% NA 348
</TABLE>
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the New
York Stock Exchange, serves as distributor of the Funds. Legg Mason receives
an annual distribution fee and an annual service fee, based on each Fund's
Primary Class's average daily net assets, computed daily and payable monthly
as follows:
At September 30, 1999
------------------------
Distribution Service Distribution and Service
Fund Fee Fee Fees Payable
---------------------------------------------------------------------------
Value Trust 0.70% 0.25% $8,266
Special Investment Trust 0.75% 0.25% 1,660
Total Return Trust 0.75% 0.25% 451
Value Trust and Special Investment Trust paid $5 and $3, respectively, in
brokerage commissions to Legg Mason for Fund security transactions for the
six months ended September 30, 1999. Total Return Trust paid no brokerage
commissions to Legg Mason for the six months ended September 30, 1999.
Legg Mason also has an agreement with the Funds' transfer agent to assist
it with some of its duties. For this assistance the transfer agent paid Legg
Mason the following amounts for the six months ended September 30, 1999:
Value Trust, $523; Special Investment Trust, $148; and Total Return Trust,
$51.
LMFA and Legg Mason are corporate affiliates and wholly owned subsidiaries
of Legg Mason, Inc.
32
<PAGE>
Notes to Financial Statements -- Continued
----------------------------------------------------------------------------
5. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in a
$200 million line of credit ("Credit Agreement") to be utilized as an
emergency source of cash in the event of unanticipated, large redemption
requests by shareholders. Pursuant to the Credit Agreement, each
participating Fund is liable only for principal and interest payments related
to borrowings made by that Fund. Borrowings under the line of credit bear
interest at prevailing short-term interest rates. For the six months ended
September 30, 1999, the Funds had no borrowings under the line of credit.
6. Fund Share Transactions:
At September 30, 1999, there were 400,000, 100,000 and 50,000 shares
authorized at $.001 par value for the Primary Class of Value Trust, Special
Investment Trust and Total Return Trust, respectively. At September 30, 1999,
there were 100,000 shares authorized at $.001 par value for the Navigator
Class of Value Trust. The Navigator Classes of Special Investment Trust and
Total Return Trust each have 50,000 shares authorized at $.001 par value.
Share transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
----------------- ----------------- ----------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Value Trust
--Primary Class
Six Months Ended Sept. 30, 1999 32,794 $2,323,859 5,174 $347,545 (12,859) $ (892,910) 25,109 $1,778,494
Year Ended March 31, 1999 64,387 3,627,343 2,789 143,657 (25,054) (1,341,839) 42,122 2,429,161
--Navigator Class
Six Months Ended Sept. 30, 1999 3,013 $ 224,863 413 $ 28,343 (1,121) $ (79,274) 2,305 $ 173,932
Year Ended March 31, 1999 8,759 469,123 133 7,050 (1,512) (85,902) 7,380 390,271
Special Investment Trust
--Primary Class
Six Months Ended Sept. 30, 1999 5,987 $ 220,197 9,372 $316,310 (3,568) $ (132,533) 11,791 $ 403,974
Year Ended March 31, 1999 15,145 485,457 3,628 114,566 (14,290) (450,210) 4,483 149,813
--Navigator Class
Six Months Ended Sept. 30, 1999 869 $ 32,490 322 $ 11,457 (155) $ (5,989) 1,036 $ 37,958
Year Ended March 31, 1999 403 13,258 133 4,362 (476) (16,329) 60 1,291
Total Return Trust
--Primary Class
Six Months Ended Sept. 30, 1999 2,134 $ 47,593 1,238 $ 27,076 (3,534) $ (77,364) (162) $ (2,695)
Year Ended March 31, 1999 5,844 131,325 2,014 44,666 (9,494) (206,613) (1,636) (30,622)
--Navigator Class
Six Months Ended Sept. 30, 1999 141 $ 3,152 40 $ 868 (106) $ (2,330) 75 $ 1,690
Year Ended March 31, 1999 172 3,717 61 1,369 (230) (4,977) 3 109
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</TABLE>
33
<PAGE>
Investment Adviser
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Board of Directors
Raymond A. Mason, Chairman
John F. Curley, Jr., President
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
G. Peter O'Brien
T. A. Rodgers
Edward A. Taber, III
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
This report is not to be distributed unless preceded or
accompanied by a prospectus.
Legg Mason Wood Walker, Incorporated
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100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 . 539 . 0000
LMF-002
11/99
