As filed with the Securities and Exchange Commission on May 28, 1999.
1933 Act File No. 2-75766
1940 Act File No. 811-3380
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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: 26 [X]
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 27
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LEGG MASON VALUE TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
100 Light Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
100 Light Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[___] immediately upon filing pursuant to Rule 485(b)
[___] on __________, 1999 pursuant to Rule 485(b)
[___] 60 days after filing pursuant to Rule 485(a)(i)
[ X ] on July 31, 1999 pursuant to Rule 485(a)(i)
[___] 75 days after filing pursuant to Rule 485(a)(ii)
[___] on ____________, 1999 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[___] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Legg Mason Value Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectus--Primary Shares
Prospectus--Navigator Shares
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
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Legg Mason Value Trust, Inc.
Form N-1A Cross Reference Sheet
-------------------------------
<TABLE>
<CAPTION>
PART A ITEM NO. PRIMARY SHARES PROSPECTUS CAPTION
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<S> <C>
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your Shares; Account Policies;
Services for Investors; Dividends and Taxes
8 Distribution Arrangements Management; How to Invest
9 Financial Highlights Information Financial Highlights
PART A ITEM NO. NAVIGATOR SHARES PROSPECTUS CAPTION
- --------------- -----------------------------------
1 Front and Back Cover Pages Same
2 Risk/Return Summary: Investments, Risks Investment Objectives, Principal Risks, Performance
3 Risk/Return Summary: Fee Table Fees and Expenses of the Funds
4 Investment Objectives, Principal Investment Investment Objectives, Principal Risks
Strategies and Related Risks
5 Management's Discussion of Fund Not Applicable
Performance
6 Management, Organization and Capital Management
Structure
7 Shareholder Information How to Invest; How to Sell Your Shares; Account Policies;
Services for Investors; Dividends and Taxes
8 Distribution Arrangements Management
9 Financial Highlights Information Financial Highlights
STATEMENT OF ADDITIONAL INFORMATION
PART B ITEM NO. ITEM NO.
- --------------- --------
10 Cover Page and Table of Contents Same
11 Fund History Description of the Funds
12 Description of the Fund and Its Description of the Funds; Fund Policies; Investment
Investments and Risks Strategies and Risks
13 Management of the Fund Management of the Funds
14 Control Persons and Principal Holders Management of the Funds
of Securities
15 Investment Advisory and Other Services Management Agreement; Investment Advisory
Agreement; The Funds' Distributor
16 Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
17 Capital Stock and Other Securities Capital Stock Information
18 Purchase, Redemption, and Pricing of Additional Purchase and Redemption Information;
Shares Valuation of Fund Shares
19 Taxation of the Fund Additional Tax Information; Tax-Deferred Retirement
Plans
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20 Underwriters The Funds' Distributors
21 Calculation of Performance Data Performance Information
22 Financial Statements Financial Statements
</TABLE>
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE>
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
Legg Mason U.S. Small-Capitalization Value Trust
PRIMARY SHARES PROSPECTUS JULY 31, 1999
logo
HOW TO INVEST (SERVICEMARK)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B L E O F C O N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
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LEGG MASON EQUITY FUNDS
[icon] I N V E S T M E N T O B J E C T I V E S
LEGG MASON VALUE TRUST, INC.:
INVESTMENT OBJECTIVE: long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities that, in the adviser's opinion,
offer the potential for capital growth. The adviser follows a value discipline
in selecting securities. This means the adviser seeks to purchase securities at
large discounts to the adviser's assessment of their intrinsic value. For the
adviser, assessment of intrinsic value is an ongoing, dynamic process employing
both quantitative and qualitative analysis. The adviser takes a long-term
approach to investing, generally characterized by long holding periods and low
portfolio turnover. The adviser typically sells a security when, in the
adviser's assessment, the security no longer appears to offer long-term above
average risk-adjusted rates of return, or when a more compelling investment
opportunity is found. The fund generally invests in companies with market
capitalizations greater than $1 billion, but may invest in companies of any
size.
The fund may invest in debt securities, including government, corporate and
money market securities for temporary defensive purposes, or when cash is
temporarily available. The fund may not achieve its investment objective when so
invested. Consistent with the investment objective, the fund may also invest in
debt securities when 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 or Baa by Moody's Investors Service, Inc. or, if unrated by those
entities, deemed by the adviser to be of comparable quality.
LEGG MASON TOTAL RETURN TRUST:
INVESTMENT OBJECTIVE: Capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for long-term capital growth and attractive current income. The
fund invests primarily in common stocks, debt securities, and securities
convertible into common stocks, but is not limited to these types of securities.
The fund may invest in securities that do not pay current income but do, in the
adviser's opinion, offer prospects for capital appreciation and/or future
income. The adviser follows a value discipline in selecting securities. This
means the adviser seeks to purchase securities at large discounts to the
adviser's assessment of their intrinsic value. For the adviser, assessment of
intrinsic value is an ongoing, dynamic process employing both quantitative and
qualitative analysis. The adviser typically sells a security when, in the
adviser's assessment, the security no longer appears to offer long-term
attractive total returns at reasonable risk, or when a more compelling
investment opportunity is found. The fund may invest in companies of any size.
The fund may invest in money market securities for temporary defensive purposes
or when cash is temporarily available. The fund may not achieve its investment
objective when so invested. Consistent with the investment objective, the fund
may also invest in debt securities when the adviser believes the return on
3
<PAGE>
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.
LEGG MASON SPECIAL INVESTMENT TRUST:
INVESTMENT OBJECTIVE: capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities, and securities convertible into
equity securities, of companies whose market capitalization are typically
classified as small to mid sized. It also invests in "special situations"
without regard to market capitalization.
Special situations are securities undergoing unusual or possibly one-time
developments that, in the opinion of the adviser, make them attractive for
investment.
Such developments may include actual or anticipated: sale or termination of an
unprofitable part of the company's business; change in the company's management
or in management's philosophy; a basic change in the industry in which the
company operates; introduction of new products or technologies; or the prospect
or effect of acquisition or merger activities.
The fund also invests in debt securities of companies having one or more of the
above characteristics. The fund may invest up to 35% of its net assets in debt
securities rated below investment grade. The fund may invest up to 20% of its
total assets in securities of companies involved in actual or anticipated
reorganizations or restructurings.
The adviser follows a value discipline in selecting securities. This means the
adviser seeks to purchase securities at large discounts to the adviser's
assessment of their intrinsic value. For the adviser, assessment of intrinsic
value is an ongoing, dynamic process employing both quantitative and qualitative
analysis. The adviser typically sells a security when, in the adviser's
assessment, the security no longer appears to offer long-term above average
risk-adjusted rates of return, or when a more compelling investment opportunity
is found.
For temporary defensive purposes, or when cash is temporarily available, the
fund may invest without limit in investment grade, short-term debt instruments,
including government, corporate and money market securities. The fund may not
achieve its investment objective when so invested.
LEGG MASON AMERICAN LEADING COMPANIES TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income
consistent with prudent investment risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for capital appreciation and potential for current income. Under
normal circumstances, the fund will seek to achieve its objective by investing
at least 75% of its total assets in common stocks of Leading Companies that have
market capitalizations of at least $2 billion and at least 75% of stocks held by
the fund will be dividend-paying stocks. The adviser defines a "Leading Company"
as one that, in the opinion of the adviser, has attained a major market share in
one or more products or services within its industry(ies) and possesses the
4
<PAGE>
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.
The adviser follows a value discipline in selecting securities. This means the
adviser seeks to purchase securities at large discounts to the adviser's
assessment of their intrinsic value. For the adviser, assessment of intrinsic
value is an ongoing, dynamic process employing both quantitative and qualitative
analysis. The adviser typically sells a security when, in the adviser's
assessment, the security no longer appears to offer long-term above average
risk-adjusted rates of return, or when a more compelling investment opportunity
is found.
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. Under normal circumstances, the fund expects to own a
minimum of 35 different securities. The adviser currently anticipates that the
fund will not invest more than 25% of its total assets in foreign securities.
During periods when the adviser 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 rate at least A by
Standard & Poor's or Moody's, or deemed by the adviser to be of comparable
quality. When cash is temporarily available, or for temporary defensive
purposes, the fund may invest without limit in repurchase agreements and money
market instruments, including high-quality short-term debt securities. The fund
may not achieve its investment objective when so invested.
LEGG MASON BALANCED TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
Under normal conditions, the fund invests up to 75% of its assets in equity
securities. The adviser emphasizes dividend-paying equity securities that, in
the opinion of the adviser, offer the potential for long-term growth and common
stocks or securities convertible into common stocks that do not pay current
dividends but offer prospects for capital appreciation and future income.
The fund invests at least 25% of its assets 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; high-quality commercial paper and other money market
instruments; and repurchase agreements. 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.
The fund is managed as a balanced fund. 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 the adviser's assessment
of investment opportunities. It is currently anticipated that the fund will
invest an average of 60% of its total assets in common stocks and preferred
stocks and the remaining 40% in various fixed income securities. These
percentages may vary in attempting to increase returns or reduce risk.
5
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Stock selection consists of three steps. The first step is to identify companies
the adviser believes are attractively priced according to a variety of
value-oriented selection criteria. Companies comprising the universe of value
candidates are characterized by low multiples of cash flow and/or are supported
by rich asset bases. Second, those equities satisfying the initial criteria are
assessed on such factors as the integrity of current earnings, the financial
strength of the company, and the trend of its businesses. The ideal is that low
valuation be accompanied by an improving fundamental outlook. The third step
involves a careful analysis of the overall portfolio and the role of each
component. The clear objective is proper diversification -- by sector and by
industry, as well as by equity characteristics.
The adviser's sell discipline is based upon monitoring the relationship between
the current market price of a stock and what the adviser believes to be its
intrinsic value. As that gap closes, the adviser reduces the size of the
position. Important fundamentals that impact intrinsic value include a
deterioration in growth potential and a change in the value of underlying
assets. A sale may also be affected to maintain appropriate portfolio
diversification, i.e., in circumstances where stock price appreciation in an
individual stock makes it a larger percentage of the portfolio than the adviser
thinks is reasonable for proper risk management.
Fixed income security selection is based upon identifying those fixed income
securities that the adviser deems to be undervalued. To identify purchase
candidates, the adviser performs three different types of analyses on an ongoing
basis: sector analysis, yield curve analysis and credit analysis.
Sector analysis is the most important. The current yield relationship of various
market sectors relative to their respective U.S. Treasury benchmarks are
compared to historical norms. Deviations can either represent an investment
opportunity as a result of investor misunderstanding or a fundamental shift in
investor attitude. The adviser seeks those investments that currently provide a
yield advantage based upon a price dislocation that the adviser believes to be
temporary in nature.
In performing yield curve analysis, the adviser seeks to identify anomalies from
historic yield curve relationships and will increase investment in those
portions of the yield curve that are apparently undervalued while underweighting
those sectors of the yield curve that are deemed to be overvalued.
With regard to credit analysis, the adviser seeks to identify those issues
experiencing positive credit momentum , I.E., improvement in credit quality. The
adviser places a particular emphasis on the trend in credit as opposed to the
absolute credit rating.
Absent the ability to find undervalued securities outside the Treasury sector,
the adviser will hold Treasury securities. The adviser avoids making interest
rate forecasts and, accordingly, the fund's fixed income portfolio maintains a
duration that is neutral to the fund's intermediate term benchmark.
With respect to the adviser's sell discipline, the following three criteria will
trigger a sale: (1) when a security has met its price yield objective or target,
I.E., a security reaches fair value and is no longer deemed to be undervalued
based upon the adviser's analysis; (2) when a swap opportunity exists within a
particular sector in which the adviser continues to find value but has
identified a particular security in that sector that appears to offer more
attractive valuation characteristics; or (3) when a change in fundamentals has
occurred that alters the adviser's view of the prospects for that particular
security or sector.
6
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LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests substantially all of its assets in domestic equity securities
of small-capitalization value companies. The adviser regards
small-capitalization companies as those whose market capitalizations at the time
of investment range between $10 million and the median of the NYSE market
capitalizations, currently about $________ billion. Value companies are those
with price-to-trailing twelve month earnings ratios that place them in the lower
quartile of price/earnings valuation.
The adviser's security selection process starts with a universe of
small-capitalization value companies which, as a group, have historically
outperformed the market over the long-term. From this universe, the adviser
follows a disciplined security exclusion process focusing on eliminating
companies with characteristics that the adviser has found to detract from
long-term portfolio returns.
First, the adviser adjusts stated earnings for any unusual and non-recurring
gains or losses to reach true operating earnings and eliminates companies which
no longer meet the adviser's low price/earnings criteria. Second, the adviser
eliminates companies that have pre-announced earnings declines. Third, the
adviser excludes companies which have experienced excessive price appreciation
over and above the market. Fourth, the adviser reviews company-specific
fundamentals to eliminate stocks that the adviser regards as having minimal
potential to increase in value or that the adviser believes have substantial
risk of downside performance risk.
Portfolios are constructed from the bottom-up from the companies that have
passed through the adviser's stock exclusion process. Positions are purchased on
a capitalization weighted basis with diligent attention to low cost
transactions.
The adviser's sell process is a mirror image of its buy process. The adviser
sells companies when the adviser believes they are no longer valuable, no longer
small-cap or if the fundamentals deteriorate.
When cash is temporarily available, or for temporary defensive purposes, the
fund may invest without limit in repurchase agreements and money market
instruments. The fund may not achieve its investment objective when so invested.
The adviser does not currently intend to invest in foreign securities.
7
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[icon] P R I N C I P A L R I S K S
IN GENERAL
Investors could lose money by investing in the funds. There is no assurance that
a fund will meet its investment objective. As with all mutual funds, an
investment in any of these funds is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
MARKET RISK -
Prices of equity securities generally fluctuate more than those of other
securities. A fund may experience a substantial or complete loss on an
individual stock. Market risk, the risk that stock prices will go down, may
affect a single issuer, an industry or sector of the economy or may affect the
market as a whole.
The value approach to investing involves the risk that those stocks may remain
undervalued. Value stocks as a group may be out of favor for a long period of
time, while the market concentrates on "growth" stocks.
SMALL AND MID-SIZED COMPANY STOCKS- SPECIAL INVESTMENT TRUST AND SMALL-CAP
VALUE
Investing in the securities of smaller companies 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
small 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 either Special
Investment Trust or Small-Cap Value may not be widely traded, and that a fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for a fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation but also may
involve greater risks than customarily are associated with more established
companies. The securities of smaller companies may be subject to more abrupt
fluctuations in market price than larger, more established companies. Small
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. In addition to exhibiting
greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks, I.E., small company stocks may decline
in price as the prices of large company stocks rise or vice versa.
COMPANY RISK- SPECIAL INVESTMENT TRUST
Special Investment Trust invests a significant portion of its assets in
companies whose market capitalizations are typically classified as small to mid
sized. It also invests in special situations, which are securities undergoing
unusual or possibly one-time developments. These investments may involve greater
risks of loss than investments in securities of larger, well-established
companies with a history of consistent operating patterns. There is always a
risk that the adviser will not properly assess the potential for an issuer's
future growth, or that an issuer will not realize that potential.
Investments in securities of companies being reorganized involve special risks,
including difficulty in obtaining information as to the financial condition of
such issuers and the fact that the market prices of such securities are subject
to above-average price volatility.
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FOREIGN SECURITIES RISK -
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, 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.
INVESTMENT MODELS -
The proprietary models used by each adviser to evaluate securities or
securities markets are based on the adviser's understanding of the interplay of
market factors and do not assure successful investment. The markets, or the
prices of individual securities, may be affected by factors not foreseen in
developing the models.
INTEREST RATE AND CREDIT RISK OF DEBT SECURITIES -
Debt securities are subject to interest rate risk, which is the possibility that
the market prices of the funds' investments may decline due to an increase in
market interest rates. Generally, the longer the maturity of a fixed income
security, the greater is the effect on its value when rates increase.
Debt securities are also subject to credit risk, I.E., the risk that an issuer
of securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which each fund invests. However, ratings are only the opinions of the agencies
issuing them and are not absolute guarantees as to quality.
Debt securities rated Baa/BBB, and unrated securities considered by a fund's
adviser to be of equivalent quality, are considered investment grade. Moody's
considers debt securities rated Baa to have speculative characteristics. Debt
securities rated below Baa/BBB are deemed by the ratings agencies to be
speculative and may involve major risk or exposure to adverse conditions. Those
in the lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding the
individual issuer are more likely to cause price volatility and weaken the
capacity of such securities to make principal and interest payments than is the
case for higher grade debt securities.
CALL RISK -
Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed income securities
experience when rates decline. Furthermore, the fund reinvests the proceeds of
the payoff at current yields, which are lower than those paid by the security
that was paid off.
SPECIAL RISKS OF MORTGAGE-BACKED SECURITIES - BALANCED TRUST
Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and
mortgage-backed securities are paid off earlier than expected. The effect on the
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fund's return is similar to that discussed above for call risk. When market
interest rates increase, the market values of mortgage-backed securities
decline. At the same time, however, mortgage refinancing slows, which lengthens
the effective maturities of these securities. As a result, the negative effect
of the rate increase on the market value of mortgage securities is usually more
pronounced than it is for other types of fixed income 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.
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.
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); (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 securities); and (4) solely the
creditworthiness of the issuer (E.G., Freddie Mac securities). There is at least
some possibility that Government securities not backed by the U.S. Treasury will
default. 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.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the funds, their advisers, distributors and
other outside service providers and could impact companies in which the funds
invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
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[icon] P E R F O R M A N C E
Each fund has two authorized classes of shares: Primary class shares and
Navigator class shares. Each class is subject to different expenses. Navigator
shares are offered through a separate prospectus only to certain investors. The
information below provides an indication of the risks of investing in Primary
shares of Value Trust, Total Return Trust, Special Investment Trust, American
Leading Companies Trust, and Balanced Trust by showing changes in their
performance from year to year. Annual returns assume reinvestment of dividends
and other distributions. Historical performance of a fund does not necessarily
indicate what will happen in the future.
VALUE TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40.76 48.04
40%
38.43 37.05
35%
34.73
30%
25%
20%
15%
11.44 11.26
10%
5%
1.39
0%
- -15% -16.95
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
DURING THE TEN CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
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Best quarter: December 31, 1998 35.86%
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Worst quarter: September 30, 1998 -21.28%
-----------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the S&P 500 Index, a broad-based unmanaged index of common
stocks, commonly used to measure general stock market activity.
11
<PAGE>
-------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
-------------------------------------------------------------------------
Value Trust - Primary Shares +48.04% +32.01% +20.92% +21.38%(a)
-------------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +19.21% +18.94%(b)
-------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) April 16, 1982 (commencement of operations) to December 31, 1998.
(b) April 30, 1982 to December 31, 1998.
TOTAL RETURN TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50%
40.48
40%
37.50
35%
30.36 31.14
30%
25%
20%
15%
14.32 14.08
10%
0% -0.39
-7.12
- -15% -16.82
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
</TABLE>
DURING THE TEN CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: March 31, 1991 +14.35%
-----------------------------------------------------------------------
Worst quarter: September 30, 1990 -18.90%
-----------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the S&P 500 Index.
12
<PAGE>
---------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
---------------------------------------------------------------------------
Total Return Trust - Primary -0.39% +16.81% +14.45% +12.02%(a)
Shares
---------------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +19.21% +18.12%(b)
---------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) November 21, 1985 (commencement of operations) to December 31, 1998.
(b) November 30, 1985 to December 31, 1998.
SPECIAL INVESTMENT TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50%
40%
38.44
35%
30%
28.85
25%
24.13 22.50 22.12 23.31
20%
15.36
15%
10%
0.52
0%
- -10%
-13.07
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
</TABLE>
DURING THE TEN CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: December 31, 1998 +40.13%
-----------------------------------------------------------------------
Worst quarter: September 30, 1998 -20.49%
-----------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the S&P 500 Index.
13
<PAGE>
------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
------------------------------------------------------------------------
Special Investment Trust - +23.31% +15.58% +18.52% +15.18%(a)
Primary Shares
------------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +19.21% +17.76%(b)
------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) December 30, 1985 (commencement of operations) to December 31, 1998.
(b) December 31, 1985 to December 31, 1998.
AMERICAN LEADING COMPANIES TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
35%
30%
28.36
25%
22.94 23.75 21.33
20%
15%
10%
0% -4.19
- -15%
1994 1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
DURING THE FIVE CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: December 31, 1996 +12.47%
-----------------------------------------------------------------------
Worst quarter: December 31, 1994 -4.11%
-----------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the S&P 500 Index.
14
<PAGE>
--------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF CLASS
--------------------------------------------------------------------
American Leading Companies +21.33% +17.82% +16.79%(a)
Trust - Primary Shares
--------------------------------------------------------------------
S&P 500 Index +28.58% +24.06% +22.78(b)
--------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) September 1, 1993 (commencement of operations) to December 31, 1998.
(b) September 30, 1993 to December 31, 1998.
BALANCED TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
35%
30%
25%
20%
18.71
15%
10%
5.60
5%
0%
1997 1998
DURING THE TWO CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
-----------------------------------------------------------------------
Best quarter: December 31, 1998 +9.00%
-----------------------------------------------------------------------
Worst quarter: September 30, 1998 -7.07%
-----------------------------------------------------------------------
In the following table, average annual returns as of December 31, 1998 are
compared with the S&P 500 Index.
15
<PAGE>
----------------------------------------------------
1 YEAR LIFE OF CLASS
----------------------------------------------------
Balanced Trust - Primary +5.60% +12.42%(a)
Shares
----------------------------------------------------
S&P 500 Index +28.58% (b)
----------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) October 1, 1996 (commencement of operations) to December 31, 1998.
(b) October 31, 1996 to December 31, 1998.
16
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets so they lower its share price and dividends. Other expenses
include transfer agency, custody, professional and registration fees. The funds
have no initial sales charge but are subject to 12b-1 fees.
The fees shown are current fees, and the expenses shown are based on expenses
for the fiscal year ended March 31, 1999. The fees and expenses are calculated
as a percentage of average net assets.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
VALUE TOTAL SPECIAL AMERICAN BALANCED SMALL-CAP
TRUST RETURN INVEST- LEADING TRUST VALUE TRUST
TRUST MENT COMPANIES
TRUST TRUST
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management fees (a) 0.67% 0.75% 0.73% 0.75% 0.75% 0.85%
------------------------------------------------------------------------------------------------------------------------
Distribution and Service 0.95% 1.00% 1.00% 1.00% 0.75% 1.00%
(12b-1) fees
------------------------------------------------------------------------------------------------------------------------
Other expenses 0.07% 0.12% 0.11% 0.18% 0.40% 0.53%
------------------------------------------------------------------------------------------------------------------------
Total Annual Fund 1.69% 1.87% 1.84% 1.93% 1.90% 2.38%
Operating Expenses (a)
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The manager has a voluntary agreement to waive fees so that Primary Share
expenses (exclusive of taxes, interest, brokerage and extraordinary expenses)
do not exceed an annual rates of average daily net assets for the following
funds: for Total Return Trust and American Leading Companies Trust, 1.95%
indefinitely; for Balanced Trust, 1.85%; and for Small-Cap Value Trust, 2.00%
until __________________. These agreements are voluntary and may be
terminated by Legg Mason Fund adviser at any time. During the fiscal year
ending March 31, 1999, no fee waivers were necessary for Value Trust, Total
Return Trust or Special Investment Trust.
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in the fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
-----------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
Value Trust $172 $533 $918 $1998
-----------------------------------------------------------------------------
Total Return Trust $190 $588 $1011 $2190
-----------------------------------------------------------------------------
Special Investment Trust $187 $579 $995 $2159
-----------------------------------------------------------------------------
American Leading Companies $196 $606 $1042 $2264
Trust
-----------------------------------------------------------------------------
17
<PAGE>
-----------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
Balanced Trust $193 $597 $1026 $2222
-----------------------------------------------------------------------------
Small-Cap Value Trust $241 $742 $1270 $2716
-----------------------------------------------------------------------------
18
<PAGE>
[icon] M A N A G E M E N T
MANAGEMENT AND ADVISERS:
Legg Mason Fund adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202, is the investment adviser for Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies Trust. The adviser is
responsible for making investment decisions and placing orders to buy or sell a
particular security. The adviser has delegated investment advisory functions for
Balanced Trust and Small-Cap Value Trust to separate advisers as described
below.
The adviser is also obligated to provide each fund with investment management
and administrative services and to oversee the funds' relationships with outside
service providers, such as the custodian, transfer agent, accountants, and
lawyers.
For its services during the fiscal year ended March 31, 1999, each fund paid the
adviser a percentage of its average daily net assets as follows:
---------------------------------------------------------------
Value Trust 0.67%
---------------------------------------------------------------
Total Return Trust 0.75%
---------------------------------------------------------------
Special Investment Trust 0.73%
---------------------------------------------------------------
American Leading Companies Trust 0.75%
---------------------------------------------------------------
Balanced Trust 0.75%
---------------------------------------------------------------
Small-Cap Value Trust 0.85%
---------------------------------------------------------------
The adviser acts as manager or adviser to investment companies with aggregate
assets of $[ ] billion as of June 30, 1999.
LMFA has entered into investment advisory agreements with Bartlett & Co.
("Bartlett") and Brandywine Asset Management, Inc. ("Brandywine") to provide
investment advisory services to Balanced Trust and Small-Cap Value,
respectively.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, as investment adviser
to Balanced Trust, is responsible for the actual investment management of this
fund which includes making investment decisions and placing orders to buy or
sell particular securities. LMFA pays Bartlett a monthly fee of 66 2/3% of the
fee it receives from Balanced Trust. Fees paid to Bartlett are net of any
waivers. Bartlett provides investment advice to individuals, corporations,
pension and profit sharing plans, trust accounts and mutual funds. Aggregate
assets under management of Bartlett were approximately $[ ] billion as of June
30, 1999.
Brandywine, 201 North Walnut Street, Wilmington, Delaware 19801, as investment
adviser to Small-Cap Value Trust is responsible for the actual investment
management of this fund which includes making investment decisions and placing
orders to buy or sell particular securities. LMFA pays Brandywine a monthly fee
of 58.8% of the fee it receives from Small-Cap Value Trust. Fees paid to
Brandywine are net of any waivers. Brandywine acts as investment adviser to [ ]
with aggregate assets of $[ ] as of June 30, 1999.
PORTFOLIO MANAGEMENT:
William H. Miller, III, President of LMFA, has had primary responsibility for
the day-to-day management of Value Trust since 1990. From Value Trust's
inception, in 1982, to November 1990, Mr. Miller co-managed that fund. Mr.
19
<PAGE>
Miller has also been primarily responsible for the day-to-day management of
Special Investment Trust since its inception in 1985. Lisa O. Rapuano is
assistant portfolio manager of Special Investment Trust. Mrs. Rapuano has been
the analyst responsible for the technology, media and telecommunication sectors,
as well as for some special situations outside these sectors, since joining LMFA
in September 1994. From July 1991 to September 1994 she was an analyst at
Franklin Street Partners, a money management firm.
Nancy T. Dennin, Senior Vice President of LMFA, has primary responsibility for
the day-to-day management of Total Return Trust. Prior to April 1, 1997, Mrs.
Dennin and Mr. Miller co-managed the fund for slightly over six years.
Mrs. Dennin has been employed at LMFA since 1985.
David E. Nelson, Senior Vice President of LMFA, has had primary responsibility
for the day-to-day management of American Leading Companies since March 9, 1998.
Previously, Mr. Nelson was the portfolio manager for the UAM ICM Equity
Portfolio since its inception on October 1, 1993. Mr. Nelson was employed at
Investment Counselors of Maryland from 1989-1998.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced Trust.
Both are senior portfolio managers of Bartlett. Mr. Rabiner has been employed by
Bartlett since 1983 and has served since then as Managing Director of its Fixed
Income Group. 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. Mr. Uible is a member of Bartlett's Management Committee,
and Mr. Rabiner and Mr. Uible are members of Bartlett's Investment Policy
Committee.
Henry F. Otto and Steven M. Tonkovich jointly manage Small-Cap Value. Both
are Managing Directors of Brandywine. Mr. Otto is a senior portfolio manager
and has been employed at Brandywine since 1987. Mr. Tonkovich is a senior
portfolio manager and analyst and has been employed at Brandywine since
1989.
DISTRIBUTOR OF EACH FUND'S SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of each fund's shares. Each fund has adopted a plan
that allows it to pay distribution fees and shareholder service fees for the
sale of its shares and for services provided to shareholders. Under each plan, a
fund may pay the distributor an annual distribution fee equal to 0.75% of the
fund's average daily net assets (0.70% for Value Trust and 0.50% for Balanced
Trust) and an annual service fee equal to 0.25% of its average daily net assets
attributable to Primary Shares.
Because these fees are paid out of each fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell Primary
Shares of each fund. The distributor pays these brokers up to 90% of the
distribution and service fee that it receives from a fund for those sales.
The advisers and distributor are wholly owned subsidiaries of Legg Mason, Inc.,
a financial services holding company.
20
<PAGE>
[icon] H O W T O I N V E S T
To open a regular account or a retirement account with one or more of the funds,
contact a Legg Mason financial adviser or other entity that has entered into an
agreement with the funds' distributor to sell shares of the Legg Mason family of
funds. A Legg Mason financial adviser will explain the shareholder services
available from the funds and answer any questions you may have. The minimum
initial investment is $1,000 and the minimum for each purchase of additional
shares is $100, except as noted below.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs, Roth
IRAs, simplified employee pension plans, savings incentive match plans for
employees and other qualified retirement plans. Contact your Legg Mason
financial adviser or other entity offering the funds to discuss which one might
be appropriate for you.
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
------------------------------------------------------------------------
IN PERSON Give your financial adviser a check for $100 or more
payable to the fund
------------------------------------------------------------------------
MAIL Mail your check, payable to the fund, for $100 or more
to your financial adviser
------------------------------------------------------------------------
TELEPHONE OR Call your financial adviser to transfer available cash
WIRE balances in your brokerage account or to transfer
money from your bank directly to Legg Mason. Wire
transfers may be subject to a service charge by your
bank.
------------------------------------------------------------------------
FUTURE FIRST Contact your Legg Mason financial adviser to enroll in
SYSTEMATIC Legg Mason's Future First Systematic Investment Plan.
INVESTMENT PLAN Under this plan, you may arrange for automatic monthly
investments in a fund of $50 or more. The fund's
transfer agent will transfer funds monthly from your
Legg Mason account or from your checking account to
purchase shares of that fund.
------------------------------------------------------------------------
AUTOMATIC Arrangements may be made with some employers and
INVESTMENTS financial institutions for regular automatic monthly
investments of $50 or more in shares of a fund. You
may also reinvest dividends from certain unit
investment trusts in shares of a fund.
------------------------------------------------------------------------
Call your financial adviser or another entity offering the funds for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities. You
should consult their program literature for further information.
Purchase orders received by your financial adviser or the entity offering the
funds before the close of the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) will be processed at the fund's net asset value as of the close of
the exchange on that day. Orders received after the close of the exchange will
21
<PAGE>
be processed at the fund's net asset value as of the close of the exchange on
the next day the exchange is open. Payment must be made within three business
days to Legg Mason.
22
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. You should
consult their program literature for further information.
Any of the following methods may be used to sell your shares:
------------------------------------------------------------------------------
TELEPHONE Call your Legg Mason financial adviser or entity offering the
fund and request a redemption. Please have the following
information ready when you call: the name of the fund, the
number of shares (or dollar amount) to be redeemed and your
shareholder account number.
Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you.
Wire requests will be subject to a fee of $18. Be sure that your
financial adviser has your bank account information on file.
The funds will follow reasonable procedures to ensure the
validity of any telephone redemption request, such as requesting
identifying information from callers or employing identification
numbers. Unless you specify that you do not wish to have
telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
------------------------------------------------------------------------------
MAIL Send a letter to the fund requesting redemption of your
shares. The letter should be signed by all of the owners of
the account and their signatures guaranteed without
qualification. You may obtain a signature guarantee from most
banks or securities dealers.
------------------------------------------------------------------------------
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial adviser or another entity.
Payment of the proceeds of redemptions of shares that were recently purchased by
check or acquired through reinvestment of dividends on such shares may be
delayed for up to 10 days from the purchase date in order to allow for the check
to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
23
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Primary Share is determined daily as of the close of the New
York Stock Exchange, on every day the exchange is open. To calculate each fund's
Primary Share price, the fund's assets attributable to Primary Shares are valued
and totaled, liabilities attributable to Primary Shares are subtracted, and the
resulting net assets are divided by the number of Primary Shares outstanding.
Each fund's securities are valued on the basis of market quotations or, lacking
such quotations, at fair value as determined under the guidance of the Board of
Directors.
Where a security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by the
adviser to be the primary market. Securities with remaining maturities of 60
days or less are valued at amortized cost. The fund will value its foreign
securities in U.S. dollars on the basis of the then-prevailing exchange rates.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The funds may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
24
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
For further information regarding any of the services below, please contact your
financial adviser or other entity offering the funds for sale.
CONFIRMATIONS AND ACCOUNT STATEMENTS:
You will receive from Legg Mason a confirmation after each transaction involving
Primary Shares (except a reinvestment of dividends or capital gain distributions
and purchases made through the Future First Systematic Investment Plan or
through automatic investments). Legg Mason or the entity through which you
invest will send you account statements monthly unless there has been no
activity in the account. Legg Mason will send you statements quarterly if you
participate in the Future First Systematic Investment Plan or if you purchase
shares through automatic investments.
SYSTEMATIC WITHDRAWAL PLAN:
If you are purchasing or already own shares with a net asset value of $5,000 or
more, you may elect to make systematic withdrawals from the fund. The minimum
amount for each withdrawal is $50. You should not purchase shares of the fund
that is participating in the plan.
EXCHANGE PRIVILEGE:
Primary fund shares may be exchanged for Primary Shares of any of the other Legg
Mason funds, provided these funds are eligible for sale in your state of
residence. You can request an exchange in writing or by phone. Be sure to read
the current prospectus for any fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. In addition, an exchange of a
fund's shares will be treated as a sale of the shares and any gain on the
transaction may be subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the fund in one calendar year
o terminate or modify the exchange privilege after 60 days' notice to
shareholders
25
<PAGE>
[icon] D I S T R I B U T I O N S A N D T A X E S
Each fund declares dividends to holders of Primary Shares out of its investment
company taxable income (which generally 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 foreign currency
gains annually. Special Investment Trust, American Leading Companies and
Small-Cap Value declare and pay dividends from investment company taxable income
following the end of each taxable year.
Distributions of substantially all of each fund's net capital gain (the excess
of net long-term capital gain over net short-term capital loss) are generally
declared and paid 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 a federal excise tax.
Your dividends and other distributions will be automatically reinvested in
additional Primary Shares of the distributing fund. If you wish to receive
dividends and/or other distributions in cash, you must notify the distributing
fund at least 10 days before the next dividend and/or other distribution is to
be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and other distributions are taxable to most investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional shares of the fund. Dividends from investment company
taxable income are taxable as ordinary income. Distributions of a fund's net
capital gain are taxable as long-term capital gain, regardless of how long you
have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Each fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number or who are otherwise subject to backup withholding. Each fund will also
withhold 31% of all dividends and capital gain distributions payable to such
shareholders who are otherwise subject to backup withholding.
Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.
26
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand each fund's
financial performance for the past five years or since its inception. Total
return represents the rate that an investor would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and other
distributions. For Value Trust, Total Return Trust and Special Investment Trust,
this information has been audited by their independent accountants,
____________, whose report, along with the funds' financial statements, is
incorporated by reference into the Statement of Additional Information (see back
cover) and is included in the annual report for these funds. For American
Leading Companies Trust, Balanced Trust and Small-Cap Value Trust, this
information has been audited by their independent auditors, _________________,
whose report, along with the funds' financial statements, is incorporated by
reference into the Statement of Additional Information and is included in the
annual report for these funds. The annual reports are available upon request by
calling toll-free 1-800-822-5544.
[icon] F I N A N C I A L H I G H L I G H T S
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Investment Operations Distributions
-----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Net Realized
For the Net Asset Net & Unrealized From Net
Years Value, Investment Gain (Loss) Total From From Net Realized Total Net Asset
Ended Beginning Income On Investment Investment Gain on Distribu- Value, End
Mar. 31, of Year (Loss) Investments Operations Income Investments tions of Year
---------------------------------------------------------------------------------------------------------------------
Value Trust - Primary Shares
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
---------------------------------------------------------------------------------------------------------------------
1998 $34.11 $(.02) $18.37 $18.35 $(.04) $(2.32) $(2.36) $50.10
---------------------------------------------------------------------------------------------------------------------
1997 26.99 .13 8.68 8.81 (.16) (1.53) (1.69) 34.11
---------------------------------------------------------------------------------------------------------------------
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41) 26.99
---------------------------------------------------------------------------------------------------------------------
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09) 20.21
---------------------------------------------------------------------------------------------------------------------
Special Investment Trust - Primary Shares
---------------------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------------------
1998 $26.55 $(.31) $11.28 $10.97 $ --- $(1.50) $(1.50) $36.02
---------------------------------------------------------------------------------------------------------------------
1997 25.09 (.23) 3.10 2.87 --- (1.41) (1.41) 26.55
---------------------------------------------------------------------------------------------------------------------
1996 19.96 --- 5.60 5.60 --- (.47) (.47) 25.09
---------------------------------------------------------------------------------------------------------------------
1995 21.56 (.06) (1.31) (1.37) --- (.23) (.23) 19.96
---------------------------------------------------------------------------------------------------------------------
Total Return Trust - Primary Shares
---------------------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------------------
1998 $19.39 $.44 $7.23 $7.67 $(.40) $(2.03) $(2.43) $24.63
---------------------------------------------------------------------------------------------------------------------
1997 16.45 .46 3.47 3.93 (.43) (.56) (.99) 19.39
---------------------------------------------------------------------------------------------------------------------
1996 12.79 .48 3.69 4.17 (.51) --- (.51) 16.45
---------------------------------------------------------------------------------------------------------------------
1995 13.54 .33 (.19) .14 (.29) (.60) (.89) 12.79
---------------------------------------------------------------------------------------------------------------------
American Leading Companies - Primary Shares
---------------------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------------------
1998 $14.74 $(.04)(A) $4.93 $4.89 $ --- $(1.85) $(1.85) $17.78
---------------------------------------------------------------------------------------------------------------------
1997 12.23 .01(A) 3.00 3.01 (.02) (.48) (.50) 14.74
---------------------------------------------------------------------------------------------------------------------
1996 10.18 .07(A) 2.08 2.15 (.10) --- (.10) 12.23
---------------------------------------------------------------------------------------------------------------------
27
<PAGE>
---------------------------------------------------------------------------------------------------------------------
1995 9.69 .12(A) .48 .60 (.11) --- (.11) 10.18
---------------------------------------------------------------------------------------------------------------------
Balanced Trust - Primary Shares
---------------------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------------------
1998 $10.16 $.21(B) $2.58 $2.79 $(.21) $(.12) $(.33) $12.62
---------------------------------------------------------------------------------------------------------------------
1997(C) 10.00 .09(B) .11 .20 (.04) --- (.04) 10.16
---------------------------------------------------------------------------------------------------------------------
U.S. Small-Cap Value - Primary Shares
---------------------------------------------------------------------------------------------------------------------
1999(D)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------------
Expenses to Net Investment Net Assets,
Total Average Net Income to Average Portfolio End of Year
Return Assets Net Assets Turnover Rate (thousands)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Value Trust - Primary Shares
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
--------------------------------------------------------------------------------------------------
1998 55.34% 1.73% (.1)% 12.9% $4,810,409
--------------------------------------------------------------------------------------------------
1997 33.59% 1.77% .4% 10.5% 2,236,400
--------------------------------------------------------------------------------------------------
1996 42.09% 1.82% .8% 19.6% 1,450,774
--------------------------------------------------------------------------------------------------
1995 9.77% 1.81% .5% 20.1% 986,325
--------------------------------------------------------------------------------------------------
Special Investment Trust - Primary Shares
--------------------------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------------------------
1998 42.88% 1.86% (1.1)% 29.8% $1,555,336
--------------------------------------------------------------------------------------------------
1997 11.58% 1.92% (.9)% 29.2% 947,684
--------------------------------------------------------------------------------------------------
1996 28.47% 1.96% --- 35.6% 792,240
--------------------------------------------------------------------------------------------------
1995 (6.37)% 1.93% (.2)% 27.5% 612,093
--------------------------------------------------------------------------------------------------
Total Return Trust - Primary Shares
--------------------------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------------------------
1998 42.44% 1.88% 2.1% 20.6% $700,535
--------------------------------------------------------------------------------------------------
1997 24.33% 1.93% 2.6% 38.4% 380,458
--------------------------------------------------------------------------------------------------
1996 33.23% 1.95% 3.2% 34.7% 267,010
--------------------------------------------------------------------------------------------------
1995 1.09% 1.93% 2.5% 61.9% 194,767
--------------------------------------------------------------------------------------------------
American Leading Companies - Primary Shares
--------------------------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------------------------
1998 35.18% 1.95%(A) (.28)%(A) 51.4% $200,326
--------------------------------------------------------------------------------------------------
1997 24.73% 1.95%(A) .05%(A) 55.7% 104,812
--------------------------------------------------------------------------------------------------
1996 21.24% 1.95%(A) .69%(A) 43.4% 76,100
--------------------------------------------------------------------------------------------------
1995 6.24% 1.95%(A) 1.21%(A) 30.5% 59,985
--------------------------------------------------------------------------------------------------
28
<PAGE>
--------------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------------
Expenses to Net Investment Net Assets,
Total Average Net Income to Average Portfolio End of Year
Return Assets Net Assets Turnover Rate (thousands)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Value Trust - Primary Shares
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
Balanced Trust - Primary Shares
--------------------------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------------------------
1998 27.80% 1.85%(B) 2.80%(B) 34.5% $47,761
--------------------------------------------------------------------------------------------------
1997(C) 2.02%(E) 1.85%(B), (F) 2.52%(B), (F) 5.1%(F) 17,948
--------------------------------------------------------------------------------------------------
U.S. Small-Cap Value - Primary Shares
--------------------------------------------------------------------------------------------------
1999(D)
--------------------------------------------------------------------------------------------------
</TABLE>
(A) 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 LMFA, the
annualized ratio of expenses to average daily net assets for the years
ended March 31, 1995, 1996, 1997, 1998, and 1999 would have been 2.12%,
2.20%, 2.06%, 1.99%, and _____, respectively.
(B) 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 LMFA, the
annualized ratio of expense to average daily net assets for the period
October 1, 1996 to March 31, 1997, and for the years ended March 31, 1998
and 1999 would have been 3.03%, 2.14%, and ______%, respectively.
(C) For the period October 1, 1996 (commencement of operations) to March 31,
1997.
(D) For the period June 15, 1998 (commencement of operations) to March 31,
1999.
(E) Not annualized.
(F) Annualized.
29
<PAGE>
L e g g M a s o n E q u i t y F u n d s
The following additional information about each fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
each fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about each fund, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC (phone 1-800-SEC-0330).
Reports and other information about each fund are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
LMF-001 SEC file numbers: 811-3380; 811-4308; 811-4451; 811-7692
30
<PAGE>
Legg Mason Value Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Investors Trust, Inc.
Legg Mason American Leading Companies Trust
Legg Mason Balanced Trust
Legg Mason U.S. Small-Capitalization Value Trust
NAVIGATOR SHARES PROSPECTUS JULY 31, 1999
logo
HOW TO INVEST(SM)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
<PAGE>
T A B L E O F C 0 N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Principal risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Distributions and taxes
xx Financial highlights
2
<PAGE>
LEGG MASON EQUITY FUNDS
[icon] I N V E S T M E N T 0 B J E C T I V E S
LEGG MASON VALUE TRUST, INC.:
INVESTMENT OBJECTIVE: long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities that, in the adviser's opinion,
offer the potential for capital growth. The adviser follows a value discipline
in selecting securities. This means the adviser seeks to purchase securities at
large discounts to the adviser's assessment of their intrinsic value. For the
adviser, assessment of intrinsic value is an ongoing, dynamic process employing
both quantitative and qualitative analysis. The adviser takes a long-term
approach to investing, generally characterized by long holding periods and low
portfolio turnover. The adviser typically sells a security when, in the
adviser's assessment, the security no longer appears to offer long-term above
average risk-adjusted rates of return, or when a more compelling investment
opportunity is found. The fund generally invests in companies with market
capitalizations greater than $1 billion, but may invest in companies of any
size.
The fund may invest in debt securities, including government, corporate and
money market securities for temporary defensive purposes, or when cash is
temporarily available. The fund may not achieve its investment objective when so
invested. Consistent with the investment objective, the fund may also invest in
debt securities when 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 or Baa by Moody's Investors Service, Inc. or, if unrated by those
entities, deemed by the adviser to be of comparable quality.
LEGG MASON TOTAL RETURN TRUST:
INVESTMENT OBJECTIVE: Capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for long-term capital growth and attractive current income. The
fund invests primarily in common stocks, debt securities, and securities
convertible into common stocks, but is not limited to these types of securities.
The fund may invest in securities that do not pay current income but do, in the
adviser's opinion, offer prospects for capital appreciation and/or future
income. The adviser follows a value discipline in selecting securities. This
means the adviser seeks to purchase securities at large discounts to the
adviser's assessment of their intrinsic value. For the adviser, assessment of
intrinsic value is an ongoing, dynamic process employing both quantitative and
qualitative analysis. The adviser typically sells a security when, in the
adviser's assessment, the security no longer appears to offer long-term
attractive total returns at reasonable risk, or when a more compelling
investment opportunity is found. The fund may invest in companies of any size.
The fund may invest in money market securities for temporary defensive purposes,
or when cash is temporarily available. The fund may not achieve its investment
objective when so invested. Consistent with the investment objective, the fund
may also invest in debt securities when 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
3
<PAGE>
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.
LEGG MASON SPECIAL INVESTMENT TRUST:
INVESTMENT OBJECTIVE: capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in equity securities, and securities convertible into
equity securities, of companies whose market capitalization are typically
classified as small to mid sized. It also invests in "special situations"
without regard to market capitalization.
Special situations are securities undergoing unusual or possibly one-time
developments that, in the opinion of the adviser, make them attractive for
investment.
Such developments may include actual or anticipated: sale or termination of an
unprofitable part of the company's business; change in the company's management
or in management's philosophy; a basic change in the industry in which the
company operates; introduction of new products or technologies; or the prospect
or effect of acquisition or merger activities.
The fund also invests in debt securities of companies having one or more of the
above characteristics. The fund may invest up to 35% of its net assets in debt
securities rated below investment grade. The fund may invest up to 20% of its
total assets in securities of companies involved in actual or anticipated
reorganizations or restructurings.
The adviser follows a value discipline in selecting securities. This means the
adviser seeks to purchase securities at large discounts to the adviser's
assessment of their intrinsic value. For the adviser, assessment of intrinsic
value is an ongoing, dynamic process employing both quantitative and qualitative
analysis. The adviser typically sells a security when, in the adviser's
assessment, the security no longer appears to offer long-term above average
risk-adjusted rates of return, or when a more compelling investment opportunity
is found.
For temporary defensive purposes, or when cash is temporarily available, the
fund may invest without limit in investment grade, short-term debt instruments,
including government, corporate and money market securities. The fund may not
achieve its investment objective when so invested.
LEGG MASON AMERICAN LEADING COMPANIES TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income
consistent with prudent investment risk
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in securities that, in the adviser's opinion, offer
the potential for capital appreciation and potential for current income. Under
normal circumstances, the fund will seek to achieve its objective by investing
at least 75% of its total assets in common stocks of Leading Companies that have
market capitalizations of at least $2 billion and at least 75% of stocks held by
the fund will be dividend-paying stocks. The adviser defines a "Leading Company"
as one that, in the opinion of the adviser, 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
4
<PAGE>
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.
The adviser follows a value discipline in selecting securities. This means the
adviser seeks to purchase securities at large discounts to the adviser's
assessment of their intrinsic value. For the adviser, assessment of intrinsic
value is an ongoing, dynamic process employing both quantitative and qualitative
analysis. The adviser typically sells a security when, in the adviser's
assessment, the security no longer appears to offer long-term above average
risk-adjusted rates of return, or when a more compelling investment opportunity
is found.
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. Under normal circumstances, the fund expects to own a
minimum of 35 different securities. The adviser currently anticipates that the
fund will not invest more than 25% of its total assets in foreign securities.
During periods when the adviser 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 rate at least A by
Standard & Poor's or Moody's, or deemed by the adviser to be of comparable
quality. When cash is temporarily available, or for temporary defensive
purposes, the fund may invest without limit in repurchase agreements and money
market instruments, including high-quality short-term debt securities. The fund
may not achieve its investment objective when so invested.
LEGG MASON BALANCED TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation and current income in order
to achieve an attractive total investment return consistent with reasonable risk
PRINCIPAL INVESTMENT STRATEGIES:
Under normal conditions, the fund invests up to 75% of its assets in equity
securities. The adviser emphasizes dividend-paying equity securities that, in
the opinion of the adviser, offer the potential for long-term growth and common
stocks or securities convertible into common stocks that do not pay current
dividends but offer prospects for capital appreciation and future income.
The fund invests at least 25% of its assets 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; high-quality commercial paper and other money market
instruments; and repurchase agreements. 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.
The fund is managed as a balanced fund. 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 the adviser's assessment
of investment opportunities. It is currently anticipated that the fund will
invest an average of 60% of its total assets in common stocks and preferred
stocks and the remaining 40% in various fixed income securities. These
percentages may vary in attempting to increase returns or reduce risk.
5
<PAGE>
Stock selection consists of three steps. The first step is to identify companies
the adviser believes are attractively priced according to a variety of
value-oriented selection criteria. Companies comprising the universe of value
candidates are characterized by low multiples of cash flow and/or are supported
by rich asset bases. Second, those equities satisfying the initial criteria are
assessed on such factors as the integrity of current earnings, the financial
strength of the company, and the trend of its businesses. The ideal is that low
valuation be accompanied by an improving fundamental outlook. The third step
involves a careful analysis of the overall portfolio and the role of each
component. The clear objective is proper diversification -- by sector and by
industry, as well as by equity characteristics.
The adviser's sell discipline is based upon monitoring the relationship between
the current market price of a stock and what the adviser believes to be its
intrinsic value. As that gap closes, the adviser reduces the size of the
position. Important fundamentals that impact intrinsic value include a
deterioration in growth potential and a change in the value of underlying
assets. A sale may also be affected to maintain appropriate portfolio
diversification, i.e., in circumstances where stock price appreciation in an
individual stock makes it a larger percentage of the portfolio than the adviser
thinks is reasonable for proper risk management.
Fixed income security selection is based upon identifying those fixed income
securities that the adviser deems to be undervalued. To identify purchase
candidates, the adviser performs three different types of analyses on an ongoing
basis: sector analysis, yield curve analysis and credit analysis.
Sector analysis is the most important. The current yield relationship of various
market sectors relative to their respective U.S. Treasury benchmarks are
compared to historical norms. Deviations can either represent an investment
opportunity as a result of investor misunderstanding or a fundamental shift in
investor attitude. The adviser seeks those investments that currently provide a
yield advantage based upon a price dislocation that the adviser believes to be
temporary in nature.
In performing yield curve analysis, the adviser seeks to identify anomalies from
historic yield curve relationships and will increase investment in those
portions of the yield curve that are apparently undervalued while underweighting
those sectors of the yield curve that are deemed to be overvalued.
With regard to credit analysis, the adviser seeks to identify those issues
experiencing positive credit momentum , i.e., improvement in credit quality. The
adviser places a particular emphasis on the trend in credit as opposed to the
absolute credit rating.
Absent the ability to find undervalued securities outside the Treasury sector,
the adviser will hold Treasury securities. The adviser avoids making interest
rate forecasts and, accordingly, the fund's fixed income portfolio maintains a
duration that is neutral to the fund's intermediate term benchmark.
With respect to the adviser's sell discipline, the following three criteria will
trigger a sale: (1) when a security has met its price yield objective or target,
i.e., a security reaches fair value and is no longer deemed to be undervalued
based upon the adviser's analysis; (2) when a swap opportunity exists within a
particular sector in which the adviser continues to find value but has
identified a particular security in that sector that appears to offer more
attractive valuation characteristics; or (3) when a change in fundamentals has
occurred that alters the adviser's view of the prospects for that particular
security or sector.
6
<PAGE>
LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST:
INVESTMENT OBJECTIVE: long-term capital appreciation
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests substantially all of its assets in domestic equity securities
of small-capitalization value companies. The adviser regards
small-capitalization companies as those whose market capitalizations at the time
of investment range between $10 million and the median of the NYSE market
capitalizations, currently about $________ billion. Value companies are those
with price-to-trailing twelve month earnings ratios that place them in the lower
quartile of price/earnings valuation.
The adviser's security selection process starts with a universe of
small-capitalization value companies which, as a group, have historically
outperformed the market over the long-term. From this universe, the adviser
follows a disciplined security exclusion process focusing on eliminating
companies with characteristics that the adviser has found to detract from
long-term portfolio returns.
First, the adviser adjusts stated earnings for any unusual and non-recurring
gains or losses to reach true operating earnings and eliminates companies which
no longer meet the adviser's low price/earnings criteria. Second, the adviser
eliminates companies that have pre-announced earnings declines. Third, the
adviser excludes companies which have experienced excessive price appreciation
over and above the market. Fourth, the adviser reviews company-specific
fundamentals to eliminate stocks that the adviser regards as having minimal
potential to increase in value or that the adviser believes have substantial
risk of downside performance risk.
Portfolios are constructed from the bottom-up from the companies that have
passed through the adviser's stock exclusion process. Positions are purchased on
a capitalization weighted basis with diligent attention to low cost
transactions.
The adviser's sell process is a mirror image of its buy process. The adviser
sells companies when the adviser believes they are no longer valuable, no longer
small-cap or if the fundamentals deteriorate.
When cash is temporarily available, or for temporary defensive purposes, the
fund may invest without limit in repurchase agreements and money market
instruments. The fund may not achieve its investment objective when so invested.
The adviser does not currently intend to invest in foreign securities.
7
<PAGE>
[icon] P R I N C I P A L R I S K S
IN GENERAL
Investors could lose money by investing in the funds. There is no assurance that
a fund will meet its investment objective. As with all mutual funds, an
investment in any of these funds is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
MARKET RISK -
Prices of equity securities generally fluctuate more than those of other
securities. A fund may experience a substantial or complete loss on an
individual stock. Market risk, the risk that stock prices will go down, may
affect a single issuer, an industry or sector of the economy or may affect the
market as a whole.
The value approach to investing involves the risk that those stocks may remain
undervalued. Value stocks as a group may be out of favor for a long period of
time, while the market concentrates on "growth" stocks.
SMALL AND MID-SIZED COMPANY STOCKS- SPECIAL INVESTMENT TRUST AND SMALL-CAP VALUE
Investing in the securities of smaller companies 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
small 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 either Special
Investment Trust or Small-Cap Value may not be widely traded, and that a fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for a fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation but also may
involve greater risks than customarily are associated with more established
companies. The securities of smaller companies may be subject to more abrupt
fluctuations in market price than larger, more established companies. Small
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. In addition to exhibiting
greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks, i.e., small company stocks may decline
in price as the prices of large company stocks rise or vice versa.
COMPANY RISK- SPECIAL INVESTMENT TRUST
Special Investment Trust invests a significant portion of its assets in
companies whose market capitalizations are typically classified as small to mid
sized. It also invests in special situations, which are securities undergoing
unusual or possibly one-time developments. These investments may involve greater
risks of loss than investments in securities of larger, well-established
companies with a history of consistent operating patterns. There is always a
risk that the adviser will not properly assess the potential for an issuer's
future growth, or that an issuer will not realize that potential.
Investments in securities of companies being reorganized involve special risks,
including difficulty in obtaining information as to the financial condition of
such issuers and the fact that the market prices of such securities are subject
to above-average price volatility.
8
<PAGE>
FOREIGN SECURITIES RISK -
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, 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.
INVESTMENT MODELS -
The proprietary models used by each adviser to evaluate securities or securities
markets are based on the adviser's understanding of the interplay of market
factors and do not assure successful investment. The markets, or the prices of
individual securities, may be affected by factors not foreseen in developing the
models.
INTEREST RATE AND CREDIT RISK OF DEBT SECURITIES -
Debt securities are subject to interest rate risk, which is the possibility that
the market prices of the funds' investments may decline due to an increase in
market interest rates. Generally, the longer the maturity of a fixed income
security, the greater is the effect on its value when rates increase.
Debt securities are also subject to credit risk, i.e., the risk that an issuer
of securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which each fund invests. However, ratings are only the opinions of the agencies
issuing them and are not absolute guarantees as to quality.
Debt securities rated Baa/BBB, and unrated securities considered by a fund's
adviser to be of equivalent quality, are considered investment grade. Moody's
considers debt securities rated Baa to have speculative characteristics. Debt
securities rated below Baa/BBB are deemed by the ratings agencies to be
speculative and may involve major risk or exposure to adverse conditions. Those
in the lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding the
individual issuer are more likely to cause price volatility and weaken the
capacity of such securities to make principal and interest payments than is the
case for higher grade debt securities.
CALL RISK -
Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed income securities
experience when rates decline. Furthermore, the fund reinvests the proceeds of
the payoff at current yields, which are lower than those paid by the security
that was paid off.
SPECIAL RISKS OF MORTGAGE-BACKED SECURITIES - BALANCED TRUST
Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and
mortgage-backed securities are paid off earlier than expected. The effect on the
9
<PAGE>
fund's return is similar to that discussed above for call risk. When market
interest rates increase, the market values of mortgage-backed securities
decline. At the same time, however, mortgage refinancing slows, which lengthens
the effective maturities of these securities. As a result, the negative effect
of the rate increase on the market value of mortgage securities is usually more
pronounced than it is for other types of fixed income 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.
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.
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); (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 securities); and (4) solely the
creditworthiness of the issuer (E.G., Freddie Mac securities). There is at least
some possibility that Government securities not backed by the U.S. Treasury will
default. 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.
YEAR 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the funds, their advisers, distributors and
other outside service providers and could impact companies in which the funds
invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the adviser and its affiliates and the other
service providers to the funds have reported that they are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
10
<PAGE>
[icon] P E R F 0 R M A N C E
Each fund has two authorized classes of shares: Primary class shares and
Navigator class shares. Each class is subject to different expenses. Primary
shares are offered through a separate prospectus. The information below provides
an indication of the risks of investing in a fund by showing changes in the
fund's performance from year to year. Annual returns assume reinvestment of
dividends and other distributions. Historical performance of a fund does not
necessarily indicate what will happen in the future.
As of the date of this prospectus, the Navigator class of shares of Balanced
Trust have not yet commenced operations. The returns presented are for Navigator
Shares of Value Trust, Total Return Trust, Special Investment Trust and American
Leading Companies Trust and for Balanced Trust Primary Shares, which are not
offered in this prospectus. The annual returns for Primary Shares and Navigator
Shares would differ only to the extent that the Navigator Shares would pay lower
expenses, and therefore would have higher returns.
VALUE TRUST - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
42.18 49.40
40%
39.82 38.49
35%
30%
25%
20%
15%
10%
5%
0%
1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
DURING THE FOUR CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: December 31, 1998 +36.15%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -11.47%
- --------------------------------------------------------------------------------
11
<PAGE>
In the following table, average annual returns as of December 31, 1998 are
compared with the S&P 500 Index, a broad-based unmanaged index of common stocks,
commonly used to measure general stock market activity.
- -----------------------------------------------------------------------------
1 YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------
Value Trust +49.40% +41.88(a)
- -----------------------------------------------------------------------------
S&P 500 Index +28.58% +29.65(b)
- -----------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) December 1, 1994 (commencement of operations) to December 31, 1998.
(b) December 31, 1994 to December 31, 1998.
TOTAL RETURN TRUST - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
39.03
35%
31.65 32.55
30%
25%
20%
15%
10%
5%
0%
1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
DURING THE FOUR CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: March 31, 1995 +19.29%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -15.63%
- --------------------------------------------------------------------------------
12
<PAGE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
1 YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------
Total Return % +23.48(a)
- -----------------------------------------------------------------------------
S&P 500 Index +28.58% +29.65(b)
- -----------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) December 1, 1994 (commencement of operations) to December 31, 1998.
(b) December 31, 1994 to December 31, 1998.
SPECIAL INVESTMENT TRUST - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
35%
30.04
30%
25%
23.83 23.44 24.50
20%
15%
10%
5%
0%
1995 1996 1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
DURING THE FOUR CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: December 31, 1998 +40.46%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -20.33%
- --------------------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
- -----------------------------------------------------------------------------
1 YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------
Special Investment Trust +24.50% +24.72(a)
- -----------------------------------------------------------------------------
S&P 500 Index +28.58% +29.65(b)
- -----------------------------------------------------------------------------
13
<PAGE>
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) December 1, 1994 (commencement of operations) to December 31, 1998.
(b) December 31, 1994 to December 31, 1998.
AMERICAN LEADING COMPANIES TRUST - NAVIGATOR SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
50%
40%
35%
30%
25.29
25%
20%
15%
10%
5%
0%
1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
DURING THE TWO CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter:
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -11.66%
- --------------------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
- -----------------------------------------------------------------------------
1 YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------
American Leading Companies % (a)
- -----------------------------------------------------------------------------
S&P 500 Index % (b)
- -----------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) October 4, 1996 (commencement of operations) to December 31, 1998.
(b) October 31, 1996 to December 31, 1998.
14
<PAGE>
BALANCED TRUST - PRIMARY SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)*
30%
25%
20%
15% 18.71%
10%
5% 5.6%
0%
1997 1998
*The fund's year-to-date total return as of June 30, 1999 is ____________.
DURING THE TWO CALENDAR YEARS ENDING DECEMBER 31, 1998:
Quarter Ended Total Return
- --------------------------------------------------------------------------------
Best quarter: December 31, 1998 +9.00%
- --------------------------------------------------------------------------------
Worst quarter: September 30, 1998 -7.07%
- --------------------------------------------------------------------------------
In the following table, average annual total returns as of December 31, 1998 are
compared with the S&P 500 Index.
1 YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------
Balanced Trust - Primary Shares +5.60% +12.42(a)
- -----------------------------------------------------------------------------
S&P 500 +28.58% (b)
- -----------------------------------------------------------------------------
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any.
(a) October 1, 1996 (commencement of operations of Balanced Trust-Primary
Shares) to December 31, 1998.
(b) October 31, 1996 to December 31, 1998.
15
<PAGE>
[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets so they lower its share price and dividends. Other expenses
include transfer agency, custody, professional and registration fees.
The fees and expenses shown are for the fiscal year ended March 31, 1999, and
are calculated as a percentage of average net assets. As of the date of this
prospectus Navigator Shares of Balanced Trust have not yet commenced operations.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- -----------------------------------------------------------------------------------
NAVIGATOR SHARES OF: Value Total Special American Balanced Small-Cap
Trust Return Invest- Leading Trust Value
ment Cos.
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
Management fees (a) % % % % % %
- -----------------------------------------------------------------------------------
Distribution and/or
Service (12b-1) fees none none none none none none
- -----------------------------------------------------------------------------------
Other Expenses % % % % % %
- -----------------------------------------------------------------------------------
Total Annual Fund
Operating Expenses (a) % % % % % %
- -----------------------------------------------------------------------------------
</TABLE>
(a) Legg Mason Fund Adviser, Inc. has voluntarily agreed to waive the management
fee to the extent necessary to limit total operating expenses relating to
Navigator Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) as follows: for Total Return Trust and American Leading Companies
Trust, _________% of each fund's average daily net assets attributable to
Navigator Shares indefinitely; for Balanced Trust, _________% of average daily
net assets attributable to Navigator shares until _________; and for Small-Cap
Value, _________% of average daily net assets attributable to Navigator Shares
until _________. These voluntary waivers may be terminated at any time. With the
waiver, management fees and total annual fund operating expenses for the fiscal
year ended March 31, 1999 would have been _________ and _________ for Total
Return Trust; _________ and _________ for American Leading Companies, _________
and _________ for Balanced Trust, and _________ and _________ for Small-Cap
Value.
EXAMPLE:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Value Trust $ $ $ $
- --------------------------------------------------------------------------------
Total Return Trust $ $ $ $
- --------------------------------------------------------------------------------
Special Investment Trust $ $ $ $
- --------------------------------------------------------------------------------
American Leading Companies
Trust $ $ $ $
- --------------------------------------------------------------------------------
Balanced Trust $ $ $ $
- --------------------------------------------------------------------------------
Small-Cap Value Trust $ $ $ $
- --------------------------------------------------------------------------------
16
<PAGE>
[icon] M A N A G E M E N T
MANAGEMENT AND ADVISERS:
Legg Mason Fund Adviser, Inc. ("LMFA"), 100 Light Street, Baltimore, Maryland
21202, is the investment adviser for Value Trust, Total Return Trust, Special
Investment Trust and American Leading Companies Trust. The adviser is
responsible for making investment decisions and placing orders to buy or sell a
particular security. The adviser has delegated investment advisory functions for
Balanced Trust and Small-Cap Value to separate advisers as described below.
The adviser is also obligated to provide each fund with investment management
and administrative services and to oversee the funds' relationships with outside
service providers, such as the custodian, transfer agent, accountants, and
lawyers.
For its services during the fiscal year ended March 31, 1999, each fund paid the
adviser a percentage of its average daily net assets as follows:
---------------------------------------
Value Trust
---------------------------------------
Total Return Trust
---------------------------------------
Special Investment Trust
---------------------------------------
American Leading Companies
Trust
---------------------------------------
Balanced Trust
---------------------------------------
Small-Cap Value Trust
---------------------------------------
The adviser acts as manager or adviser to investment companies with aggregate
assets of $[ ] billion as of June 30, 1999.
LMFA has entered into investment advisory agreements with Bartlett & Co.
("Bartlett") and Brandywine Asset Management, Inc. ("Brandywine") to provide
investment advisory services to Balanced Trust and Small-Cap Value,
respectively.
Bartlett, 36 East Fourth Street, Cincinnati, Ohio 45202, is investment adviser
to Balanced Trust. Bartlett is responsible for the actual investment management
of this fund which includes making investment decisions and placing orders to
buy or sell particular securities. LMFA pays Bartlett a monthly fee of [ ]% of
the fee it receives from Balanced Trust. Fees paid to Bartlett are net of any
waivers. Bartlett provides investment advice to individuals, corporations,
pension and profit sharing plans, trust accounts and mutual funds. Aggregate
assets under management of Bartlett were approximately $[ ] billion as of June
30, 1999.
Brandywine, 201 North Walnut Street, Wilmington, Delaware 19801, as investment
adviser to Small-Cap Value, is responsible for the actual investment management
of this fund which includes making investment decisions and placing orders to
buy or sell particular securities. LMFA. pays Brandywine a monthly fee of [ ]%
of the fee it receives from Small-Cap Value. Fees paid to Brandywine are net of
any waivers. Brandywine acts as investment adviser to [ ] with aggregate assets
of $[ ] as of June 30, 1999.
PORTFOLIO MANAGEMENT:
William H. Miller, III, President of LMFA, has had primary responsibility for
the day-to-day management of Value Trust since 1990. From Value Trust's
inception, in 1982, to November 1990, Mr. Miller co-managed that fund. Mr.
Miller has also been primarily responsible for the day-to-day management of
Special Investment Trust since its inception in 1985. Lisa O. Rapuano is
assistant portfolio manager of Special Investment Trust. Mrs. Rapuano has been
the analyst responsible for the technology, media and telecommunication sectors,
as well as for some special situations outside these sectors, since joining LMFA
17
<PAGE>
in September 1994. From July 1991 to September 1994 she was an analyst at
Franklin Street Partners, a money management firm.
Nancy T. Dennin, Senior Vice President of LMFA, has primary responsibility for
the day-to-day management of Total Return Trust. Prior to April 1, 1997, Mrs.
Dennin and Mr. Miller co-managed the fund for slightly over six years. Mrs.
Dennin has been employed at LMFA since 1985.
David E. Nelson, Senior Vice President of LMFA, has had primary responsibility
for the day-to-day management of American Leading Companies since March 9, 1998.
Previously, Mr. Nelson was the portfolio manager for the UAM ICM Equity
Portfolio since its inception on October 1, 1993. Mr. Nelson was employed at
Investment Counselors of Maryland from 1989-1998.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced Trust.
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. 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. Mr. Rabiner and Mr. Uible are members of Bartlett's Management
Committee and Investment Policy Committee.
Henry F. Otto and Steven M. Tonkovich jointly manage Small-Cap Value. Both are
Managing Directors of Brandywine. Mr. Otto is a senior portfolio manager and has
been employed at Brandywine since 1987. Mr. Tonkovich is a senior portfolio
manager and analyst and has been employed at Brandywine since 1989.
DISTRIBUTOR OF THE FUNDS' SHARES:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland
21202, is the distributor of each fund's shares under separate Underwriting
Agreements. Each Underwriting Agreement obligates Legg Mason to pay certain
expenses in connection with offering fund shares, including compensation to its
financial advisers, the printing and distribution of prospectuses, statements of
additional information and shareholder reports (after these have been printed
and mailed to existing shareholders at the funds' expense), supplementary sales
literature and advertising materials.
Legg Mason and the manager may pay non-affiliated entities out of their own
assets to support the distribution of Navigator Shares and shareholder
servicing.
Legg Mason and the advisers are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
18
<PAGE>
[icon] H O W T O I N V E S T
Navigator Shares are currently offered for sale only to:
o Institutional Clients of Legg Mason Trust Company for which they exercise
discretionary investment management responsibility and accounts of the
customers with such Institutional Clients ("Customers").
o qualified retirement plans managed on a discretionary basis and having net
assets of at least $200 million
o clients of Bartlett who, as of December 19, 1996, were shareholders of
Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund and for whom
Bartlett acts as an ERISA fiduciary
o any qualified retirement plan of Legg Mason, Inc. or of any of its
affiliates
o Certain institutions who were clients of Fairfield Group, Inc. as of
February 28, 1999 for investment of their own monies and monies for which
they act in a fiduciary capacity
Eligible investors may purchase Navigator Shares through a brokerage account at
Legg Mason. The minimum initial investment is $50,000 and the minimum for each
purchase of additional shares is $100. Institutional Clients may set different
minimums for their Customers' investments in accounts invested in Navigator
Shares.
Customers of certain Institutional Clients that have omnibus accounts with the
funds' transfer agent can purchase shares through those Institutions. The
distributor may pay such Institutional Clients for account servicing.
Institutional Clients may charge their Customers for services provided in
connection with the purchase and redemption of shares. Information concerning
these services and any applicable charges will be provided by the Institutional
Clients. This Prospectus should by read by Customers in connection with any such
information received by Institutional Clients. Any such fees, charges or
requirements imposed by Institutional Clients will be in addition to the fees
and requirements of this Prospectus.
Certain institutions that have agreements with Legg Mason or the funds may be
authorized to accept purchase and redemption orders on their behalf. Once the
authorized institution accepts the order, you will receive the next determined
net asset value. You should consult with your institution to determine the time
by which it must receive your order to get that day's share price. It is the
institution's responsibility to transmit your order to the fund in a timely
fashion.
Purchase orders received by Legg Mason before the Close of the New York Stock
Exchange (normally 4:00 p.m., Eastern time) will be processed at the fund's net
asset value as of the close of the exchange on that day. Orders received after
the close of the exchange will be processed at the fund's net asset value as of
the close of the exchange on the next day the exchange is open. Payment must be
made within three business days to the selling organization.
19
<PAGE>
[icon] H O W T O S E L L Y O U R S H A R E S
To redeem your shares by telephone:
o Call 1-800-822-5544
Please have available the number of shares (or dollar amount) to be redeemed and
the account number.
The funds will follow reasonable procedures to ensure the validity of any
telephone redemption request, such as requesting identifying information from
callers or employing identification numbers. Unless you specify that you do not
wish to have telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
Customers of Institutional Clients may redeem only in accordance with
instructions and limitations pertaining to their account at the Institution.
Redemption orders received by Legg Mason before the close of the exchange will
be transmitted to the funds' transfer agent. Your order will be processed at
that day's net asset value. Redemption orders received by Legg Mason after the
close of the exchange will be processed at the closing net asset value on the
next day the exchange is open.
Your order will be processed promptly and you will generally receive the
proceeds by mail to the name and address on the account registration within a
week. You may also have your telephone redemption requests paid by a direct wire
to a previously designated domestic commercial bank account
Redemptions of shares that were recently purchased by check or acquired through
reinvestment of dividends on such shares may be delayed for up to 10 days from
the purchase date in order to allow for the check to clear.
20
<PAGE>
[icon] A C C O U N T P O L I C I E S
CALCULATION OF NET ASSET VALUE:
Net asset value per Navigator Share is determined daily as of the close of the
New York Stock Exchange, on every day the exchange is open. To calculate each
fund's Navigator Share price, the fund's assets attributable to Navigator Shares
are valued and totaled, liabilities attributable to Navigator Shares are
subtracted, and the resulting net assets are divided by the number of Navigator
Shares outstanding. Each fund's securities are valued on the basis of market
quotations or, lacking such quotations, at fair value as determined under the
guidance of the Board of Directors.
Securities for which market quotations are readily available are valued at the
last sale price of the day for a comparable position, or, in the absence of any
such sales, the last available bid price for a comparable position. 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.
OTHER:
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason or its affiliates.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period
of time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or
during unusual market conditions. The funds may delay redemptions beyond
seven days, or suspend redemptions, only as permitted by the SEC.
21
<PAGE>
[icon] S E R V I C E S F O R I N V E S T O R S
CONFIRMATIONS AND ACCOUNT STATEMENTS:
Confirmations will be sent to Institutional Clients after each transaction
involving Navigator Shares which will include the total number of shares being
held in safekeeping by the transfer agent. The transfer agent will send
confirmations of each purchase and redemption transaction (except a reinvestment
of dividends or capital gain distributions). Beneficial ownership of shares by
Customer accounts will be recorded by the Institutional Client and reflected in
their regular account statements.
EXCHANGE PRIVILEGE:
Navigator Shares of a fund may be exchanged for Navigator Shares of any of the
other Legg Mason funds or the Legg Mason Cash Reserve Trust, provided these
funds are eligible for sale in your state of residence. You can request an
exchange in writing or by phone. Be sure to read the current prospectus for any
fund into which you are exchanging.
There is currently no fee for exchanges; however, you may be subject to a sales
charge when exchanging into a fund that has one. An exchange of a fund's shares
will be treated as a sale of the shares and any gain on the transaction may be
subject to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from a fund in one calendar year
o terminate or modify the exchange privilege after 60 days' notice to
shareholders
Some Institutional Clients may not offer all of the Navigator Funds for
exchange.
22
<PAGE>
[icon] D I S T R I B U T I O N S A N D T A X E S
Each fund declares dividends to holders of navigator shares out of its
investment company taxable income (which generally consists of net investment
income, any 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 foreign
currency gains annually. Special Investment Trust, American Leading Companies
and Small-Cap Value declare and pay dividends from investment company taxable
income following the end of each taxable year.
Distributions of substantially all of each fund's net capital gain (the excess
of net long-term capital gain over net short-term capital loss) are generally
declared and paid 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 a federal excise tax.
Your dividends and other distributions will be automatically reinvested in
additional Navigator Shares of the distributing fund. If you wish to receive
dividends and/or other distributions in cash, you must notify the distributing
fund at least 10 days before the next dividend and/or other distribution is to
be paid.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and other distributions are taxable to investors (other than
retirement plans and other tax-exempt investors) whether received in cash or
reinvested in additional Navigator Shares of the fund. Dividends from net
investment company taxable income are taxable as ordinary income. Distributions
of a fund's net capital gain are taxable as long-term capital gain, regardless
of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
Each fund's dividend and interest income, and gains realized from disposition of
foreign securities, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions.
A tax statement is sent to you at the end of each year detailing the tax status
of your distributions.
Each fund will withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. Each fund will also withhold 31% of all dividends and capital gain
distributions payable to such shareholders who are otherwise subject to backup
withholding.
Because each investor's tax situation is different, please consult your tax
adviser about federal, state and local tax considerations.
23
<PAGE>
[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand each fund's
financial performance for the past five years or since its inception. Total
return represents the rate that an investor would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and other
distributions. For Value Trust, Total Return Trust and Special Investment Trust,
this information has been audited by their independent accountants,
____________, whose report, along with the funds' financial statements, is
incorporated by reference into the Statement of Additional Information (see back
cover) and is included in the annual report for these funds. For American
Leading Companies Trust and Small-Cap Value Trust, this information has been
audited by their independent auditors, _________________, whose report, along
with the funds' financial statements, is incorporated by reference into the
Statement of Additional Information and is included in the annual report for
these funds. The annual reports are available upon request by calling toll-free
1-800-822-5544.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Investment Operations Distributions
----------------------------------------------------------------------------------------------------------------------
Net Realized
For the Net Asset Net & Unrealized From Net
Years Value, Investment Gain (Loss) Total From From Net Realized Total Net Asset
Ended Beginning Income On Investment Investment Gain on Distribu- Value, End
Mar. 31, of Year (Loss) Investments Operations Income Investments tions of Year
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Value Trust - Navigator Shares
----------------------------------------------------------------------------------------------------------------------
1999
----------------------------------------------------------------------------------------------------------------------
1998 $34.30 $.35 $18.55 $18.90 $(.31) $(2.32) (2.63) $50.57
----------------------------------------------------------------------------------------------------------------------
1997 27.08 .41 8.75 9.16 (.41) (1.53) (1.94) 34.30
----------------------------------------------------------------------------------------------------------------------
1996 20.27 .43 8.02 8.45 (.40) (1.24) (1.64) 27.08
----------------------------------------------------------------------------------------------------------------------
1995(B) 18.76 .12 1.40 1.52 (.01) --- (.01) 20.27
----------------------------------------------------------------------------------------------------------------------
Special Investment Trust - Navigator Shares
----------------------------------------------------------------------------------------------------------------------
1999
----------------------------------------------------------------------------------------------------------------------
1998 $27.04 $ --- $11.58 $11.58 $ --- $(1.50) $(1.50) $37.12
----------------------------------------------------------------------------------------------------------------------
1997 25.26 .02 3.17 3.19 --- (1.41) (1.41) 27.04
----------------------------------------------------------------------------------------------------------------------
1996 20.03 .09 5.78 5.87 (.17) (.47) (.64) 25.26
----------------------------------------------------------------------------------------------------------------------
1995(B) 19.11 .07 .85 .92 --- --- --- 20.03
----------------------------------------------------------------------------------------------------------------------
Total Return Trust - Navigator Shares
----------------------------------------------------------------------------------------------------------------------
1999
----------------------------------------------------------------------------------------------------------------------
1998 $19.53 $.66 $7.29 $7.95 $(.58) $(2.03) $(2.61) $24.87
----------------------------------------------------------------------------------------------------------------------
1997 16.52 .65 3.48 4.13 (.56) (.56) (1.12) 19.53
----------------------------------------------------------------------------------------------------------------------
1996 12.83 .62 3.72 4.34 (.65) --- (.65) 16.52
----------------------------------------------------------------------------------------------------------------------
1995(B) 12.66 .15 .25 .40 (.06) (.17) (.23) 12.83
----------------------------------------------------------------------------------------------------------------------
American Leading Companies - Navigator Shares
----------------------------------------------------------------------------------------------------------------------
1999
----------------------------------------------------------------------------------------------------------------------
1998 $14.71 $.10(G) $4.99 $5.09 $ --- $(1.85) $(1.85) $17.95
----------------------------------------------------------------------------------------------------------------------
1997(F) 13.30 .07(G) 1.94 2.01 (.12) (.48) (.60) 14.71
----------------------------------------------------------------------------------------------------------------------
24
<PAGE>
Small-Cap Value - Navigator Shares
----------------------------------------------------------------------------------------------------------------------
1999(H)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
-----------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------
Net
Investment
Total Expenses Income to Portfolio Net Assets,
Return to Average Average Net Turnover End of Year
Net Assets Assets Rate (thousands)
-------------------------------------------------------------------
Value Trust - Navigator Shares
-------------------------------------------------------------------
1999
-------------------------------------------------------------------
1998 56.90% .73% .9% 12.9% $179,664
-------------------------------------------------------------------
1997 34.97% .77% 1.4% 10.5% 83,752
-------------------------------------------------------------------
1996 43.53% .82% 1.8% 19.6% 52,332
-------------------------------------------------------------------
1995(B) 8.11%(C) .82%(D) 1.8%(D) 20.1% 36,519
-------------------------------------------------------------------
Special Investment Trust - Navigator Shares
-------------------------------------------------------------------
1999
-------------------------------------------------------------------
1998 44.42% .80% ---% 29.8% $63,299
-------------------------------------------------------------------
1997 12.81% .85% .1% 29.2% 41,415
-------------------------------------------------------------------
1996 29.85% .88% 1.0% 35.6% 35,731
-------------------------------------------------------------------
1995(B) 4.81%(C) .90%(D) 1.0%(D) 27.5% 26,123
-------------------------------------------------------------------
Total Return Trust - Navigator Shares
-------------------------------------------------------------------
1999
-------------------------------------------------------------------
1998 43.94% .83% 3.1% 20.6% $17,792
-------------------------------------------------------------------
1997 25.67% .86% 3.7% 38.4% 10,048
-------------------------------------------------------------------
1996 34.67% .94% 4.2% 34.7% 7,058
-------------------------------------------------------------------
1995(B) 2.28%(C) .86%(D),(E) 3.6%(D),(E) 61.9% 4,823
-------------------------------------------------------------------
American Leading Companies - Navigator Shares
-------------------------------------------------------------------
1999
-------------------------------------------------------------------
1998 36.68% .93%(G) .74%(G) 51.4% $82
-------------------------------------------------------------------
1997(F) 15.16%(D) .86%(D), (G) .98%(D), (G) 55.7% 55
-------------------------------------------------------------------
Small-Cap Value - Navigator Shares
-------------------------------------------------------------------
1999(H)
-------------------------------------------------------------------
(B) For the period December 1, 1994 (commencement of sale of Navigator Shares)
to March 31, 1995.
(C) Not annualized.
(D) Annualized.
25
<PAGE>
(E) Net of fees waived by LMFA in excess of a voluntary expense limitation of
.95% from inception to ____________________.
(F) For the period October 4, 1996 (commencement of sale of Navigator Shares)
to March 31, 1997.
(G) Net of fees waived pursuant to a voluntary expense limitation of 0.95% of
average daily net assts. If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for the period October 4,
1996 to March 31, 1997 and the years ended March 31, 1998 and 1999 would
have been 0.97%, 0.98%, and _________, respectively.
(H) For the period June 15, 1998 (commencement of operations) to March 31,
1999.
26
<PAGE>
L e g g M a s o n E q u i t y F u n d s
The following additional information about each fund is available upon request
and without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) this prospectus. The SAI provides additional details about
each fund and its policies.
ANNUAL AND SEMIANNUAL REPORTS - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated 100 Light Street,
P.O. Box 1476 Baltimore, Maryland 21203-1476
Information about the funds, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC. (phone 1-800-SEC-0330).
Reports and other information about the funds are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
LMF-041 SEC file numbers 811-3380; 811-4308;
811-4451; 811-7692.
27
<PAGE>
LEGG MASON EQUITY FUNDS
<TABLE>
<CAPTION>
<S> <C>
LEGG MASON VALUE TRUST, INC. LEGG MASON INVESTORS TRUST, INC.:
LEGG MASON TOTAL RETURN TRUST, INC. LEGG MASON AMERICAN LEADING COMPANIES TRUST
LEGG MASON SPECIAL INVESTMENT TRUST, INC. LEGG MASON BALANCED TRUST
LEGG MASON U.S. SMALL-CAPITALIZATION VALUE TRUST
</TABLE>
PRIMARY SHARES AND NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus for Primary Shares or for Navigator
Shares of the funds (both dated July 31, 1999), as appropriate, which have been
filed with the Securities and Exchange Commission ("SEC"). The Funds' annual
report is incorporated by reference into this Statement of Additional
Information. A copy of either of the Prospectuses or the annual report may be
obtained without charge from the Funds' distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason"), at 1-800-822-5544.
Legg Mason Wood Walker,
Incorporated
100 Light Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410)539-0000 (800)822-5544
<PAGE>
TABLE OF CONTENTS
Page
DESCRIPTION OF THE FUNDS.....................................................3
FUND POLICIES................................................................3
INVESTMENT STRATEGIES AND RISKS..............................................5
ADDITIONAL TAX INFORMATION..................................................21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................24
VALUATION OF FUND SHARES....................................................25
PERFORMANCE INFORMATION.....................................................26
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES..............................34
MANAGEMENT OF THE FUND......................................................36
THE FUNDS' INVESTMENT ADVISER/MANAGER.......................................38
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................41
THE FUNDS' DISTRIBUTOR......................................................43
CAPITAL STOCK INFORMATION...................................................46
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT.............46
THE FUNDS' LEGAL COUNSEL....................................................47
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS.................................47
FINANCIAL STATEMENTS........................................................47
Appendix A..................................................................48
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 any
fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
2
<PAGE>
DESCRIPTION OF THE FUNDS
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") and Legg Mason Investors Trust, Inc. ("Investors Trust") are
each diversified open-end investment companies that were established as Maryland
corporations on January 20, 1982, May 22, 1985, October 31, 1985, and May 5,
1993, respectively. Legg Mason American Leading Companies Trust ("American
Leading Companies"), Legg Mason Balanced Trust ("Balanced Trust"), and Legg
Mason U.S. Small-Capitalization Value Trust ("Small-Cap Value") are separate
series of Investors Trust.
FUND POLICIES
VALUE TRUST's investment objective is to seek long-term growth of capital.
TOTAL RETURN TRUST's investment objective is to seek capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. SPECIAL INVESTMENT TRUST's investment objective
is to seek capital appreciation. AMERICAN LEADING COMPANIES' investment
objective is to seek long-term capital appreciation and current income
consistent with prudent investment risk. 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. SMALL-CAP
VALUE's investment objective is to seek long-term capital appreciation.
In addition to the investment objective of each Fund described in the
Prospectuses, 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 25% or more 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;
3
<PAGE>
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, Balanced Trust and Small-Cap Value 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. 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.
4
<PAGE>
AMERICAN LEADING COMPANIES, BALANCED TRUST AND SMALL-CAP VALUE:
The following are some of the non-fundamental limitations which American
Leading Companies, Balanced Trust and Small-Cap Value currently observe. Each
Fund may not:
1. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with the use of permitted currency futures contracts and
options on currency futures contracts; or
2. 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 (No Fund intends to make short sales
in excess of 5% of its net assets during the coming year).
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.
Except as otherwise stated, if a fundamental or non-fundamental percentage
limitation set forth above is complied with at the time an investment is made, a
later increase or decrease in percentage resulting from a change in value of
portfolio securities, in the net asset value of a Fund, or in the number of
securities an issuer has outstanding, will not be considered to be outside the
limitation.
Unless otherwise stated, the investment policies and limitations contained
in this Statement of Additional Information are not fundamental, and can be
changed without shareholder approval.
INVESTMENT STRATEGIES AND RISKS
This section supplements the information in the Prospectuses concerning
the investments the Funds may make and the techniques they may use. Each Fund,
unless otherwise stated, may employ several investment strategies, including but
not limited to:
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 other regulatory practices and requirements comparable to those
applicable to domestic issuers. These risks are intensified when investing in
countries with developing economies and securities markets, also known as
"emerging markets." Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation, confiscatory taxation, withholding taxes and limitations on
the use or removal of funds or other assets.
The costs associated with investment in foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, are higher than
those associated with investment in domestic issuers. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of 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.
5
<PAGE>
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. 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. Each Fund may also invest in GDRs,
which are receipts, often denominated in U.S. dollars, issued by either a U.S.
or non-U.S. bank evidencing its ownership of the underlying foreign securities.
Small-Cap Value does not currently intend to invest in foreign securities.
Although not a fundamental policy subject to shareholder vote, the
advisers currently anticipate the 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. Small-Cap Value does not
currently intend to invest in foreign securities.
ILLIQUID SECURITIES
Value Trust and Total Return Trust each may invest up to 10% of its net
assets in illiquid securities. American Leading Companies, Balanced Trust,
Special Investment Trust and Small-Cap Value 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 to a Fund has determined are liquid pursuant to
guidelines established by each Fund's Board of Directors. Due to the absence of
an active trading market, a Fund may have difficulty valuing or disposing of
illiquid securities promptly.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the Securities
Act of 1933, or pursuant to an exemption from registration. 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.
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.
6
<PAGE>
DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of the
issuer's creditworthiness and also tend to vary inversely with market interest
rates. The value of such securities is likely to decline in times of rising
interest rates. Conversely, when rates fall, the value of these investments is
likely to rise. The longer the time to maturity the greater are such variations.
Generally, debt securities rated below BBB by 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 period of rising interest rates. Lower-rated debt securities are
also sometimes referred to as "junk bonds."
The market for lower-rated debt securities has expanded rapidly in recent
years. This growth has paralleled a long economic expansion. At certain times in
the past, the prices of many lower-rated debt securities declined, indicating
concerns that issuers of such securities might experience financial
difficulties. At those time, the yields on lower-rated debt securities rose
dramatically reflecting the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuer's financial
restructuring or default. There can be no assurance that such declines will not
recur.
The market for lower-rated debt securities is generally thinner and less
active than that for higher quality debt securities, which may limit 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 publicly and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market.
The ratings of S&P and Moody's represent the opinions of those agencies.
Such ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as many buyers. A description of
the ratings assigned to corporate debt obligations by Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's ("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, LMFA 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
7
<PAGE>
debt securities rated below A. If one rating agency has rated a security A or
better and another agency has rated it below A, LMFA may rely on the higher
rating in determining to purchase or retain the security on behalf of American
Leading Companies. 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.
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 of non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
nonconvertible securities but rank senior to common stock in a corporation's
capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. The price of a convertible
security often reflects variations in the price of the underlying common stock
in a way that non-convertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
convertible security's governing instrument, which may be less than the ultimate
conversion value.
Many convertible securities are rated below investment grade or, if
unrated, are considered of comparable quality. 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 LMFA 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."
If an investment grade security purchased by Value Trust, Total Return
Trust or Special Investment Trust is subsequently given a rating below
investment grade, LMFA will consider that fact in determining whether to retain
that security in that Fund's portfolio, but is not required to dispose of it.
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
8
<PAGE>
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.
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 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.
COVERED CALL OPTIONS
Each 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, a Fund might write covered call options on
securities generally when the adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by a 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. A 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, a Fund could lose the ability to participate in an increase in the
value of such securities above the exercise price of the call option because
such an increase would likely be offset by an increase in the cost of closing
out the call option.
If a 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.
Each 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 a Fund intends to write only those exchange-traded
options for which there appears to be an active secondary market, there is no
9
<PAGE>
assurance that a liquid secondary market will exist for any particular option at
any specific time. With respect to options written by a 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.
A 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. A 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.
As a non-fundamental policy, ALC 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.
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 if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations and certain U.S. government agencies. The U.S.
Treasury recently began issuing securities whose principal value is indexed to
the Consumer Price Index (also known as "Treasury Inflation-Protection
Securities"). The funds will only purchase indexed securities of issuers which
its adviser determines present minimal credit risks and will monitor the
issuer's creditworthiness during the time the indexed security is held. The
adviser will use its judgment in determining whether indexed securities should
be treated as short-term instruments, bonds, stock or as a separate asset class
for purposes of 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 net assets in indexed securities. Indexed securities may
fluctuate according to a multiple of changes in the underlying instrument and,
in that respect, have a leverage-like effect on a Fund.
STRIPPED SECURITIES
Stripped securities are created by separating bonds into their principal
and interest components and selling each piece separately (commonly referred to
as IOs and POs). Stripped securities are more volatile than other fixed income
securities in their response to changes in market interest rates. The value of
some stripped securities moves in the same direction as interest rates, further
increasing their volatility.
ZERO COUPON BONDS
Zero coupon bonds do not provide for cash interest payments but instead
are issued at a significant discount from face value. Each year, a holder of
such bonds must accrue a portion of the discount as income. Because each Fund is
required to pay out substantially all of its income each year, including income
accrued on zero coupon bonds, a Fund may have to sell other holdings to raise
cash necessary to make the payout. Because issuers of zero coupon bonds do not
make periodic interest payments, their prices can be very volatile when market
interest rates change.
CLOSED-END INVESTMENT COMPANIES
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.
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THE FOLLOWING INFORMATION APPLIES TO SPECIAL INVESTMENT TRUST AND SMALL-CAP
VALUE:
SMALL AND MID-SIZED COMPANY STOCKS
The advisers for Special Investment Trust and Small-Cap Value believe 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. Each 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
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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 either Special
Investment Trust or Small-Cap Value may not be widely traded, and that a Fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for a Fund to dispose of such
securities at prevailing market prices in order to meet redemptions. However, as
a non-fundamental policy, Special Investment Trust and Small-Cap Value will not
invest more than 15% of their respective net assets in illiquid securities.
Investments in securities of companies with small market capitalizations
are generally considered to offer greater opportunity for appreciation but also
may involve greater risks than customarily are associated with more established
companies. The securities of small companies may be subject to more abrupt
fluctuations in market price than larger, more established companies. Small
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. In addition to exhibiting
greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks, I.E., small company stocks may decline
in price as the prices of large company stocks rise or vice versa.
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 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 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 and Freddie Mac
each issue pass-through securities which are guaranteed as to principal and
interest by Fannie Mae and Freddie Mac, 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
Freddie Mac participation certificates ("PCs") because there is a tendency for
the conventional and privately-insured mortgages underlying Freddie Mac PCs to
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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. 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 dollar-weighted average maturity of the fixed income
portion of the portfolio, Bartlett, investment adviser to Balanced Trust, 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 Bartlett believes 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.
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 Freddie Mac, Fannie Mae, 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.
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The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
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.
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 following information applies to VALUE TRUST, TOTAL RETURN TRUST, SPECIAL
INVESTMENT TRUST, BALANCED TRUST AND SMALL-CAP VALUE: (SMALL-CAP VALUE DOES NOT
CURRENTLY INTEND TO INVEST IN FUTURES AND OPTIONS.)
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST
Each of these Funds 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 a fund, if its adviser
is not successful in employing such instruments in managing the Fund's
investments, the Fund's performance will be worse than if the Fund did not make
such investments.
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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 would 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 contact 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 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 were 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 off-set all or a portion of the
Fund's resulting losses in its stock holdings. However, option premiums tend to
decrease over time as the expiration date nears. Therefore, because of the costs
of the option (in the form of premium and transaction costs), 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 stock, with results similar to those
obtainable from purchasing a futures contract, but with risk limited to the cost
of the option if stock prices fell. At the same time, 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 advisers 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
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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 hedge 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 elated 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. Small-Cap Value does not currently intend to invest in futures and
options.
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.
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.
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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
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 and Total Return Trust each may invest up to 10% and Special
Investment Trust, Balanced Trust and Small-Cap Value 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
No Fund will 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. No Fund will 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
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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.
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.
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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 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.
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.
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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.
FORWARD CURRENCY CONTRACTS
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. No Fund will 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. 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
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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:
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 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
When cash is temporarily available, or for temporary defensive purposes,
each Fund may invest without limit in repurchase agreement and money market
instruments, including high-quality short-term debt securities. A repurchase
agreement is an agreement under which either U.S. government obligations or
high-quality liquid debt securities are acquired from a securities dealer or
bank subject to resale at an agreed-upon price and date. The securities are held
for 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
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of default during the term of the agreement based on guidelines established by
the Funds' Board of Directors.
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, Balanced Trust, Special Investment Trust and
Small-Cap Value) or more than 10% of net assets (with respect to Value Trust and
Total Return 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 apply to them.
GENERAL
For federal tax purposes, each Fund is treated as a separate corporation.
To continue to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended ("Code"), 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) the fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward currency contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in the securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If any fund failed to qualify for treatment as a RIC for any taxable
year, (i) it would be taxed at corporate rates on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (ii) the shareholders would treat all those distributions,
including distributions of net capital gain (I.E., the excess of net long-term
capital gain over net short-term capital loss), as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.
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, and gains realized thereby,
may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the total return on its
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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 federal alternative minimum tax.
Distributions of net capital gain made by any 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 -- other than a
"controlled foreign corporation" (i.e., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which a Fund is a U.S. shareholder -- 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 it distributes that income
to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its PRO
RATA share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund probably would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if the QEF did not
distribute those earnings and gain to the Fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Each Fund may elect to "mark-to-mark" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included in income by the
Fund for prior taxable years under the election (and under regulations proposed
in 1992 that provided a similar election with respect to the stock of certain
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PFICs). A Fund's adjusted basis in each PFIC's stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder.
OPTIONS, FUTURES, FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCIES
The use of hedging instruments, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses each Fund realizes
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains that may be excluded by future regulations) -- and gains
from options derived by American Leading Companies, or from options, futures and
forward currency contracts derived by each other Fund, with respect to its
business of investing in securities or foreign currencies -- will qualify as
permissible income under the Income Requirement.
Certain futures and foreign currency contracts in which a Fund may invest
will be subject to section 1256 of the Code ("section 1256 contracts"). Any
section 1256 contracts a Fund holds at the end of each taxable year other than
contracts with respect to which the Fund has made a "mixed straddle election,
must be "marked-to-market" (that is, treated as having been sold at that time
for their fair market value), with the result that unrealized gains or losses
will be treated as though they were realized. Sixty percent of any net gain or
loss recognized on these deemed sales, and sixty percent of any net realized
gain or loss on section 1256 contracts actually sold by the Fund during the year
will be treated as long-term capital gain or loss, and the balance will be
treated as short-term capital gain or loss. Section 1256 contracts also may be
marked-to market for purposes of the Excise Tax. These rules may operate to
increase the amount that a fund must distribute to satisfy the Distribution
Requirement (I.E., with respect to the portion treated as short-term capital
gain), which will be taxable to the shareholders as ordinary income, and to
increase the net capital gain a fund recognizes, without in either case
increasing the cash available to the fund. A fund may elect to exclude certain
transactions from the operation of section 1256, although doing so may have the
effect of increasing the relative proportion of net short-term capital gain
(taxable as ordinary income) and thus increasing the amount of dividends that
must be distributed.
When a covered call option written (sold) by 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 on the
exercise plus the premium received when the option was written exceeds or is
less than the basis of the underlying security.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which a Fund may invest. Section 1092 defines a
"straddle" as offsetting positions with respect to personal property; for these
purposes, options and futures contracts are personal property. Under section
1092, any loss from the disposition of a position in a straddle generally may be
deducted only to the extent the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle; in addition, these rules may apply to
postpone the recognition of loss that otherwise would be recognized under the
mark-to-market rules discussed above. The regulations under section 1092 also
provide certain "wash sale" rules, which apply to transactions where a position
is sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses
from the affected straddle positions would be determined under rules that vary
according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Funds of straddle transactions are not entirely clear.
If a Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or a futures or forward
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currency contract entered into by a Fund or a related person with respect to the
same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction of
a fund during any taxable year that otherwise would be treated as a constructive
sale if the transaction is closed within 30 days after the end of that year and
the fund holds the appreciated financial position unhedged for 60 days after
that closing (I.E., at no time during that 60-day period is the fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
To the extent a fund recognizes income from a "conversion transaction," as
defined in section 1258 of the Code, all or part of the gain from the
disposition or other termination of a position held as part of the conversion
transaction may be recharacterized as ordinary income. A conversion transaction
generally consists of two or more positions taken with regard to the same or
similar property, where (1) substantially all of the taxpayer's return is
attributable to the time value of its net investment in the transaction and (2)
the transaction satisfies any of the following criteria: (a) the transaction
consists of the acquisition of property by the taxpayer and a substantially
contemporaneous agreement to sell the same or substantially identical property
in the future; (b) the transaction is a straddle, within the meaning of section
1092 of the Code (see above); (c) the transaction is one that was marketed or
sold to the taxpayer on the basis that it would have the economic
characteristics of a loan but the interest-like return would be taxed as capital
gain; or (d) the transaction is described as a conversion transaction in future
regulations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason, certain of its
affiliates and unaffiliated entities having an agreement with Legg Mason.
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 any qualified retirement plan of Legg
Mason, Inc. or of any of its affiliates. 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
Legg Mason account or from your checking account to be used to buy Primary
Shares at the per share net asset value determined on the day the funds are sent
from your bank. You will receive a quarterly account statement. You may
terminate the Future First Systematic Investment Plan at any time without charge
or penalty. Forms to enroll in the Future First Systematic Investment Plan are
available from any Legg Mason or affiliated office.
Investors in Primary Shares may also buy Primary Shares through a plan
permitting transfers of funds from a financial institution. Certain financial
institutions may allow the investor, on a pre-authorized basis, to have $50 or
more automatically transferred monthly for investment in shares of 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"),
Simplified Employee Pension Plan ("SEP"), Savings Incentive Match Plan for
Employees ("SIMPLE") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value per share
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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. No
Fund will 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,
Martin Luther King, Jr. 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 the NASDAQ Stock Market securities
are normally valued at last sale prices. Other over-the-counter securities, and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), are valued at the mean of latest closing bid and
asked prices. Securities with remaining maturities of 60 days or less are valued
at amortized cost. Securities and other assets quoted in foreign currencies will
be valued in U.S. dollars based on the currency exchange rates prevailing at the
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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.
Performance data is only historical, and is not intended to indicate any Fund's
future performance.
VALUE TRUST:
PRIMARY SHARES
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
- --------------------------------------------------------------------------------
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 110,379 19,502 129,881
1998 172,493? 29,268? 201,761
1999 259,794 42,708 302,502
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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
- --------------------------------------------------------------------------------
* April 16, 1982 (commencement of operations) to March 31, 1983.
NAVIGATOR SHARES
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
- --------------------------------------------------------------------------------
1995* $10,805 $ 6 $10,811
1996 15,249 268 15,517
1997 20,323 619 20,942
1998 31,713 1,146 32,859
1999 48,038 1,688 49,726
* 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, 1999 would have been $146,180, and the investor would
have received a total of $29,223 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, 1999 would have
been $39,707, and the investor would have received a total of $4,062 in
distributions. If the adviser had not waived certain fees in the 1983-1999
fiscal years, returns would have been lower.
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<PAGE>
TOTAL RETURN TRUST:
PRIMARY SHARES
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
- --------------------------------------------------------------------------------
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
1997 26,102 6,890 32,992
1998 37,430 9,565 46,995
1999 34,742 8,903 43,175
* November 21, 1985 (commencement of operations) to March 31, 1986.
NAVIGATOR SHARES
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
- --------------------------------------------------------------------------------
1995* $10,203 $160 $10,363
1996 13,106 668 13,774
1997 15,989 1,321 17,310
1998 22,606 2,311 24,917
1999 20,509 2,619 23,128
* December 1, 1994 (commencement of operations) to March 31, 1995.
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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, 1999 would have been $21,690, and the investor would
have received a total of $10,332 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, 1999 would have
been $16,643, and the investor would have received a total of $5,056 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
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
- --------------------------------------------------------------------------------
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 38,345 1,526 39,871
1998 54,898 2,070 56,968
1999 64,288 2,230 66,518
* December 30, 1985 (commencement of operations) to March 31, 1986.
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<PAGE>
NAVIGATOR SHARES
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
- --------------------------------------------------------------------------------
1995* $10,481 - $10,481
1996 13,489 $121 13,610
1997 15,224 129 15,353
1998 21,996 177 22,173
1999 25,948 193 26,141
* 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, 1999 would have been $38,820, and the investor would
have received a total of $10,646 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, 1999 would have
been $21,313, and the investor would have received a total of $3,249 in
distributions. If the adviser had not waived certain fees in the 1986-1998
fiscal years, returns would have been lower.
AMERICAN LEADING COMPANIES:
PRIMARY SHARES
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
- --------------------------------------------------------------------------------
1994* $9,690 $ 24 $9,714
1995 10,180 140 10,320
1996 12,230 283 12,513
1997 15,242 366 15,608
1998 20,658 442 21,100
1999 24,713 506 25,219
* September 1, 1993 (commencement of operations) to March 31, 1994.
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NAVIGATOR SHARES
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
- --------------------------------------------------------------------------------
1997* $11,428 $88 $11,516
1998 15,602 110 15,742
**1999 ------- --- -------
* October 4, 1996 (commencement of operations) to March 31, 1997.
**
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, 1999 would have been $20,380, and the investor would
have received a total of $3,295 in distributions.
BALANCED TRUST:
PRIMARY SHARES
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
- --------------------------------------------------------------------------------
1997* $10,160 $42 $10,202
1998 12,749 289 13,038
1999 12,241 473 12,687
* October 4, 1996 (commencement of operations) to March 31, 1997.
If the investor had not reinvested dividends and other distributions, the
total value of the hypothetical investment as of March 31, 1999 would have been
$11,980, and the investor would have received a total of $630 in distributions.
If the adviser had not waived certain fees in the fiscal years ended March 31,
1997 and 1998, returns would have been lower.
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.
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<PAGE>
SMALL-CAP VALUE TRUST:
PRIMARY SHARES
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
- --------------------------------------------------------------------------------
1999*
* June 15, 1998 (commencement of operations) to March 31, 1999.
If the investor had not reinvested dividends and other distributions, the total
value of the hypothetical investment as of March 31, 1999 would have been
$______________, and the investor would have received a total of
$_________________ in distributions.
NAVIGATOR SHARES
Value of Original Shares Value of Shares
Plus Shares Obtained Acquired Through
Through Reinvestment of Reinvestment of
Fiscal Year Capital Gain Distributions Income Dividends Total Value
- --------------------------------------------------------------------------------
1999*
* June 19, 1998 (commencement of operations) to March 31, 1999.
If the investor had not reinvested dividends and other distributions, the total
value of the hypothetical investment as of March 31, 1999 would have been
$___________________, and the investor would have received a total of
$________________ in distributions.
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
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<PAGE>
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 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
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<PAGE>
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 periods of low price levels.
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 approximately $89 billion as of March 31, 1999.
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 of Primary Shares ranked among general equity funds it measured
during the one year ended April 30, 1999. For the five years ended April 30,
1999, Value Trust's total return ranked among equity funds and for the ten years
ended April 30, 1999, 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. Rankings
may have been different if the adviser had not waived certain fees during the
periods in question.
TAX-DEFERRED RETIREMENT PLANS - PRIMARY SHARES
In general, income earned through the investment of assets of qualified
retirement plans is not taxed to the beneficiaries of those plans until the
income is distributed to them. Primary Share investors who are considering
establishing an IRA, SEP, SIMPLE or other qualified retirement plan should
consult their attorneys or other tax advisers with respect to individual tax
questions. The option of investing in those plans with respect to Primary Shares
through regular payroll deductions may be arranged with a Legg Mason or
affiliated financial advisor and your employer. Additional information with
respect to these plans is available upon request from any Financial Advisor or
Service Provider.
TRADITIONAL IRA. Certain Primary Share investors may obtain tax advantages
by establishing IRAs. Specifically, except as noted below, if neither you nor
your spouse is an active participant in a qualified employer or government
retirement plan, or if either you or your spouse is an active participant and
your adjusted gross income does not exceed a certain level, then each of you may
deduct cash contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. A married investor
who is not an active participant in such a plan and files a joint income tax
return with his or her spouse (and their combined adjusted gross income does not
exceed $150,000) is not affected by the spouse's active participant status. In
addition, if your spouse is not employed and you file a joint return, you may
establish a separate IRA for your spouse and contribute up to a total of $4,000
to the two IRAs, provided that the contribution to either does not exceed
34
<PAGE>
$2,000. If your employer's plan qualifies as a SEP, permits voluntary
contributions and meets certain other requirements, you may make voluntary
contributions to that plan that are treated as deductible IRA contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your Fund shares are then not immediately taxable to
you or the IRA; they become taxable only when distributed to you. To avoid
penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than the end of the taxable year in which you
attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability, where the distribution is rolled over
into another qualified plan or certain other situations.
ROTH IRA. A shareholder whose adjusted gross income (or combined adjusted
gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
EDUCATION IRA. Although not technically for retirement savings, an
Education IRA provides a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than the maximum amount allowable under
current law (currently $500) may be contributed for any year to Education IRAs
for the same beneficiary. Contributions are not deductible and may not be made
after the beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or transferred to an Education IRA of a qualified
family member).
SIMPLIFIED EMPLOYEE PENSION PLAN -- SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES - SIMPLE
An employer with no more than 100 employees that does not maintain another
retirement plan may establish a SIMPLE either as separate IRAs or as part of a
Code section 401(k) plan. A SIMPLE, which is not subject to the complicated
nondiscrimination rules that generally apply to qualified retirement plans, will
allow certain employees to make elective contributions of up to $6,000 per year
and will require the employer to make either matching contributions up to 3% of
each such employee's salary or a 2% nonelective contribution.
Withholding at the rate of 20% is required for federal income tax purposes
on certain distributions (excluding, for example, certain periodic payments)
from the foregoing retirement plans (except IRAs and SEPs), unless the recipient
transfers the distribution directly to an "eligible retirement plan" (including
IRAs and other qualified plans) that accepts those distributions. Other
distributions generally are subject to regular wage withholding at the rate of
10% (depending on the type and amount of the distribution), unless the recipient
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<PAGE>
elects not to have any withholding apply. Primary Share investors should consult
their plan administrator or tax advisor for further information.
MANAGEMENT OF THE FUND
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 100 Light 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 INVESTORS TRUST; Retired Vice Chairman and Director of Legg Mason,
Inc. and Legg Mason Wood Walker, Incorporated; 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. Formerly: Director of Legg Mason Fund adviser, Inc. ("LMFA") and Western
Asset Management Company (each a registered investment adviser); Officer and/or
Director of various other affiliates of Legg Mason, Inc.
RICHARD G. GILMORE [6/9/27], DIRECTOR 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/Trustee of five other Legg Mason funds. Formerly: Senior Vice
President and Chief Financial Officer of Philadelphia Electric Company (now PECO
Energy Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company; and Director of
Finance, City of Philadelphia.
ARNOLD L. LEHMAN [7/18/44], DIRECTOR OF EACH FUND; Director of the
Brooklyn Museum of Art; Director/Trustee of five other Legg Mason funds.
Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN [8/29/44], DIRECTOR OF EACH FUND; 400 Seventh Street NW,
Washington, DC. Chief Executive Officer of the Marrow Foundation.
Director/Trustee of five other 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/Trustee of five other 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; Senior Executive Vice President of Legg Mason, Inc. and Legg Mason Wood
Walker, Inc.; Vice Chairman and Director of LMFA; President and/or
Director/Trustee of four Legg Mason funds.
The executive officers of the Funds, other than those who also serve as
directors, are:
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<PAGE>
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; Vice President of Legg Mason.
KATHI D. BAIR* [12/15/64], SECRETARY AND/OR ASSISTANT TREASURER OF EACH
FUND; Secretary/Assistant Treasurer of five other Legg Mason funds.
SUSAN L. SILVA* [3/29/67], ASSISTANT SECRETARY OF EACH FUND; Assistant
Secretary of one other Legg Mason fund; employee of Legg Mason since January
1994.
The Nominating Committee of the Board of Directors is responsible for the
selection and nomination of disinterested directors. The Committee is composed
of Messrs. Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of 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 Directors") receives an annual
retainer and a per meeting fee based on the average net assets of each Fund at
December 31, of the previous year.
On May 1, 1999, the directors and officers of each Fund beneficially owned
in the aggregate less than 1% of that Fund's outstanding shares.
On May 1, 1999, 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 %
On May 1, 1999, Wood County Trust Co, 181 2nd Street South, Wisconsin
Rapids, WI 54494, owned of record and beneficially ____% of the outstanding
shares of the Navigator Class of Value Trust. As of the same date, State Street
Bank & Trust Company, Trustee for the NCR Savings Plan, One Enterprise Drive,
North Quincy, MA, owned of record and beneficially ____% of the outstanding
shares of the Navigator Class of Value Trust.
As of the same date, SMICO & CO, P.O. Box 307, Smith Center, Kansas 66967,
owned of record and beneficially ____% 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, 1999.
None of the Legg Mason funds has any retirement plan for its directors.
37
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
AGGREGATE AGGREGATE
AGGREGATE AGGREGATE COMPENSATION COMPENSATION TOTAL COMPENSATION
NAME OF PERSON COMPENSATION COMPENSATION FROM SPECIAL FROM FROM EACH FUND AND
AND POSITION FROM VALUE FROM TOTAL INVESTMENT INVESTORS FUND COMPLEX PAID
TRUST* RETURN TRUST* TRUST* TRUST* TO DIRECTORS**
<S> <C> <C> <C> <C> <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. $3,340 $2,283 $3,340 $2,285 $35,100
Gilmore -
Director
Charles F. $3,340 $2,283 $3,340 $2,285 $25,800
Haugh -
Director
Arnold L. $3,340 $2,283 $3,340 $2,285 $30,600
Lehman -
Director
Jill E. $3,340 $2,283 $3,340 $2,285 $35,100
McGovern -
Director
T. A. Rodgers- $3,340 $2,283 $3,340 $2,285 $35,100
Director
</TABLE>
* Represents fees paid to each director during the fiscal year ended March
31, 1999.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1998. There are eleven open-end
investment companies in the Legg Mason Complex (with a total of twenty
funds).
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA, a Maryland Corporation, is located at 100 Light Street, Baltimore,
Maryland 21202. LMFA is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of Legg Mason, Bartlett and Legg Mason Capital Management, Inc.
("LMCM"). LMFA serves as manager and investment adviser to Value Trust, Total
Return Trust, Special Investment Trust and American Leading Companies and as
manager to Balanced Trust and Small-Cap Value under separate Management
Agreements with each Fund ("Management Agreement"). The Management Agreement for
Value Trust originally became effective as of April 19, 1982 and was last
38
<PAGE>
approved by the shareholders of Value Trust on July 20, 1984. The Management
Agreement for Total Return Trust originally became effective as of August 5,
1985 and was last approved by the shareholders of Total Return Trust on July 17,
1986. The Management Agreement for Special Investment Trust originally became
effective as of December 10, 1985 and was last 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
Management Agreement for Small-Cap Value became effective on May 1, 1998.
The Management Agreements for each Fund (other than Small-Cap Value) 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 LMFA, on
November 7, 1997. The Management Agreement for Small-Cap Value was approved by
the Fund's Board of Directors, including a majority of the directors who are not
"interested persons" of the Fund, Brandywine, or LMFA, on February 13, 1998.
Each Management Agreement provides that, subject to overall direction by
the Fund's Board of Directors, LMFA manages or oversees the investment and other
affairs of each Fund. LMFA 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. LMFA 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, LMFA 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. LMFA and its affiliates pay
all compensation of directors and officers of each Fund who are officers,
directors or employees of LMFA. Each Fund pays all of its expenses which are not
expressly assumed by LMFA. These expenses include, among others, interest
expense, taxes, brokerage fees and commissions, expenses of preparing and
printing prospectuses, proxy statements and reports to shareholders and of
distributing them to existing shareholders, custodian charges, transfer agency
fees, distribution fees to Legg Mason, 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.
LMFA receives for its services to each Fund a management fee, calculated
daily and payable monthly. LMFA receives from Value Trust and 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. LMFA receives from Total Return
Trust a management fee at an annual rate of 0.75% of the average daily net
assets of that Fund. LMFA receives from American Leading Companies a management
fee at an annual rate of 0.75% of the average daily net assets of that Fund.
LMFA receives from Balanced Trust a management fee at an annual rate of 0.75% of
the average daily net assets of that Fund. LMFA receives from Small-Cap Value a
management fee at an annual rate of 0.85% of the average daily net assets of
that Fund. LMFA has agreed to waive its fees for Total Return Trust, American
Leading Companies, Balanced Trust and Small-Cap Value 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; for Balanced Trust, 1.85% of average net assets
attributable to Primary Shares until ____________; and for Small-Cap Value,
2.00% of average net assets attributable to Primary Shares until ____________.
39
<PAGE>
LMFA has agreed to waive its fees for Total Return Trust, American Leading
Companies, Balanced Trust and Small-Cap Value 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; for Balanced Trust, 1.10% of average net assets attributable to
Navigator Shares until ____________; and for Small-Cap Value, 1.00% of average
net assets attributable to Navigator Shares until ____________.
For the fiscal years ended March 31, 1999, 1998 and 1997, management fees
of $45,014,441, $24,282,523, and $13,199,924, respectively were received from
Value Trust; $4,952,596, $4,031,818, and $2,404,297, respectively, were received
from Total Return Trust; and $11,608,871, $9,875,632, and $7,272,943,
respectively, were received from Special Investment Trust.
For the fiscal years ended March 31, 1999, 1998 and 1997, LMFA received
management fees of $1,655,396, $1,190,729 (prior to fees waived of $69,496), and
$643,329 (prior to fees waived of $94,059), respectively, from American Leading
Companies.
For the fiscal years ended March 31, 1999, and 1998 LMFA received
management fees of $419,683 (prior to fees waived of $25,964) and $215,415
(prior to fees waived of $83,278) respectively for Balanced Trust. For the
period October 1, 1996 (commencement of operations) to March 31, 1997, all
management fees were waived by LMFA for Balanced Trust.
[For the period June 15, 1998 (commencement of operations) to December 31,
1998, LMFA received management fees of $_____________ from Small-Cap Value.]
Under each Advisory Agreement or (with respect to Balanced Trust and
Small-Cap Value) 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 LMFA.
LMCM, 100 Light Street, Baltimore, MD 21202, an affiliate of Legg Mason,
also serves as an investment adviser to American Leading Companies pursuant to
an Investment Advisory Agreement dated August 2, 1993, between LMCM and LMFA
("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 Investors
Trust, LMFA or LMCM, on November 7, 1997. The Advisory Agreement was approved by
LMFA, Inc., as the Fund's sole shareholder, on August 2, 1993.
Under the Advisory Agreement, LMCM may provide the Fund with research and
investment advisory services for which LMFA (not the Fund) may pay a fee.
Currently, LMCM is not providing any services to the Fund.
For the fiscal years ended March 31, 1999, 1998 and 1997, LMFA paid
$______________, $610,704, and $219,733, respectively, to LMCM on behalf of the
Fund for such services.
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 LMFA
("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 7, 1997. The Advisory Agreement was
approved by LMFA, 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
40
<PAGE>
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 fiscal year ended March 31, 1999 and 1998, Bartlett received
$_______________ and $88,092 respectively in advisory fees on behalf of Balanced
Trust. For the period October 1, 1996 (commencement of operations) to March 31,
1997, Bartlett waived its advisory fees.
Brandywine Asset Management, Inc. ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware, an affiliate of Legg Mason, serves as investment adviser
to Small-Cap Value pursuant to an Investment Advisory Agreement dated May 1,
1998, between Brandywine and LMFA ("Advisory Agreement"). The Advisory Agreement
was approved by LMFA as the Fund's sole shareholder, on May 28, 1998.
Under the Advisory Agreement, Brandywine is responsible, subject to the
general supervision of LMFA and Investors 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
Brandywine's services to the Fund, LMFA (not the Fund) pays Brandywine a fee,
computed daily and payable monthly, at an annual rate equal to 0.50% of the
Fund's average daily net assets or 58.8% of the fee received by LMFA from the
Fund, net of any waivers by LMFA.
Under each Advisory Agreement and (with respect to Balanced Trust and
Small-Cap Value) Management Agreement, LMFA/LMCM/Bartlett/Brandywine 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 Balanced Trust and Small-Cap
Value) 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 LMFA/LMCM/Bartlett/Brandywine, on not less than 60 days' notice to the other
party to the Agreement, and may be terminated immediately upon the mutual
written consent of all parties to the Agreement.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, each Corporation and LMFA have adopted policies that
restrict securities trading in the personal accounts of portfolio managers and
others who normally come into advance possession of information on portfolio
transactions. These policies comply, in all material respects, with the
recommendations of the Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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, 1999 and 1998, the
portfolio turnover rates for Value Trust were 19.3% and 12.9%, respectively; the
portfolio turnover rates for Total Return Trust were 44.2% and 20.6%,
respectively; the portfolio turnover rates for Special Investment Trust were
47.8% and 29.8%, respectively; and the portfolio turnover rates for American
Leading Companies were 47.6% and 51.4%, respectively. And, the portfolio
turnover rates for Balanced Trust were 50.0% and 34.5%, respectively. For the
period June 15, 1998 to March 31, 1999, the portfolio turnover rate for
Small-Cap Value Trust was 29.5% (annualized).
41
<PAGE>
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. LMFA's/Bartlett's/Brandywine'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, 1999, 1998 and 1997, Legg Mason
received $________, $3,120, and $0 from Value Trust, $______________, $1,134,
and $0 from Total Return Trust, and $_________________, $0, and $0,
respectively, from Special Investment Trust. Value Trust paid total brokerage
commissions of $ 432,152 $1,360,133, and $693,443, respectively; Total Return
Trust paid total brokerage commissions of $83,104, $477,779, and $386,786,
respectively; and Special Investment Trust paid total brokerage commissions of
$2,824,033, $1,333,903, and $1,066,917, respectively, during the fiscal years
ended March 31, 1999, 1998 and 1997.
For the fiscal years ended March 31, 1999, 1998 and 1997, American Leading
Companies paid total brokerage commissions of $365,317,644, $203,625, and
$120,631, respectively. Legg Mason received no brokerage commissions from
American Leading Companies for the same periods.
For the fiscal year ended March 31, 1999, and 1998 Balanced Trust paid
total brokerage commissions of $____________________ and $34,738 respectively.
For the period October 1, 1996 (commencement of operations) to March 31, 1997,
Balanced Trust paid total brokerage commissions of $23,144. Legg Mason received
no brokerage commissions from Balanced Trust for the same periods.
[For the period June 15, 1998 (commencement of operations) to March 31,
1999, Small-Cap Value paid total brokerage commissions of $________. Legg Mason
received no brokerage commissions from Small-Cap Value for that 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
42
<PAGE>
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: a Fund together with all other registered investment
companies having the same adviser, may not purchase more than 25% of the
principal amount of the offering of such class . In addition, 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, 1999, 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 $84,961,000; Total Return Trust at that date owned shares
of the following parent companies: 397,000 shares of The Bear Stearns Companies,
Inc. at a market value of $20,382,000; 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 $28,320,000. American Leading
Companies, Balanced Trust [and Small-Cap Value] held no shares of their regular
broker-dealers. Investment decisions for each Fund are made independently from
those of other funds and accounts advised by LMFA, Bartlett or Brandywine.
However, the same security may be held in the portfolios of more than one fund
or account. When two or more accounts simultaneously engage in the purchase or
sale of the same security, the prices and amounts will be equitably allocated to
each account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large-volume transactions may
produce better executions and prices.
THE 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.
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, American Leading Companies and Small-Cap Value; 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 Plans were 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 Plans were approved by LMFA, as sole shareholder
of: American Leading Companies, on August 2, 1993 and Balanced Trust, on October
7, 1996 [and Small-Cap Value on _________]. The Plans of Value Trust, Total
43
<PAGE>
Return Trust and Special Investment Trust were amended, effective July 1, 1993,
to make clear that, of the aggregate 1.00% fees with respect to Total Return
Trust and Special Investment Trust, 0.75% 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 financial advisors.
Continuation of the Plans was most recently approved on November 7, 1997 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, Balanced Trust and
Small-Cap Value as described under "The Funds' Investment Adviser/Manager."
In approving the establishment or continuation of each 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 could offset the costs of the Plan; the likelihood that the Plan
would succeed in producing such potential benefits; the merits of certain
possible alternatives to the Plan; and the extent to which the retention of
assets and additional sales of each Fund's Primary Shares would be likely to
maintain or increase the amount of compensation paid by that Fund to the
adviser/LMFA.
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/LMFA 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.
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, at least 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.
44
<PAGE>
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, 1999, 1998 and 1997, Value Trust paid
Legg Mason $60,265,880, $32,477,903, and $16,863,796, 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
$6,436,510, $5,232,873, and $3,120,818, respectively; Special Investment Trust
paid Legg Mason $12,733,789, $12,733,789, and $8,965,838, respectively; and
American Leading Companies paid Legg Mason $2,206,663, $1,587,015, and $857,522,
respectively, in fees under the Plan. For the fiscal year ended March 31, 1999
and 1998, Balanced Trust paid Legg Mason $419,683, and $215,415 in fees under
the Plan and for the period October 1, 1996 (commencement of operations) to
March 31, 1997, Balanced Trust paid distribution and service fees of $45,587
(prior to fees waived of $26,398). For the period June 15, 1998 (commencement of
operations) to March 31, 1999, Small-Cap Value paid distribution and service
fees of $ ________.
45
<PAGE>
During the year ended March 31, 1999, Legg Mason incurred the following
expenses with respect to Primary Shares:
<TABLE>
<CAPTION>
Special American
Total Investment Leading Balanced Small
Value Trust Return Trust Companies Trust Cap Value
Trust Trust*
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Compensation to sales
personnel $35,389,000 $3,987,000 $9,354,000 $1,268,000 $241,000 $144,000
Advertising $431,000 $149,000 $142,000 $92,000 $122,000 $108,000
Printing and mailing
of prospectuses to
prospective
shareholders $586,000 $207,000 $219,000 $119,000 $171,000 $99,000
Other $12,467,000 $2,231,000 $4,492,000 $1,192,000 $855,000 $606,000
----------------------------------------------------------------------
Total expenses $48,873,000 $6,574,000 $14,207,000 $2,671,000 $1,389,000 $957,000
======================================================================
</TABLE>
* June 15, 1998 (commencement of operations) to March 31, 1999.
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Primary
Shares.
CAPITAL STOCK INFORMATION
Value Trust has authorized capital of 500 million shares of common stock,
par value $0.001 per share. Total Return Trust has authorized capital of 100
million shares of common stock, par value $0.001 per share. Special Investment
Trust has authorized capital of 150 million shares of common stock, par value
$0.001 per share. The Articles of Incorporation of Investors Trust authorize
issuance of 500 million shares of par value $.001 per share of American Leading
Companies, 250 million shares of par value $.001 per share of Balanced Trust and
100 million shares of par value $.001 per share of Small-Cap Value. 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 and sales charges, which may affect
performance.
Investors may obtain more information concerning the Navigator Class from
their financial advisor or any person making available to them shares of the
Primary Class, or by calling 1-800-822-5544.
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.
46
<PAGE>
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Ave., N.W., Washington,
D.C. 20036-1800, serves as counsel to each Fund.
THE FUNDS' INDEPENDENT ACCOUNTANTS/AUDITORS
_________________., 250 W. Pratt Street, Baltimore, MD 21201, has been
selected by the Directors to serve as independent accountants for Value Trust,
Total Return Trust and Special Investment Trust. _______________, 2001 Market
Street, Philadelphia, PA 19103, has been selected by the Directors to serve as
independent auditors for Investors Trust.
FINANCIAL STATEMENTS
The Statement of Net Assets as of March 31, 1999; the Statements of
Operations for the year ended March 31, 1999; the Statements of Changes in Net
Assets for the years ended March 31, 1999 and 1998; the Financial Highlights for
all periods; the Notes to Financial Statements and the Report of the Independent
Accountants, each with respect to Value Trust, Total Return Trust and Special
Investment Trust, are included in the combined annual report for the year ended
March 31, 1999, and are hereby incorporated by reference in this Statement of
Additional Information.
The Statement of Net Assets as of March 31, 1999; the Statements of
Operations for the year ended March 31, 1999; the Statements of Changes in Net
Assets for the years ended March 31, 1999 and 1998; the Financial Highlights for
all periods; the Notes to Financial Statements and the Report of Independent
Auditors, each with respect to American Leading Companies and Balanced Trust,
are included in the combined annual report for the year ended March 31, 1999,
and are hereby incorporated by reference in this Statement of Additional
Information.
47
<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.
48
<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.
49
<PAGE>
Legg Mason Value Trust, Inc.
Part C. Other Information
-----------------
Item 23. Exhibits
--------
(a) (i) Charter (2)
(ii) Amendment to Charter (dated April 24, 1992) (2)
(iii) Articles Supplementary (dated August 1, 1994) (2)
(iv) Articles Supplementary (dated August 8, 1997) (3)
(v) Articles Supplementary (dated March 9, 1999) - filed herewith
(b) (i) By-Laws as Amended and Restated (2)
(ii) Amendment to By-Laws (effective February 19, 1992) (2)
(c) Specimen Security -- not applicable
(d) (i) Investment Advisory and Management Agreement (2)
(e) (i) Amended Underwriting Agreement (1)
(ii) Dealer Agreement with respect to Navigator Shares (1)
(f) Bonus, profit sharing or pension plans - none
(g) (i) Custodian Agreement (2)
(ii) Addendum dated February 9, 1988 (2)
(iii) Addendum dated February 25, 1988 (2)
(iv) Addendum dated August 12, 1988 (2)
(v) Addendum dated May 28, 1996 (2)
(h) (i) Transfer Agency and Service Agreement (2)
(ii) Credit Agreement - filed herewith
(i) (i) Opinion and Consent of Counsel - filed herewith
(ii) Opinion of counsel with respect to Navigator Shares -- to be
filed
(j) Accountant's consent - to be filed
(k) Financial statements omitted from Item 22 - none
(l) Agreements for providing initial capital (2)
(m) Amended Plan pursuant to Rule 12b-1 (1)
(n) Financial Data Schedule - to be filed
(o) Plan Pursuant to Rule 18f-3 - none
(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 22 to the initial Registration Statement, SEC File No. 2-75766,
filed July 31, 1996.
(2) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 24 to the Registration Statement, SEC File No. 2-75766, filed
July 31, 1997.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 25, SEC File No. 2-75766, filed May 29, 1998.
Item 24. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
None.
Item 25. Indemnification
---------------
This item is incorporated by reference to Item 27 of Part C of
Post-Effective Amendment No. 25 to the registration statement, SEC File
No. 2-75766, filed May 29, 1998.
<PAGE>
Item 26. 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 twenty open-end investment
companies or portfolios. Information as to the officers and directors of the
Adviser is included in its Form ADV filed on June 24, 1998 with the Securities
and Exchange Commission (registration number 801-16958) and is incorporated
herein by reference.
Item 27. 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.
Legg Mason Focus Trust, Inc.
Legg Mason Light Street Trust, Inc.
LM Institutional Fund Advisors I, Inc.
LM Institutional Fund Advisors II, Inc.
(b) The following table sets forth information concerning each director
and officer of the Registrant's principal underwriter, Legg Mason Wood Walker,
Incorporated ("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ -------------
Raymond A. Mason Chairman of the Chairman of the
Board Board and Director
John F. Curley, Jr. Retired 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
<PAGE>
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
F. Barry Bilson Senior Vice None
President 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
Joseph Sullivan Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
W. William Brab Senior Vice None
President
Deepak Chowdhury Senior Vice None
255 Alhambra Circle President
Coral Gables, FL 33134
Harry M. Ford, Jr. Senior Vice None
President
Dennis A. Green 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
Seth J. Lehr Senior Vice None
1735 Market St President
Philadelphia, PA 19103
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
Jonathan M. Pearl Senior Vice None
1777 Reisterstown Rd. President
Pikesville, MD 21208
John A. Pliakas Senior Vice None
125 High Street President
Boston, MA 02110
<PAGE>
Gail Reichard Senior Vice None
President
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Robert J. Walker, Jr. Senior Vice None
200 Gibraltar Road President
Horsham, PA 19044
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
John C. Boblitz Vice President None
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Joseph H. Davis, Jr. Vice President None
1735 Market Street
Philadelphia, PA 19380
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
John R. Gilner Vice President None
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
Mark C. Micklem Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Gerard F. Petrik, Jr. Vice President None
<PAGE>
Douglas F. Pollard Vice President None
K. Mitchell Posner Vice President None
1735 Market Street
Philadelphia, PA 19103
Carl W. Riedy, Jr. Vice President None
Jeffrey M. Rogatz Vice President None
Thomas E. Robinson Vice President None
Douglas M. Schmidt Vice President None
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
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
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
William A. Verch Vice President None
Lewis T. Yeager Vice President None
Joseph F. Zunic Vice President None
- -------------------
* All addresses are 100 Light Street, Baltimore, Maryland 21202, unless
otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person of
such an affiliated person.
Item 28. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 29. Management Services
-------------------
None.
Item 30. Undertakings
------------
None.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Value Trust, Inc. 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 28th day of May, 1999.
LEGG MASON VALUE TRUST, INC.
by: /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 26 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ Raymond A. Mason* Chairman of the Board May 28, 1999
- ----------------------- and Director
Raymond A. Mason
/s/ John F. Curley, Jr.* President and Director May 28, 1999
- -----------------------
John F. Curley, Jr.
/s/ Edward A. Taber, III* Director May 28, 1999
- ------------------------
Edward A. Taber, III
/s/ Richard G. Gilmore* Director May 28, 1999
- -----------------------
Richard G. Gilmore
/s/ Arnold L. Lehman* Director May 28, 1999
- -----------------------
Arnold L. Lehman
/s/ Jill E. McGovern* Director May 28, 1999
- -----------------------
Jill E. McGovern
/s/ T.A. Rodgers* Director May 28, 1999
- -----------------------
T.A. Rodgers
/s/ Marie K. Karpinski Vice President May 28, 1999
- ---------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated
May 8, 1998, a copy of which is filed herewith.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director/Trustee of the following investment companies:
LEGG MASON CASH RESERVE TRUST LEGG MASON VALUE TRUST, INC.
LEGG MASON INCOME TRUST, INC. LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON GLOBAL TRUST, INC. LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON TAX EXEMPT TRUST, INC. LEGG MASON INVESTORS TRUST, INC.
LEGG MASON TAX-FREE INCOME FUND
plus any other investment company for which Legg Mason Fund Adviser, Inc. acts
as investment adviser or manager and for which the undersigned individual serves
as Director/Trustee hereby severally constitute and appoint each of MARIE K.
KARPINSKI, KATHI D. BAIR, ARTHUR J. BROWN and ARTHUR C. DELIBERT my true and
lawful attorney-in-fact, with full power of substitution, and with full power to
sign for me and in my name in the appropriate capacity, any Registration
Statements on Form N-1A, all Pre-Effective Amendments to any Registration
Statements of the Funds, any and all subsequent Post-Effective Amendments to
said Registration Statements, any supplements or other instruments in connection
therewith, to file the same with the Securities and Exchange Commission and the
securities regulators of appropriate states and territories, and generally to do
all such things in my name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate, to comply with the provisions
of the Securities Act of 1933 and the Investment Company Act of 1940, all
related requirements of the Securities and Exchange Commission and all
requirements of appropriate states and territories. I hereby ratify and confirm
all that said attorney-in-fact or their substitutes may do or cause to be done
by virtue hereof.
WITNESS my hand on the date set forth below.
SIGNATURE DATE
- --------- ----
/s/ Richard G. Gilmore May 8, 1998
- ---------------------
Richard G. Gilmore
/s/ T. A. Rodgers May 8, 1998
- ---------------------
T. A. Rodgers
/s/ Charles F. Haugh May 8, 1998
- ---------------------
Charles F. Haugh
/s/ Arnold L. Lehman May 8, 1998
- ---------------------
Arnold L. Lehman
/s/ Jill E. McGovern May 8, 1998
- ---------------------
Jill E. McGovern
/s/ Edward A. Taber, III May 8, 1998
- ------------------------
Edward A. Taber, III
/s/ Edmund J. Cashman, Jr. May 8, 1998
- --------------------------
Edmund J. Cashman, Jr.
/s/ John F. Curley, Jr. May 8, 1998
- -----------------------
John F. Curley, Jr.
/s/ Raymond A. Mason May 8, 1998
- ----------------------
Raymond A. Mason
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON VALUE TRUST, INC.
FIRST: The Board of Directors of Legg Mason Value Trust, Inc., a Maryland
Corporation ("Corporation") organized on January 20, 1982, has, by action on
February 12, 1999, increased the aggregate number of shares of capital stock
that the Corporation has authority to issue from three hundred million
(300,000,000) to five hundred million (500,000,000) shares. Two hundred million
(200,000,000) shares of capital stock that the Corporation previously was
authorized to issue, whether or not outstanding, have been designated as Class A
shares. One hundred million (100,000,000) shares of capital stock that the
Corporation previously was authorized to issue, whether or not outstanding, have
been designated as Class Y shares.
The additional two hundred million (200,000,000) shares of capital stock
that the Corporation is newly authorized to issue have been classified by the
Corporation's Board of Directors, pursuant to a power contained in the
Corporation's charter, as Class A shares, increasing the total number of shares
of capital stock classified as Class A shares from two hundred million
(200,000,000) to four hundred million (400,000,000) shares. The additional
shares will have all the preferences, rights, powers, restrictions, limitations,
terms and conditions as the existing Class A shares.
The par value of the shares of capital stock of each class of the
Corporation remains one tenth of one cent ($0.001) per share. Immediately before
the increase in the aggregate number of authorized shares described herein, the
aggregate par value of all of the authorized shares was three hundred thousand
(300,000) dollars; as increased, the aggregate par value of all of the shares is
five hundred thousand (500,000) dollars. Immediately before the increase in the
aggregate number of authorized shares described herein, the aggregate par value
of all authorized Class A shares was two hundred thousand (200,000) dollars; as
increased, the aggregate par value of all of the Class A shares is four hundred
thousand (400,000) dollars. Immediately before the increase in the aggregate
number of authorized shares described herein, the aggregate par value of all
authorized Class Y shares was one hundred thousand (100,000) dollars; after the
increase in the aggregate number of authorized shares, the aggregate par value
of Class Y shares remains one hundred thousand (100,000) dollars.
<PAGE>
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
THIRD: The total number of shares of capital stock that the Corporation
has authority to issue has been increased by the Board of Directors in
accordance with Section 2-105(c) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, the undersigned Vice President of Legg Mason Value
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of her knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: March 9, 1999 /s/ Marie K. Karpinski
----------------------
Marie K. Karpinski
Vice President
Attest: /s/ Kathi D. Bair
-----------------
Secretary
Baltimore, Maryland (ss)
Subscribed and sworn to before me this 9th day of March, 1999.
/s/ Laura V. Atwater
- --------------------
Notary Public
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
DATED AS OF FEBRUARY 20, 1998
AMONG
THE FUNDS AND PORTFOLIOS PARTIES HERETO,
THE BANKS PARTY HERETO AS LENDERS
AND
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, AS AGENT
Amendment and Restatement of March 19, 1999
NATIONSBANC MONTGOMERY SECURITIES LLC,
AS SOLE ARRANGER AND SOLE BOOK MANAGER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS, INTERPRETATION OF AGREEMENT AND COMPLIANCE WITH
FINANCIAL RESTRICTIONS....................................................1
1.1 Definitions...........................................................1
1.2 Other Definitional Provisions.........................................9
1.3 Interpretation of Agreement...........................................9
1.4 Compliance with Financial Restrictions................................9
1.5 Assumptions Regarding Structure......................................10
1.6 Authority of Adviser; Adviser Disclaimer.............................10
2. COMMITMENTS OF THE BANKS AND CERTAIN LOAN TERMS..........................10
2.1 Loans................................................................10
2.2 Loan Options.........................................................11
2.3 Borrowing Procedures.................................................11
2.4 Continuation and/or Conversion of Loans..............................12
2.5 Note Evidencing Loans................................................12
2.6 Source of Repayment..................................................13
2.7 Extension of Scheduled Termination Date..............................13
3. INTEREST AND FEES........................................................14
3.1 Interest.............................................................14
3.2 Commitment Fee.......................................................14
3.3 Method of Calculating Interest and Fees..............................14
4. PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION OF THE COMMITMENTS
AND SETOFF...............................................................15
4.1 Place of Payment.....................................................15
4.2 Prepayments..........................................................15
4.3 Reduction or Termination of the Commitment Amount....................15
4.4 Setoff...............................................................16
4.5 Borrowing Base.......................................................16
4.6 Payments by the Banks to the Agent...................................16
4.7 Sharing of Payments..................................................17
5. ADDITIONAL PROVISIONS RELATING TO LOANS..................................17
5.1 Increased Cost.......................................................17
5.2 Deposits Unavailable or Interest Rate Unascertainable or
Inadequate; Impracticability.........................................18
5.3 Changes in Law Rendering Eurodollar Loans Unlawful...................19
5.4 Discretion of the Bank as to Manner of Funding.......................19
5.5 Funding Losses.......................................................19
<PAGE>
5.6 Capital Adequacy.....................................................20
5.7 Additional Provisions with respect to Federal Funds Rate Loan........20
6. WARRANTIES...............................................................21
6.1 Existence............................................................21
6.2 Authorization........................................................21
6.3 No Conflicts.........................................................21
6.4 Validity and Binding Effect..........................................21
6.5 No Default...........................................................22
6.6 Financial Statements.................................................22
6.7 Litigation...........................................................22
6.8 Liens................................................................22
6.9 Partnerships.........................................................23
6.10 Purpose.............................................................23
6.11 Compliance..........................................................23
6.12 Pension and Welfare Plans...........................................23
6.13 Taxes...............................................................23
6.14 Subsidiaries; Investments ..........................................24
6.15 Full Disclosure.....................................................24
6.16 Investment Policies.................................................24
6.17 Computer Systems....................................................24
7. COVENANTS................................................................25
7.1 Financial Statements and Other Reports...............................25
7.2 Notices..............................................................26
7.3 Existence............................................................27
7.4 Nature of Business...................................................27
7.5 Books, Records and Access............................................28
7.6 Insurance............................................................28
7.7 Dividends............................................................28
7.8 Investment Policies and Restrictions.................................28
7.9 Taxes................................................................29
7.10 Compliance..........................................................29
7.11 Pension Plans.......................................................29
7.12 Merger, Purchase and Sale...........................................29
7.13 Asset Coverage Ratio................................................30
7.14 Liens...............................................................30
7.15 Guaranties..........................................................30
7.16 Other Agreements....................................................31
7.17 Transactions with Related Parties...................................31
7.18 Payment of Management Fees..........................................31
7.19 Other Indebtedness..................................................31
7.20 Changes to Trust Agreement, etc.....................................31
7.21 Violation of Investment Restrictions, etc...........................31
7.22 Proceeds of Loans...................................................32
- ii -
<PAGE>
8. CONDITIONS PRECEDENT TO ALL LOANS........................................32
8.1 Notice...............................................................32
8.2 Default..............................................................32
8.3 Warranties...........................................................32
8.4 Certification........................................................32
8.5 Borrowing Certificate................................................32
8.6 Minimum Net Asset Value..............................................32
9. CONDITIONS PRECEDENT TO AND CONSEQUENCES OF EFFECTIVENESS OF
AMENDMENTS...............................................................33
9.1 Notes................................................................33
9.2 Resolutions..........................................................33
9.3 Incumbency Certificate...............................................33
9.4 Opinion..............................................................33
9.5 Net Asset Value Certificate..........................................34
9.6 Consent of Investment Adviser........................................34
9.7 Form U-1.............................................................34
9.8 Consequences of Effectiveness........................................34
10. ADDITION OF NEW PARTIES.................................................34
10.1 New Parties........................................................34
11. EVENTS OF DEFAULT AND REMEDIES..........................................34
11.1 Events of Default..................................................34
11.2 Remedies...........................................................37
12. THE AGENT...............................................................37
12.1 Appointment and Authorization......................................37
12.2 Delegation of Duties...............................................37
12.3 Liability of Agent.................................................38
12.4 Reliance by Agent..................................................38
12.5 Notice of Event of Default.........................................38
12.6 Credit Decision....................................................39
12.7 Indemnification of Agent...........................................39
12.8 Agent in Individual Capacity.......................................40
12.9 Successor Agent....................................................40
13. GENERAL.................................................................41
13.1 Waiver and Amendments..............................................41
13.2 Notices............................................................41
13.3 Expenses...........................................................42
13.4 Funds Indemnification..............................................42
13.5 Information........................................................43
13.6 Severability.......................................................44
13.7 Law................................................................44
13.8 Successors.........................................................44
13.9 Waiver of Jury Trial...............................................45
- iii -
<PAGE>
EXHIBITS
EXHIBIT A - BORROWING CERTIFICATE
EXHIBIT B - FORM OF PROMISSORY NOTE (Fund without Portfolios)
EXHIBIT B-1 - PROMISSORY NOTE (Fund with Portfolios)
EXHIBIT C - DESIGNATION OF PORTFOLIOS
EXHIBIT D - SCHEDULE OF LITIGATION
EXHIBIT E - SCHEDULE OF CONTINGENT LIABILITIES
EXHIBIT F - BORROWING BASE CERTIFICATE
EXHIBIT G - FUNDS' AND PORTFOLIOS' INVESTMENT RESTRICTIONS
EXHIBIT H - CONSENT LETTER
EXHIBIT I - FORM OF OPINION OF COUNSEL
EXHIBIT J - FORM OF ASSIGNMENT AND ACCEPTANCE
SCHEDULES
SCHEDULE I - COMMITMENTS AND PRO RATA SHARES
SCHEUDLE II - OFFSHORE AND DOMESTIC LENDING OFFICES,
ADDRESSES FOR NOTICES
ANNEX I - LIST OF ORIGINAL BORROWER PARTIES AND NEW BORROWER
PARTIES
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CREDIT AGREEMENT
This document, dated as of March 19, 1999, amends and restates that
certain CREDIT AGREEMENT, dated as of February 20, 1998 and amended as of
February 19, 1999 (the "EXISTING AGREEMENT"), and is entered into among each of
the funds (each, a "FUND") a party hereto or which may become a party hereto
pursuant to the terms hereof, the various banks as are or may become party
hereto pursuant to the terms hereof (individually, a "BANK" and, collectively,
the "BANKS") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
("BOFA"), a national banking association, as agent (in such capacity, the
"AGENT") for the Banks.
WHEREAS, the Funds (either on their own behalf or on behalf of certain
specified Portfolios) identified on Annex I hereto listed under the heading
Original Borrower Parties (the "ORIGINAL BORROWER PARTIES") are parties to the
Existing Agreement;
WHEREAS, the Original Borrower Parties, the Banks party to the Existing
Agreement and the Agent desire to amend the Existing Agreement to add as parties
thereto the Funds (either on their own behalf or on behalf of certain specified
Portfolios) identified on Annex I hereto listed under the heading New Borrower
Parties, to increase the Commitment from $150,000,000 to $200,000,000, to extend
the Termination Date and to effect other changes to the Existing Agreement as
hereinafter provided;
WHEREAS, in order to facilitate the aforesaid amendments, it is desirable
to amend and restate the Existing Agreement on the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
1. DEFINITIONS, INTERPRETATION OF AGREEMENT AND COMPLIANCE WITH
FINANCIAL RESTRICTIONS.
1.1 DEFINITIONS. In addition to the terms defined elsewhere in
this Agreement, the following terms shall have the meanings indicated for
purposes of this Agreement (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"ACT" means the Investment Company Act of 1940, as amended,
modified, or supplemented from time to time, and all rules and regulations
promulgated thereunder, and any successor statute and associated regulations.
"ADVISER" means Legg Mason Fund Adviser, Inc., Legg Mason Capital
Management, Inc., Bartlett & Co. or LM Institutional Advisors, Inc., as the case
may be, as investment adviser or manager to a Fund or a Portfolio together with
any successor thereto permitted by SECTION 7.2(f) hereof.
"ADVISER PERSONS" is defined in SECTION 1.6.
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"AFFILIATE" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such Person. A Person shall be deemed to control another Person if
the controlling Person possesses, directly or indirectly, the power to direct
or cause the direction of the management and policies of the other Person,
whether through the ownership of voting securities, membership interests, by
contract, or otherwise.
"AGENT" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"AGENT-RELATED PERSONS" means BOFA and any successor agent arising
under SECTION 12.9, together with their respective Affiliates (including, in the
case of BofA, the Arranger), and the officers, directors, employees, agents and
attorneys-in-fact of such Persons and Affiliates.
"AGENT'S PAYMENT OFFICE" means the address for payments set forth on
Schedule II hereto in relation to the Agent or such other address as the Agent
may from time to time specify.
"AGREEMENT" means this Credit Agreement, as it may be amended,
restated, modified and/or supplemented from time to time.
"ARRANGER" means NationsBanc Montgomery Securities LLC, as sole
arranger and sole book manager.
"ASSET COVERAGE RATIO" means, with respect to any Fund or Portfolio
(as the case may be) at any time, the ratio which the value of the Total Assets
of such Fund or Portfolio (reduced by the value of assets subject to Liens) at
such time less all liabilities and indebtedness not represented by Senior
Securities of such Fund or Portfolio, bears to the aggregate amount of Senior
Securities Representing Indebtedness of such Fund or Portfolio at such time.
"ASSIGNEE" has the meaning assigned to such term in SECTION
13.8(b).
"ASSIGNMENT AND ACCEPTANCE" has the meaning assigned to such term
in SECTION 13.8(b).
"ATTORNEY COSTS" means and includes any and all reasonable fees and
disbursements of any law firm or other external counsel, the reasonable
allocated cost of internal legal services and all disbursements of internal
counsel.
"BANK" and "BANKS" have the meanings assigned to such terms in the
introductory paragraph of this Agreement.
"BOFA" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
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"BANKING DAY" means any day other than a Saturday, Sunday or legal
holiday on which banks are authorized or required to be closed in Chicago,
Illinois, New York, New York and San Francisco, California and, with respect to
Eurodollar Loans, a day on which dealings in Dollars may be carried on by the
Agent in the interbank eurodollar market.
"BORROWING" means a borrowing hereunder consisting of Loans of the
same type made to a Fund or Portfolio on the same day by the Banks under SECTION
2 and, other than in the case of Federal Funds Rate Loans, having the same
Interest Period.
"BORROWING BASE" means the amount defined as such in SECTION 4.5
with respect to each Fund or Portfolio, as the case may be.
"BORROWING BASE CERTIFICATE" means a Borrowing Base Certificate as
defined in SECTION 7.1(c).
"BORROWING CERTIFICATE" means a certificate provided by a Fund or
Portfolio, in the form of EXHIBIT A hereto.
"CAPITALIZED LEASE" of any Person means all monetary obligations of
such Person under any leasing or similar arrangement which, in accordance with
GAAP, are or would be classified as capitalized leases on a balance sheet of
such Person.
"CODE" means the Internal Revenue Code of 1986 and any successor
statute of similar import, together with the regulations thereunder, in each
case as in effect from time to time. References to sections of the Code shall be
construed to also refer to any successor sections.
"COMMITMENT" means, relative to any Bank, such Bank's obligation
to make Loans pursuant to SECTION 2. 1.
"COMMITMENT AMOUNT" means, on any date, $200,000,000, as such amount
may be reduced from time to time pursuant to SECTION 4.3.
"CREDIT DOCUMENTS" means this Agreement, any Notes and all other
documents delivered to the Agent or any Bank in connection herewith.
"DOLLARS" and the symbol "$" mean lawful money of the United
States of America.
"ELIGIBLE LENDER" means an entity that is a "bank" (as such term is
defined in the Act) but not an "affiliated person" (as such term is defined in
the Act), "principal underwriter" (as such term is defined in the Act) or
"promoter" (as such term is defined in the Act) of any Fund or Portfolio or an
"affiliated person" (as such term is defined in the Act) of any such Person.
"EUROCURRENCY RESERVE REQUIREMENT" means, with respect to any
Eurodollar Loan for any Interest Period, a percentage equal to the daily average
during such Interest Period of the percentages in effect on each day of such
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Interest Period, as prescribed by the Federal Reserve Board (or any successor),
for determining the aggregate maximum reserve requirements (including all basic,
supplemental, marginal and other reserves) applicable to "Eurocurrency
liabilities" pursuant to Regulation D or any other then applicable regulation of
the Federal Reserve Board (or any successor) which prescribes reserve
requirements applicable to "Eurocurrency liabilities," as presently defined in
Regulation D. Without limiting the effect of the foregoing, the Eurocurrency
Reserve Requirement shall reflect any other reserves required to be maintained
against (i) any category of liabilities that includes deposits by reference to
which the Interbank Rate (Reserve Adjusted) is to be determined or (ii) any
category of extensions of credit or other assets that includes the Loans. For
purposes of this Agreement, any Eurodollar Loan hereunder shall be deemed to be
"Eurocurrency liabilities," as defined in Regulation D, and, as such, shall be
deemed to be subject to such reserve requirements without the benefit of, or
credit for, proration, exceptions or offsets which may be available from time to
time under Regulation D.
"EURODOLLAR LOAN" means any Loan which bears interest at a rate
determined with reference to the Interbank Rate (Reserve Adjusted).
"EURODOLLAR MARGIN" means 0.50%.
"EVENT OF DEFAULT" means any of the events described in SECTION
11.1.
"EXISTING AGREEMENT" has the meaning assigned to such term in the
introductory paragraph of this Agreement.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum as
quoted by the Federal Reserve Bank of New York and confirmed in the daily
statistical release designated as H. 15, or any successor publication, published
by the Federal Reserve Bank of New York (including any such successor "H.15")
for the preceding Banking Day opposite the caption "Federal Funds (Effective)";
or, if for any relevant day such rate is not so published on any such preceding
Banking Day, the rate for such day will be the arithmetic mean as determined by
the Agent of the rates for the last transaction in overnight Federal funds
arranged prior to 9:00 a.m. (New York City time) on that day by each of three
leading brokers of Federal funds transactions in New York City selected by the
Agent.
"FEDERAL FUNDS RATE MARGIN" means 0.50%.
"FEDERAL FUNDS RATE LOAN" means any loan which bears interest at a
rate determined with reference to the Federal Funds Rate.
"FEDERAL RESERVE BOARD" means the Board of Governors of the
Federal Reserve System.
"FISCAL YEAR" means each fiscal year of any Fund or Portfolio, as
the case may be. References to a Fiscal Year with a number corresponding to any
calendar year (e.g. "Fiscal Year 1994") refer to the Fiscal Year ending on a
date occurring during such calendar year.
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"FUND" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"GAAP" means generally accepted accounting principles as applied in
the preparation of the financial statements of the Funds and Portfolios
referred to in SECTION 6.6.
"INDEBTEDNESS" of any Person means, without duplication, (i) any
obligation of such Person for borrowed money, including, without limitation, (a)
any obligation of such Person evidenced by bonds, debentures, notes or other
similar debt instruments or arising out of a reverse repurchase transaction, and
(b) any obligation for borrowed money which is non-recourse to the credit of
such Person but which is secured by a Lien on any asset of such Person; (ii) any
obligation of such Person on account of deposits or advances; (iii) any
obligation of such Person for the deferred purchase price of any property or
services, except Trade Accounts Payable and investments purchased on a forward
delivery basis; (iv) any obligation of such Person as lessee under a Capitalized
Lease; (v) any Indebtedness of another Person secured by a Lien on any asset of
such first Person, whether or not such Indebtedness is assumed by such first
Person; and (vi) any guaranty or other contingent liability, direct or indirect,
with respect to any obligation of another Person, except for the endorsement of
items for collection in the ordinary course of such first Person's business. For
all purposes of this Agreement, the Indebtedness of any Person shall include the
Indebtedness of any partnership or joint venture in which such Person is a
general partner or joint venturer.
"INDEMNIFIED LIABILITIES" has the meaning assigned to such term
in SECTION 13.4.
"INDEMNIFIED PERSON" has the meaning assigned to such term in
SECTION 13.4.
"INTERBANK RATE" applicable to any Interest Period, means the rate
of interest per annum determined by the Agent as the rate at which dollar
deposits in the approximate amount of BofA's Eurodollar Loan for such Interest
Period would be offered by BofA's Grand Cayman Branch, Grand Cayman, B.W.I. (or
such other office as may be designated for such purpose by BofA), to major banks
in the offshore dollar interbank market at their request at approximately 11:00
a.m. (New York City time) two Banking Days prior to the commencement of such
Interest Period.
"INTERBANK RATE (RESERVE ADJUSTED)" means, with respect to each
Interest Period for a Eurodollar Loan, a rate per annum (rounded upward to the
nearest 1/100 of 1 %) determined pursuant to the following formula:
Interbank Rate = Interbank Rate
(Reserve Adjusted) --------------
1-Eurocurrency Reserve Requirement
The Interbank Rate shall be adjusted automatically as to all Eurodollar
Loans then outstanding as of the effective date of any change in the
Eurocurrency Reserve Requirement.
"INTEREST PERIOD" means with respect to any Eurodollar Loan, the
period commencing on the Borrowing date of such Eurodollar Loan, and ending on
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the date which is one day, one week, two weeks or three weeks later, as the case
may be (in each case as selected by the applicable Fund or Portfolio, as the
case may be, pursuant to SECTION 2.3 or SECTION 2.4); PROVIDED, HOWEVER, that:
(a) any Interest Period which would otherwise end on a day which is
not a Banking Day shall end on the next succeeding Banking Day
unless such next succeeding Banking Day falls in another calendar
month, in which case such Interest Period shall end on the next
preceding Banking Day; and
(b) no Interest Period shall extend beyond the Termination Date.
"LIEN" means any mortgage, pledge, hypothecation, judgment lien or
similar legal process, title retention lien, or other lien or security interest,
including, without limitation, the interest of a vendor under any conditional
sale or other title retention agreement and the interest of a lessor under any
Capitalized Lease. The term Lien shall not include the property interest
acquired by a counterparty in connection with a securities repurchase agreement
between a Fund or Portfolio, as the case may be, and a counterparty.
"LOAN" means a loan by a Bank to a Fund or Portfolio, as the case
may be, pursuant to SECTION 2.1, and shall be a Federal Funds Rate Loan or a
Eurodollar Loan (each of which shall be a "TYPE" of Loan).
"MAJORITY BANKS" means, at any time, at least two Banks then holding
at least 66-2/3% of the then aggregate unpaid principal amount of the Loans or,
if no such principal amount is then outstanding, at least two Banks then having
at least 66-2/3% of the Commitments.
"MATERIAL ADVERSE CHANGE" means any change that the Majority Banks
determine to be material and adverse to (x) the condition (financial or
otherwise), business or prospects of a Fund or Portfolio, as the case may be, or
(y) the ability of a Fund or Portfolio, as the case may be, to duly and
punctually pay and perform all or any of its obligations under this Agreement or
the relevant Notes; PROVIDED, HOWEVER, that if a Fund's or a Portfolio's Asset
Coverage Ratio equals or exceeds 6 to 1, a Material Adverse Change shall not
have occurred.
"MATERIAL ADVERSE EFFECT" means a material and adverse effect on (i)
the condition (financial or other), business, operations or prospects of a Fund
or Portfolio, as the case may be, or (ii) the ability of a Fund or Portfolio, as
the case may be, to duly and punctually pay and perform its obligations under
this Agreement and its Note.
"NET ASSET VALUE" means, at any date, Total Assets less Total
Liabilities.
"NOTE" means the promissory note of a Fund or Portfolio, as the case
may be, substantially in the form set forth as EXHIBIT B OR EXHIBIT B-1, as
appropriate, as such promissory note may be amended, modified or supplemented
from time to time, and the term "Note" shall include any substitutions for, or
renewals of, such promissory note.
"ORIGINATING BANK" has the meaning assigned to such term in
SECTION 13.8(c).
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"PARTICIPANT" has the meaning assigned to such term in SECTION
13.8(c).
"PAYMENT DATE" means (i) with respect to any Eurodollar Loan, the
last day of each Interest Period with respect thereto; and (ii) as to any
Federal Funds Rate Loan and any fees, the last day of each March, June,
September and December, commencing on the first such date to occur after the
date hereof.
"PERSON" means an individual, partnership, corporation, trust, joint
venture, joint stock company, association, unincorporated organization,
government or agency or political subdivision thereof, or other entity.
"PLAN" means any "pension plan," or "welfare benefit plan" as such
terms are defined in the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"PORTFOLIO" means each series or class of shares of a Fund that
constitutes a "series" under the Act, which is a signatory to this Agreement or
any amendment hereto or which such Fund has previously identified to the Banks
as a Portfolio in a certificate in the form of EXHIBIT C and has been approved
by the Banks hereunder.
"PRO RATA SHARE" means, as to any Bank at any time, the percentage
equivalent (expressed as a decimal, rounded to the ninth decimal place) at such
time of such Bank's Commitment divided by the combined Commitments of all Banks,
as set forth on Schedule I, as such amount may be adjusted from time to time as
a result of an assignment made by such Bank pursuant to SECTION 13.8 or
otherwise.
"REFERENCE RATE" means, at any time, the rate of interest then most
recently announced by the BofA at San Francisco, California as its reference
rate. It is a rate set by the BofA based upon various factors including the
BofA's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. Loans may be
priced at, above or below the Reference Rate. Any change in the Reference Rate
shall take effect at the opening of business on the date specified in the public
announcement of such change.
"REFINANCING" means the refinancing of the Agreement as contemplated
by this amendment and restatement of the Existing Agreement.
"REFINANCING DATE" has the meaning assigned to such term in
SECTION 9.
"RELATED PARTY" means, with respect to a Fund or Portfolio, as the
case may be, and for purposes of SECTION 7.17 only, any Person (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such Fund or Portfolio, (ii)
which beneficially owns or holds 5% or more of the equity interest of such Fund
or Portfolio or (iii) 5 % or more of the equity interest of which is
beneficially owned or held by such Fund or Portfolio. The term "control" means
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the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"SENIOR SECURITY" means any bond, debenture, note, or similar
obligation or instrument constituting a security and evidencing indebtedness,
and any stock of a class having priority over any other class as to distribution
of assets or payment of dividends.
"SENIOR SECURITY REPRESENTING INDEBTEDNESS" means any Senior
Security other than stock.
"SUBSIDIARY" means, with respect to a Fund or Portfolio, as the case
may be, (i) any corporation more than 50% of whose stock of any class or classes
having by the terms thereof ordinary voting power to elect a majority of the
directors of such corporation (irrespective of whether or not at the time stock
of any class or classes of such corporation shall have or might have voting
power by reason of the happening of any contingency) is at the time owned by the
Fund or Portfolio and/or one or more Subsidiaries of such Fund or Portfolio and
(ii) any partnership, association, joint venture or other entity in which such
Fund or Portfolio and/or one or more Subsidiaries of such Fund or Portfolio has
more than a 50% equity interest at the time.
"TAXES" with respect to any Person means taxes, assessments or other
governmental charges or levies imposed upon such Person, its income or any of
its properties, franchises or assets.
"TERMINATION DATE" means March 17, 2000, or such earlier date as may
be fixed by the Funds and Portfolios on at least 15 Banking Days' prior written
or telephonic notice received by the Agent. The Funds and Portfolios shall
promptly confirm any telephonic notice in writing. Upon the request of the Funds
and Portfolios, and in the Banks' sole discretion, the Termination Date may be
extended for successive 364-day periods as provided in SECTION 2.7.
"TOTAL ASSETS" means, with respect to a Fund or Portfolio, as the
case may be, as of any date, an amount equal to the aggregate fair market value
of all items which would be set forth as assets on a balance sheet of such Fund
or Portfolio on such date in accordance with GAAP. "FAIR MARKET VALUE," for
purposes of this definition, shall be determined as follows: each portfolio
security traded on a national securities exchange or traded over-the- counter
and quoted on the Nasdaq National Market (or similar quotation system providing
daily quotations with respect to the last sale prices of traded securities)
shall be valued at the last sale price on the date of valuation; PROVIDED that
any security so traded and quoted for which there was no sale on the date of
valuation, and securities traded over-the-counter but not quoted on the Nasdaq
National Market or any such similar quotation system, shall be valued at an
amount equal to the arithmetic mean of the most recent available bid and asked
quotations therefor, except that debt securities not traded on a national
securities exchange nor quoted on the Nasdaq National Market or any such similar
quotation system shall be assigned such values as shall be determined with
respect thereto by the pricing service or services normally utilized by such
Fund or Portfolio to determine the fair market value of such securities, or, if
any such pricing service does not provide a value for such asset, then the value
of such asset shall be determined in accordance with the Fund's or Portfolio's
standard procedures. Upon the written request of the Agent, a Fund or Portfolio
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shall promptly furnish all such information as the Agent shall reasonably
request relating to the value of any portfolio security or other asset of such
Fund or Portfolio or the assignment of values thereto by such Fund or Portfolio
or any other Person.
"TOTAL LIABILITIES" means, with respect to a Fund or Portfolio as of
any date, the aggregate amount of all items which would be set forth as
liabilities on a balance sheet of such Fund or Portfolio on such date in
accordance with GAAP.
"TRADE ACCOUNTS PAYABLE" of any Person means trade accounts payable
of such Person with a maturity of not greater than ninety (90) days incurred in
the ordinary course of such Person's business.
"TRUST AGREEMENT" means, with respect to a Fund that is a business
trust, such Fund's Declaration of Trust, as amended from time to time.
"UNMATURED EVENT OF DEFAULT" means any event or condition which,
with the lapse of time or giving, of notice to a Fund or a Portfolio, or both,
would constitute an Event of Default.
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1.2 OTHER DEFINITIONAL PROVISIONS. Unless otherwise defined or the
context otherwise requires, all financial and accounting terms used herein or in
any certificate or other document made or delivered pursuant hereto shall be
defined in accordance with GAAP. Unless otherwise defined therein, all terms
defined in this Agreement shall have the defined meanings when used in a Note or
in any certificate or other document made or delivered pursuant hereto.
1.3 INTERPRETATION OF AGREEMENT. A SECTION or an EXHIBIT is,
unless otherwise stated, a reference to a section hereof or an exhibit hereto,
as the case may be. Section captions used in this Agreement are for convenience
only, and shall not affect the construction of this Agreement. The words
"hereof," "herein," "hereto," and "hereunder" and words of similar purport when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. Unless expressly indicated otherwise,
when used in this Agreement (including the Schedules and Exhibits hereto)
"from" means "from and including" and "to" means "to but excluding". Unless
expressly indicated otherwise, when used in this Agreement (including the
Schedules and Exhibits hereto) "to the best of a Person's knowledge" means "to
the best of such Person's knowledge after due inquiry".
1.4 COMPLIANCE WITH FINANCIAL RESTRICTIONS. Compliance with each
of the financial ratios and restrictions contained in SECTION 7 shall, except as
otherwise provided herein, be determined in accordance with GAAP consistently
followed.
1.5 ASSUMPTIONS REGARDING STRUCTURE. The parties acknowledge and
agree that certain of the Funds under this Agreement are comprised of separate
Portfolios and that such Portfolios are not separately existing legal entities
entitled to enter into contractual agreements or to execute instruments and, for
these reasons, the relevant Funds are executing this Agreement and the relevant
Notes on behalf of their specified respective Portfolios.
1.6 AUTHORITY OF ADVISER; ADVISER DISCLAIMER. Each of the Funds
and Portfolios hereby confirms that its Adviser has been duly authorized to act
on behalf of such Fund or Portfolio for purposes of this Agreement and the
relevant Note and to take all actions which such Fund or such Portfolio is
entitled or required to take hereunder or thereunder, including, without
limitation, requesting the making, continuation or conversion of Loans on behalf
of a Fund or Portfolio pursuant to SECTION 2, reducing or terminating the
Commitment as to one or more Funds or Portfolios, and executing and delivering
Borrowing Certificates, Borrowing Base Certificates and any and all other
certificates, reports, financial information and notices required to be
delivered to the Agent and/or the Banks hereunder. Notwithstanding the foregoing
or anything to the contrary contained in this Agreement, the parties hereto
acknowledge and agree that (a) in taking any such action hereunder or under a
Note the Adviser is acting solely in its capacity as investment adviser for the
Funds and Portfolios and not in its individual capacity and (b) neither the
Adviser nor any of its officers, employees or agents (with the Adviser,
collectively, "ADVISER PERSONS") shall have any liability whatsoever to any Bank
or the Agent for any action taken or omitted to be taken by any of them in
connection with this Agreement or any Note nor shall any of them be bound by or
liable for any indebtedness, liability or obligation hereunder or under the Note
and (c) no Adviser Person shall be responsible in any manner to the Agent or the
Banks for the truth, completeness or accuracy of any statement, representation,
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warranty or certification contained in this Agreement or in any information,
report, certificate or other document furnished by the Adviser on behalf of any
Fund or Portfolio in connection with this Agreement, including, without
limitation, any Borrowing Certificate, any Borrowing Base Certificate, and any
certificate or notice furnished pursuant to SECTION 7.1 or 7.2 hereof; PROVIDED
that, in the case of CLAUSES (b) and (c) above, the conduct of the Adviser
Persons or any of them did not constitute negligence, misconduct or a breach of
any obligation to any Fund or Portfolio.
2. COMMITMENTS OF THE BANKS AND CERTAIN LOAN TERMS.
2.1 Loans. Subject to the terms and conditions of this Agreement
and in reliance upon the warranties of each of the Funds set forth herein, each
Bank severally agrees to make individual loans (collectively called the "LOANS"
and individually called a "LOAN") to the Funds or, in the case of a Fund
comprised of one or more Portfolios, to such Portfolios as are shown on the
signature pages hereof or which are designated in the manner specified in
SECTION 10. 1, in immediately available funds, as designated in a Borrowing
Certificate provided pursuant to SECTION 2.3, which Loans each Fund or
Portfolio, as the case may be, may repay and reborrow during the period from the
date hereof to, but not including, the Termination Date. Notwithstanding the
foregoing, the parties hereto agree that any breach of a warranty by a Fund or
Portfolio will not alter the Banks' obligations to make Loans to any other Fund
or Portfolio. The commitment of each Bank and the outstanding principal amount
of Loans made by each Bank hereunder shall not exceed at any time the aggregate
amount set forth on SCHEDULE I (such amount as the same may be reduced under
SECTION 4.3 or as a result of one or more assignments as permitted herein, the
Bank's "COMMITMENT"); PROVIDED, HOWEVER, that, after giving effect to any
Borrowing, the aggregate principal amount of all outstanding Loans shall not at
any time exceed the Commitment Amount, and PROVIDED that the aggregate principal
amount of all Loans outstanding from time to time to any Fund or Portfolio, as
the case may be, shall not exceed the Borrowing Base for such Fund or Portfolio.
2.2 LOAN OPTIONS. Each Loan shall be either a Federal Funds Rate
Loan or a Eurodollar Loan, as shall be selected by the relevant Fund or
Portfolio, except as otherwise provided herein. Any combination of types of
Loans may be outstanding at the same time, except that no more than three Loans
having different Interest Periods may be outstanding at any one time with
respect to each Fund or, with respect to a Fund comprised of Portfolios, each
Portfolio of that Fund.
2.3 BORROWING PROCEDURES.
(a) NOTICE TO AGENT. A Fund or Portfolio shall give the Agent prior
written or telephonic notice of each Loan, which shall be received by the Agent,
in the case of a Federal Funds Rate Loan, not later than 11:00 a.m., Chicago
time, on the Borrowing date with respect to such Loan, or, in the case of a
Eurodollar Loan, not later than 11:00 a.m., Chicago time, three (3) Banking Days
prior to the Borrowing date with respect to such Loan. Each such notice shall
specify (i) the Borrowing date (which shall be a Banking Day), (ii) the amount
and type of Loan, (iii) the initial Interest Period for such Loan, and (iv) in
the case of a Fund with Portfolios, the name of the Portfolio that will utilize
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the proceeds of such Loan. Each Loan shall be in a minimum amount of $500,000 or
in an integral multiple of $100,000 in excess thereof. The relevant Fund or
Portfolio shall promptly confirm each such telephonic notice in writing by
providing to the Agent a Borrowing Certificate signed by such Fund's or
Portfolio's Treasurer or Assistant Treasurer or a designated officer of the
Adviser, on behalf of the Fund or Portfolio (it being understood, however, that
the Fund's, the Portfolio's or the Adviser's failure to confirm any telephonic
notice or otherwise comply with the provisions of this SECTION 2.3 shall not
affect the obligation of the relevant Fund or Portfolio to repay each Loan in
accordance with the terms of this Agreement and the relevant Notes). In the
event that more than one Loan request is made on any Banking Day, the Agent
shall, for purposes of ensuring that the aggregate of the then-outstanding Loans
and the Loans which are the subject of Loan requests will not exceed the
Commitment Amount, process the Loan requests in the order of receipt.
(b) NOTICE TO BANKS. The Agent will promptly notify each Bank of its
receipt of any Loan request and of the amount of such Bank's Pro Rata Share of
the requested Loan.
(c) TRANSFERS TO AGENT. Each Bank will make the amount of its Pro Rata
Share of each Loan available to the Agent for the account of the borrowing Fund
or Portfolio at the Agent's Payment Office by 1:00 p.m. (Chicago time) on the
Borrowing date requested by the borrowing Fund or Portfolio in funds immediately
available to the Agent for deposit to the account which the Agent shall from
time to time specify by notice to the Banks. The proceeds of all such Loans will
then be made available to the borrowing Fund or Portfolio by the Agent in
accordance with written instructions provided to the Agent by the Fund or
Portfolio in like funds as received by the Agent. No Bank's obligation to make
any Loan shall be affected by any other Bank's failure to make any Loan.
(d) DISBURSEMENT TO FUND OR PORTFOLIO. The Agent will pay to the
relevant Fund or Portfolio the amount of each Loan on the date specified in the
notice of Borrowing, with respect to such Loan upon satisfaction of the
applicable conditions precedent with respect to such Loan.
2.4 CONTINUATION AND/OR CONVERSION OF LOANS. A Fund or Portfolio
may elect to continue an outstanding Eurodollar Loan into a subsequent Interest
Period to begin on the day following the last day of such current Interest
Period or convert a Eurodollar Loan into a Federal Funds Rate Loan by giving the
Agent prior written or telephonic notice of such continuation or conversion,
which shall be received by the Agent not later than 11:00 a.m., Chicago time,
three (3) Banking Days prior to the effective date of any continuation or
conversion which results in a Eurodollar Loan or 11:00 a.m., Chicago time, on
the date of conversion with respect to such Loan that is to be continued as a
Federal Funds Rate Loan; PROVIDED that no Loan shall be outstanding for a period
of more than twenty-one (21) days and PROVIDED FURTHER, that there shall be no
more than three Interest Periods in respect of a Loan. Each such notice shall
specify (a) the effective date of continuation or conversion (which shall be a
Banking Day), (b) the amount of such Loan, and (c) the Interest Period for such
Loan. The Fund or Portfolio making such an election shall promptly confirm each
such telephonic notice in writing by providing the Agent a new Borrowing
Certificate signed by the relevant Fund's or Portfolio's Treasurer or Assistant
Treasurer or a designated officer of the Adviser, on behalf of such Fund or
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Portfolio. Absent timely notice of continuation or conversion, each Eurodollar
Loan shall automatically convert into a Federal Funds Rate Loan on the last day
of the current Interest Period for such Loan unless paid in full on such last
day. At any time that an Event of Default or an Unmatured Event of Default shall
exist, any Loans may be converted or continued only as Federal Funds Rate Loans.
The Agent will promptly notify each Bank of its receipt of a request to convert
or continue a Loan. All conversions and continuations shall be made ratably
according to the respective outstanding principal amounts of the Loans with
respect to which the notice was given held by each Bank.
2.5 NOTE EVIDENCING LOANS. The Loans made to a Fund or Portfolio
by each Bank under its Commitment shall be evidenced by a Note, which shall be
dated as of the date hereof and shall mature (unless accelerated pursuant to
SECTION 11.2) on the Termination Date. All Loans made by the Banks to a Fund or
Portfolio pursuant to this Agreement and all payments of principal shall be
evidenced by the Banks in their records which records shall be rebuttably
presumptive evidence of the subject matter thereof.
2.6 SOURCE OF REPAYMENT.
(a) Notwithstanding any other provision of this Agreement, the parties
agree that the assets and liabilities of each Portfolio of a Fund are separate
and distinct from the assets and liabilities of each other Portfolio of that
Fund. No Portfolio or Fund shall be liable or shall be charged for any debt,
obligation, liability, fee, or expense arising out of or in connection with a
transaction entered into by or on behalf of any other Portfolio or Fund or any
judgment with respect thereto.
(b) With respect to each Fund that is organized as a Massachusetts
business trust, the parties hereby agree that this Agreement is not executed on
behalf of the trustees of such Fund as individuals, and the obligations of such
Fund, or a Portfolio of such Fund (with respect to a Fund with Portfolios),
under this Agreement and its Note(s) are not binding on any of the trustees,
officers or shareholders of such Fund individually, but are binding upon only
the assets and property of such Fund or Portfolio, as the case may be.
(c) Nothing in this SECTION 2.6 shall affect the rights of the Agent or
the Banks against Adviser Persons as provided in SECTION 1.6.
2.7 EXTENSION OF SCHEDULED TERMINATION DATE. Between 60 and 45
days prior to the scheduled Termination Date, the Funds and Portfolios may, by
written notice to the Agent, request that all Banks extend for an additional 364
days the scheduled Termination Date. The Agent shall deliver a copy of such
notice to each Bank promptly following its receipt thereof. Such extension so
requested shall become effective on the then- current scheduled Termination Date
if (and only if) on or prior to 30 days after such notice, each Bank shall have
consented to such extension in writing by notice to the Agent. If a Bank shall
not respond to any such request, it shall be deemed to have refused to extend.
The Agent shall promptly inform the Funds and Portfolios of each Bank's consent
to or rejection of, or failure to consent to, any Termination Date extension
request. If any Bank (a "NON-EXTENDING BANK") shall not agree to such extension,
but Banks holding at least 66 2/3% of the Commitments shall agree to such
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extension, the Funds and Portfolios may request one or more of the other Banks
to purchase the Commitment of the Non-Extending Bank or, with the consent of the
Agent, the Funds and Portfolios may request an Eligible Lender to purchase the
Commitment of the Non-Extending Bank (any such Bank or Eligible Lender
purchasing all or a portion of such Commitment being called a "REPLACEMENT
BANK"). Any such purchase by a Replacement Bank shall be subject to the terms of
SECTION 13.8(b), except that the relevant Fund(s) and/or Portfolio(s) shall pay
any cost related to breakage of existing Interest Periods or the cost of funding
existing Loans for the remainder of existing Interest Periods.
3. INTEREST AND FEES.
3.1 INTEREST.
(a) FEDERAL FUNDS RATE LOANS. The unpaid principal amount of each
Federal Funds Rate Loan shall bear interest prior to maturity at a rate per
annum equal to the Federal Funds Rate in effect from time to time plus the
Federal Funds Rate Margin. Accrued interest on each Federal Funds Rate Loan
shall be payable on each Payment Date and at maturity.
(b) EURODOLLAR LOANS. The unpaid principal amount of each Eurodollar
Loan shall bear interest prior to maturity at a rate per annum equal to the
Interbank Rate (Reserve Adjusted) in effect for each Interest Period with
respect to such Eurodollar Loan plus the Eurodollar Margin. Accrued interest on
each Eurodollar Loan shall be payable on each Payment Date and at maturity.
(c) INTEREST AFTER MATURITY. Each Fund and, in the case of a Fund
comprised of Portfolios, each Fund on behalf of its Portfolios shall pay to the
Banks interest on any amount of principal of any Loan borrowed on behalf of each
such Fund or Portfolio which is not paid when due, whether at stated maturity,
by acceleration or otherwise, accruing from and including the date such amount
shall have become due to, but not including, the date of payment thereof in full
at the rate per annum which is equal to the greater of (i) 2% in excess of the
rate applicable to the unpaid principal amount immediately before it became due,
or (ii) 2% in excess of the Reference Rate in effect from time to time. After
maturity, accrued interest shall be payable on demand.
3.2 COMMITMENT FEE. The Funds and Portfolios shall collectively
pay to the Banks a commitment fee equal to 0.07% per annum on the average daily
unused portion of the Commitment Amount from time to time during the period from
and including the date of this Agreement to, but not including, the earlier of
the Termination Date or the date of termination of the Commitment Amount
pursuant to SECTION 4.3 or 11.2. Such commitment fee shall be payable in arrears
on each Payment Date and a pro-rated installment shall be payable on the
Termination Date or the date of termination of the Commitments for any period
then ending for which such commitment fee shall not have been theretofore paid.
Notwithstanding the foregoing, the amount of the commitment fee shall be reduced
pro rata in accordance with any termination, or reduction from time to time in
the Commitment Amount. Each Fund or Portfolio, as the case may be, shall be
liable only for its portion of the commitment fee, and such Fund or Portfolio
shall not be liable for any portion of the commitment fee of any other Fund or
Portfolio. The Funds shall notify the Agent at least two Banking Days in advance
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of a commitment fee Payment Date of the manner in which the fees to be paid on
such Payment Date are to be allocated among the Funds and Portfolios.
3.3 METHOD OF CALCULATING INTEREST AND FEES. Interest on each Loan
shall be calculated on the basis of a year consisting of 360 days and paid for
actual days elapsed, calculated as to each Interest Period from and including
the first day thereof to, but not including, the last day thereof. Any fees
shall be calculated on the basis of a year consisting of 360 days and paid for
actual days elapsed.
4. PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION OF THE
COMMITMENTS AND SETOFF.
4.1 PLACE OF PAYMENT. All payments hereunder (including payments
with respect to the Notes) shall be made without setoff or counterclaim and
shall be made to the Agent in immediately available funds prior to 12:30 p.m.,
California time, on the date due at Bank of America, ABA No. 1210-0035-8, Agency
Administration Services, #5596, Account No. 122331-16136, Reference: Legg Mason,
or at such other place or for such other account as may be designated by the
Agent to the Funds and Portfolios in writing. Any payments received after such
time shall be deemed received on the next Banking Day. The Agent will promptly
distribute to each Bank its Pro Rata Share (or other applicable share as
expressly provided herein) of such payment in like funds as received. Subject to
the definition of the term "Interest Period," whenever any payment to be made
hereunder or under a Note shall be stated to be due on a date other than a
Banking Day, such payment may be made on the next succeeding Banking Day, and
such extension of time shall be included in the calculation of interest or any
fees.
4.2 PREPAYMENTS.
(a) MANDATORY PREPAYMENTS. If at any time the outstanding principal
balance of a Fund's or Portfolio's, as the case may be, Loans hereunder shall
exceed the then-current Borrowing Base of such Fund or Portfolio, such Fund or
Portfolio shall immediately prepay the outstanding, principal amount of such
Loans in an amount equal to such excess, subject to the indemnification
provisions of SECTION 5.5.
(b) OPTIONAL PREPAYMENTS. Each Fund or Portfolio, as the case may be,
may from time to time, upon at least two (2) Banking Days' prior written or
telephonic notice received by the Agent, prepay the principal of the Loans to
such Fund or Portfolio in whole or in part, as contemplated by SECTION 2.1;
PROVIDED, HOWEVER, that any partial prepayment of principal shall be in a
minimum amount of $100,000 or in an integral multiple of $100,000 in excess
thereof, and PROVIDED FURTHER, that any prepayment of principal shall be subject
to the indemnification provisions of Section 5.5, but shall otherwise be without
any premium or penalty. Such Fund or Portfolio shall promptly confirm any
telephonic notice of prepayment in writing.
4.3 REDUCTION OR TERMINATION OF THE COMMITMENT AMOUNT. The Funds
and Portfolios may from time to time, upon at least 30 calendar days' prior
written or telephonic notice given by or on behalf of the Funds and Portfolios
and received by the Agent, permanently reduce the Commitment Amount, but only
upon payment of the unpaid principal amount of the Loans, if any, in excess of
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the then-reduced amount of the Commitment Amount, plus (i) accrued interest to
the date of such payment on the principal amount being repaid and (ii) any
amount required to indemnify the Banks pursuant to SECTION 5.5 in respect of
such payment. Any such reduction shall be in a minimum amount of $1,000,000 and
in an integral multiple of $500,000 and shall be applied to each Bank according
to its Pro Rata Share. The Funds and Portfolios may at any time on like notice
terminate the Commitments upon payment in full of (a) the Loans, (b) accrued
interest thereon to the date of such payment, (c) any amount required to
indemnify the Banks pursuant to SECTION 5.5 in respect of such payment, and (d)
any other liabilities of the Funds and Portfolios hereunder. The Funds and
Portfolios shall promptly confirm any telephonic notice of reduction or
termination of the Commitments in writing.
4.4 SETOFF. In addition to and not in limitation of all other
rights and remedies (including other rights of setoff) that the Banks may have,
a Bank shall, upon the occurrence of any Event of Default described in SECTION
11. 1 or any Unmatured Event of Default described in SECTION 11.1(e), have the
right to appropriate and apply to any payment of any and all Loans and other
liabilities of a Fund or Portfolio hereunder (whether or not then due), in such
order of application as such Bank may elect, any and all balances, credits,
deposits (general or special, time or demand, provisional or final), accounts or
moneys of such Fund or Portfolio (and not any other Fund or Portfolio) then or
thereafter with such Bank. A Bank shall promptly advise the relevant Fund or
Portfolio and the Agent of any such setoff and application made with respect to
the Fund or Portfolio, but failure to do so shall not affect the validity of
such setoff and application.
4.5 BORROWING BASE. The borrowing base (the "BORROWING BASE") of
each Fund or Portfolio, as the case may be, as of any date shall be the amount
shown on each Borrowing Base Certificate or Borrowing Certificate, if
applicable, furnished from time to time with respect to such Fund or Portfolio.
4.6 PAYMENTS BY THE BANKS TO THE AGENT.
(a) Unless the Agent receives notice from a Bank at least one Banking
Day prior to the date of such Borrowing that such Bank will not make available
as and when required hereunder to the Agent for the account of the relevant Fund
or Portfolio the amount of that Bank's Pro Rata Share of the Borrowing, the
Agent may assume that each Bank has made such amount available to the Agent in
immediately available funds on the Borrowing date and the Agent may (but shall
not be so required), in reliance upon such assumption, make available to the
relevant Fund or Portfolio on such date a corresponding amount. If and to the
extent any Bank shall not have made its full amount available to the Agent in
immediately available funds and the Agent in such circumstances has made
available to the relevant Fund or Portfolio such amount, that Bank shall on the
Banking Day following such Borrowing date make such amount available to the
Agent, together with interest at the Federal Funds Rate for each day during such
period. A notice of the Agent submitted to any Bank with respect to amounts
owing under this subsection (a) shall be conclusive, absent manifest error. If
such amount is so made available, such payment to the Agent shall constitute
such Bank's Loan on the Borrowing date for all purposes of this Agreement. If
such amount is not made available to the Agent on the Banking Day following the
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Borrowing date, the Agent will notify the relevant Fund or Portfolio of such
failure to fund, and upon demand by the Agent, the relevant Fund or Portfolio
shall pay such amount to the Agent for the Agent's account, together with
interest thereon for each day elapsed since the date of such Borrowing, at a
rate per annum equal to the interest rate applicable at the time to the Loans
comprising such Borrowing.
(b) The failure of any Bank to make any Loan on any Borrowing date shall
not relieve any other Bank of any obligation hereunder to make a Loan on such
Borrowing date, but no Bank shall be responsible for the failure of any other
Bank to make the Loan to be made by such other Bank on any Borrowing date.
4.7 SHARING OF PAYMENTS. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Loans made by it any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Agent of such fact and (b) purchase from the other
Banks such participations in the Loans made by them as shall be necessary to
cause such purchasing Bank to share the excess payment pro rata with each of
them; PROVIDED, HOWEVER, that if all or any portion of such excess payment is
thereafter recovered from the purchasing Bank, such purchase shall to that
extent be rescinded and each other Bank shall repay to the purchasing Bank the
purchase price paid therefor, together with an amount equal to such paying
Bank's ratable share (according to the proportion of (i) the amount of such
paying Bank's required repayment to the purchasing Bank to (ii) the total amount
so recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. Each
Fund and Portfolio agrees that any Bank so purchasing a participation from
another Bank may, to the fullest extent permitted by law, exercise all its
rights of payment (including the right of set-off with respect to such
participation) as fully as if such Bank were the direct creditor of the relevant
Fund in the amount of such participation. The Agent will keep records (which
shall be conclusive and binding in the absence of manifest error) of
participations purchased under this Section and will in each case notify the
Banks following any such purchases or repayments.
5. ADDITIONAL PROVISIONS RELATING TO LOANS.
5.1 INCREASED COST. If, as a result of any law, rule, regulation,
treaty or directive, or any change therein or in the interpretation or
administration thereof, or compliance by a Bank with any request or directive
(whether or not having the force of law) from any court or governmental
authority, agency or instrumentality:
(a) any tax, duty or other charge with respect to any Loan, any
Note, or such Bank's obligation to make Loans is imposed, modified or
deemed applicable, or the basis of taxation of payments to such Bank of
the principal of, or interest on, any Loan (other than taxes imposed on
the overall net income of such Bank by the jurisdiction in which such Bank
has its principal office) is changed;
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(b) any reserve, special deposit, special assessment or similar
requirement against assets of, deposits with or for the account of, or
credit extended by, such Bank is imposed, modified or deemed applicable;
or
(c) any other condition affecting this Agreement or any Loan is
imposed on such the Bank or the interbank eurodollar market,
and such Bank determines that, by reason thereof, the cost to such Bank of
making or maintaining any Loan is increased, or the amount of any sum receivable
by such Bank hereunder or under the Note in respect of any Loan is reduced,
THEN each Fund and/or each Portfolio, as the case may be, whose Loan is
affected by the foregoing shall pay to such Bank upon demand such additional
amount or amounts as will compensate such Bank for such additional cost or
reduction, not to exceed an amount or amounts reasonably incurred, upon
presentation by such Bank of a statement in the amount or amounts and setting
forth such Bank's calculation thereof (provided that such Bank has not been
compensated for such additional cost or reduction in the calculation of the
Eurocurrency Reserve Requirement). Determinations by a Bank for purposes of this
SECTION 5.1 of the additional amounts required to compensate such Bank in
respect of the foregoing shall be conclusive in the absence of manifest error.
In determining such amounts, the relevant Bank may use any reasonable averaging,
attribution and allocation methods.
5.2 DEPOSITS UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE OR
INADEQUATE; IMPRACTICABILITY. If any Fund or Portfolio has any Eurodollar Loan
outstanding or a Fund or Portfolio, as the case may be, has notified the Agent
of its intention to borrow a Eurodollar Loan as provided herein, then in the
event that, prior to any Interest Period, a Bank shall have determined in good
faith (which determination shall be conclusive and binding on the parties
hereto) that:
(i) deposits of the necessary amount for the relevant Interest
Period are not available to such Bank in the interbank eurodollar market
or that, by reason of circumstances affecting such market, adequate and
reasonable means do not exist for ascertaining the Interbank Rate
applicable to such Interest Period; or
(ii) the Interbank Rate (Reserve Adjusted) will not adequately
and fairly reflect the cost to such Bank of making or funding the
Eurodollar Loans for such Interest Period; or
(iii) the making or funding of Eurodollar Loans has become
impracticable as a result of any event occurring after the date of this
Agreement which, in the opinion of such Bank, materially and adversely
affects such Loans or such Bank's obligation to make such Loans, THEN (x)
any notice of a new Eurodollar Loan previously given by or on behalf of
any Fund or Portfolio, as the case may be, and not yet borrowed or
converted shall be deemed to be a notice to make a Federal Funds Rate
Loan, and (y) PROVIDED that such Fund or Portfolio has been notified of
such determination by the relevant Bank, such Fund or Portfolio shall be
obligated, at its election, either to prepay in full the outstanding
Eurodollar Loans without any premium or penalty (except as provided in
SECTION 5.5) on the last day of the then- current Interest Period with
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respect thereto or to convert any such Loans to Federal Funds Rate Loans
on such last day, unless payment or conversion of such Loans is demanded
sooner.
5.3 CHANGES IN LAW RENDERING EURODOLLAR LOANS UNLAWFUL. If at any
time due to any new law, treaty or regulation, or any interpretation thereof by
any governmental or other regulatory authority charged with the administration
thereof, or for any other reason arising subsequent to the date hereof, it shall
become unlawful for a Bank to fund any Eurodollar Loan, Eurodollar Loans shall
not be made hereunder by such Bank for so long as it would be unlawful for such
Bank to do so. If any such change shall make it unlawful for a Bank to continue
any Eurodollar Loan previously made by it hereunder, each Fund or Portfolio
having Eurodollar Loans outstanding at such time shall, after being notified by
such Bank of the occurrence of such event, on the earlier of (i) the last day of
the then-current Interest Period or (ii) if required by such law, regulation or
interpretation, on such date as shall be specified in such notice, at such
Fund's or Portfolio's option, either convert each such Eurodollar Loan to a
Federal Funds Rate Loan or prepay such Loan to such Bank in full without any
premium or penalty (but subject to SECTION 5.5).
5.4 DISCRETION OF THE BANK AS TO MANNER OF FUNDING.
Notwithstanding any provision of this Agreement to the contrary, each Bank shall
be entitled to fund and maintain its funding of all or an part of its Eurodollar
Loans in any manner it sees fit; it being understood, however, that for purposes
of this Agreement, all determinations hereunder shall be made as if such Bank
had actually funded and maintained each Eurodollar Loan during the Interest
Period for such Loan through the purchase of deposits having a term
corresponding to such Interest Period and bearing an interest rate equal to the
Interbank Rate for such Interest Period (whether or not such Bank shall have
granted any participations in such Eurodollar Loan). The Funds and Portfolios
acknowledge that the Banks may fund all or any part of the Loans by sales of
participations to various participants, PROVIDED such participants are Eligible
Lenders.
5.5 FUNDING LOSSES. Each Fund or Portfolio, as the case may be,
will indemnify each Bank upon demand against any loss or expense which such Bank
may sustain or incur (including, without limitation, any loss or expense
sustained or incurred in obtaining, liquidating or employing deposits or other
funds acquired to effect, fund or maintain any Loan, but not including any loss
or expense incurred as a result of such Bank's gross negligence or wilful
misconduct) as a consequence of (i) any failure of any such Fund or Portfolio to
make any payment when due of any amount due hereunder, (ii) any failure of any
such Fund or Portfolio to borrow, continue or convert a Loan on a date specified
therefor in a notice thereof or (iii) any payment (including any payment made
pursuant to the Bank's demand for payment of the unpaid principal of the Loans),
prepayment or conversion of any Loan on a date other than the last day of the
Interest Period for such Loan. Other than the indemnification provided above, no
premium or penalty shall be payable in connection with any of the circumstances
described above.
5.6 CAPITAL ADEQUACY. If a Bank shall reasonably determine that
the application or adoption of any law, rule, regulation, directive,
interpretation, treaty or guideline regarding capital adequacy, or any change
therein or in the interpretation or administration thereof, whether or not
having the force of law (including, without limitation, application of changes
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to Regulation H and Regulation Y of the Federal Reserve Board issued by the
Federal Reserve Board and regulations of the Comptroller of the Currency,
Department of the Treasury, 12 CFR Part 3, Appendix A, issued by the Comptroller
of the Currency), increases the amount of capital required or expected to be
maintained by such Bank or any entity controlling such Bank, and such increase
is based upon the existence of such Bank's obligations hereunder and other
commitments of this type, then from time to time the relevant Fund(s) or
Portfolio(s), as the case may be, shall pay to such Bank an amount equal to such
amount or amounts as will compensate such Bank or such controlling entity, as
the case may be, for such increased capital requirement within ten (10) Banking
Days upon presentation of a certificate of such Bank setting forth the amount or
amounts and the Bank's calculation thereof, which certificate shall be
conclusive in the absence of manifest error. The determination of any amount or
amounts to be paid under this SECTION 5.6 shall be based upon any reasonable
averaging, attribution and allocation methods. In this connection, the relevant
Bank shall allocate such amount or amounts among its customers to which such
Bank has made loans of the type covered hereby in good faith and on an equitable
basis. A certificate of a Bank setting forth the amount or amounts as shall be
necessary to compensate the Bank and a calculation of such amount or amounts as
specified in this SECTION 5.6 shall be delivered to such Fund or Portfolio and
shall be conclusive in the absence of manifest error.
5.7 ADDITIONAL PROVISIONS WITH RESPECT TO FEDERAL FUNDS RATE LOAN.
The selection by a Fund or Portfolio of the Federal Funds Rate and the
maintenance of advances at such rate shall be subject to the following
additional terms and conditions:
(a) If, after a Fund or Portfolio has elected to borrow or maintain
any Loan at the Federal Funds Rate, the Agent notifies such Fund or
Portfolio that reasonable means do not exist for the Agent to determine
the Federal Funds Rate, as determined by the Agent in its sole discretion,
then the principal of the Loan subject to the Federal Funds Rate shall
accrue or shall continue to accrue interest at the Reference Rate.
(b) If any treaty, statute, regulation or interpretation thereof, or
any directive, guideline, or other requirement of a central bank or fiscal
authority (whether or not having the force of law) shall prohibit the
maintenance of any Loan subject to the Federal Funds Rate, then on and as
of the date the prohibition becomes effective, the principal subject to
that prohibition shall accrue or shall continue to accrue interest at the
Reference Rate.
6. WARRANTIES. To induce the Banks and the Agent to enter into this
Agreement, grant the Commitments and to make the Loans, each Fund hereby
warrants with respect to itself and, as may be relevant with respect to a Fund
comprised of Portfolios, the relevant Portfolio that:
6.1 EXISTENCE. It is an open-end, management investment company
within the meaning of the Act and is duly organized, validly existing and in
good standing under the laws of the state of its organization. It is in good
standing and is duly qualified to do business in each state where, because of
the nature of its respective activities or properties, such qualification is
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required, except where the failure to be so qualified would not have a Material
Adverse Effect. If it is a Fund comprised of Portfolios, the relevant Portfolio
is a series of shares of beneficial interest in, or common stock of, such Fund
(which shares have been and will be duly authorized, validly issued, fully paid
and non-assessable by such Fund) and legally constitutes a fund or portfolio
permitted to be marketed to investors pursuant to the provisions of the Act.
6.2 AUTHORIZATION. It is duly authorized to execute and deliver
this Agreement and its Notes and is and, so long as this Agreement shall remain
in effect with respect to it, will continue to be duly authorized to borrow
monies hereunder on its own behalf or, if it is a Fund comprised of one or more
Portfolios, on behalf of the relevant Portfolio, and to perform its obligations
under this Agreement and its Notes. The execution, delivery and performance by
it of this Agreement and its Notes and the effecting of its Borrowings hereunder
on its own behalf or, if it is a Fund comprised of Portfolios, on behalf of the
relevant Portfolio, do not and will not require any consent or approval of, or
registration with, any governmental agency or authority.
6.3 NO CONFLICTS. The execution, delivery and performance by it of
this Agreement and its Notes do not and, so long as this Agreement shall remain
in effect with respect to it, will not (i) conflict with any provision of law,
(ii) conflict with its constituent documents or, as applicable, its Trust
Agreement, (iii) conflict with any agreement binding upon it, (iv) conflict with
either its most recent prospectus or its most recent statement of additional
information, (v) conflict with any court or administrative order or decree
applicable to it or (vi) require, or result in, the creation or imposition of
any Lien on any of its assets.
6.4 VALIDITY AND BINDING EFFECT. This Agreement is, and its Notes
when duly executed and delivered will be, a legal, valid and binding obligation
of such Fund or Portfolio, enforceable against it in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, receivership, fraudulent conveyance, fraudulent transfer,
moratorium or other similar laws of general application affecting the
enforcement of creditors' rights or by general principles of equity limiting the
availability of equitable remedies. The claims of the Banks under its Notes for
Borrowings hereunder will rank at least PARI PASSU with the claims of all its
other unsecured creditors, except those whose claims are preferred solely by any
bankruptcy, insolvency, liquidation or other similar laws of general
application.
6.5 NO DEFAULT. It is not in default under any agreement or
instrument to which it is a party or by which any of its respective properties
or assets is bound or affected, which default might have a Material Adverse
Effect. To the best of the Fund's knowledge, no Event of Default or Unmatured
Event of Default with respect to it or, if it is comprised of Portfolios, the
relevant Portfolio, has occurred and is continuing.
6.6 FINANCIAL STATEMENTS. Its most recent audited Statement of
Assets and Liabilities and its most recent semi-annual asset statement, copies
of which have been or will be furnished to the Agent and the Banks, have been
prepared in conformity with GAAP applied on a basis consistent with that of the
preceding Fiscal Year or period and present fairly its financial condition as at
such dates and the results of its operations for the periods then ended, subject
(in the case of the interim financial statement) to year-end audit adjustments.
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Since the date of its most recent Statement of Assets and Liabilities and such
semi-annual asset statement, there has been no material adverse change in such
financial condition or, if it is comprised of Portfolios, the relevant
Portfolio, except for fluctuations in value of its assets or the assets of such
Portfolio due to market conditions and shareholder purchases and redemptions.
6.7 LITIGATION. No claims, litigation, arbitration proceedings or
governmental proceedings are pending or, to the best of its knowledge,
threatened against or are affecting it or, if it is comprised of Portfolios, the
relevant Portfolio, the results of which, if adversely determined, could
reasonably be expected to have a Material Adverse Effect, except those referred
to in a schedule furnished to the Agent and the Banks contemporaneously herewith
and attached hereto as EXHIBIT D. Other than any liability incident to such
claims, litigation or proceedings or provided for or disclosed in the financial
statements referred to in SECTION 6.6 or listed on EXHIBIT E, neither such Fund
nor the relevant Portfolio, in the case of a Fund comprised of Portfolios, to
the best of its knowledge, has any contingent liabilities which are material to
it other than those incurred in the ordinary course of business.
6.8 LIENS. None of the property, revenues or assets of such Fund
or any of the relevant Portfolio, in the case of a Fund comprised of Portfolios,
is subject to any Lien, except (i) Liens in favor of the Agent, if any, (ii)
Liens for current Taxes not delinquent or Taxes being contested in good faith
and by appropriate proceedings and as to which such reserves or other
appropriate provisions as may be required by GAAP are being maintained, (iii)
Liens as are necessary in connection with a secured letter of credit opened by
such Fund or Portfolio in connection with the Fund's or the Portfolio's
trustees/directors' and officers' errors and omissions liability insurance
policy, (iv) Liens in connection with advances of cash or securities made, or in
connection with any taxes, charges, expenses, assessments, claims or liabilities
incurred, by a Fund's or Portfolio's custodian and (v) Liens in connection with
the payment of initial and variation margin in connection with authorized
futures and options transactions and collateral arrangements with respect to
options, futures contracts, options on futures contracts, when-issued or delayed
delivery securities or other authorized investments or portfolio management
techniques.
6.9 PARTNERSHIPS. Such Fund or Portfolio is not a partner or joint
venturer in any partnership or joint venture other than (i) in connection with
its investments as a limited partner in limited partnership investments and (ii)
in connection with its insurance arrangements.
6.10 PURPOSE. The proceeds of the Loans will be used by such Fund
or, if it is comprised of Portfolios, by the relevant Portfolio, as may be
designated in the relevant Borrowing Certificate, for short-term liquidity and
other temporary emergency purposes, which purposes are permitted by such Fund's
or Portfolio's prospectus and statement of additional information and the Act.
Neither the making of any Loan nor the use of the proceeds thereof will violate
or be inconsistent with the provisions of Federal Reserve Board Regulation T, U
or X. Each such Fund acknowledges that Loans made to it or to it on behalf of
its Portfolios, as the case may be, may be deemed by the Federal Reserve Board
to be "purpose loans" under Regulation U because of such Fund's status as an
investment company (or the functional equivalent thereof).
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6.11 COMPLIANCE. Such Fund or Portfolio is in compliance with all
statutes and governmental rules and regulations, consents, orders and decrees
applicable to it, including, without limitation, the Act, other than any
statutes, governmental rules and regulations, consents and decrees the
non-compliance with which will not have a Material Adverse Effect on such Fund's
or Portfolio's operations, assets or financial condition.
6.12 PENSION AND WELFARE PLANS. Such Fund or Portfolio has not
established or maintained, nor is it liable under or in respect of, any Plan.
6.13 TAXES. Such Fund or Portfolio has filed all tax returns that
are required to have been filed and has paid, or made adequate provisions for
the payment of, all of its Taxes that are due and payable, except such Taxes, if
any, as are being contested in good faith and by appropriate proceedings and as
to which such reserves or other appropriate provisions as may be required by
GAAP have been maintained. Such Fund or Portfolio is not aware of any proposed
assessment against it for additional Taxes (or any basis for any such
assessment) which might be material in amount to it. Such Fund or Portfolio has
complied with all requirements of the Code applicable to regulated investment
companies so as to be relieved of federal income tax on net investment income
and net capital gains distributed to shareholders of the Fund or Portfolio.
6.14 SUBSIDIARIES: INVESTMENTS. Such Fund or Portfolio has no
Subsidiaries and no equity investment or interest in any other Person other
than portfolio securities which may have been acquired in the ordinary course
of business.
6.15 FULL DISCLOSURE. No representation or warranty contained in
this Agreement or in any other document or instrument furnished to the Agent and
the Banks in connection herewith contains any untrue statement of any material
fact as of the date when made or omits to state any material fact necessary to
make the statements herein or therein not misleading as of the date when made.
6.16 INVESTMENT POLICIES. The assets of such Fund or Portfolio are
being invested in accordance with the investment policies and restrictions set
forth in each of its most recent prospectus and its most recent statement of
additional information, except for incidents of inadvertent non-compliance
therewith which will not, individually or in the aggregate, have a Material
Adverse Effect on the Fund's or Portfolio's business or financial condition.
6.17 COMPUTER SYSTEMS. (This provision is a Year 2000 Readiness
Disclosure pursuant to the Year 2000 Information and Readiness Disclosure Act,
P.L. 105-271. Please note that some of the year 2000 statements set forth herein
may be republished statements based on information supplied by another person or
entity the contents of which have not been verified.) Each Fund reasonably
believes that each of its service providers designated below has developed a
reasonably comprehensive program to address the "Year 2000 Problem" (that is,
the inability of its computers, as well as embedded microchips in its
non-computing devices, to perform properly date-sensitive functions with respect
to certain dates after December 31, 1999). Each Fund reasonably anticipates that
each of its service providers designated below will substantially avoid the Year
2000 problem as to all of its computers, as well as embedded microchips in its
non-computing devices, that are material to its business, properties or
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operations. Each Fund reasonably believes that each of its service providers
designated below has developed or will develop feasible contingency plans
adequate to ensure reasonably uninterrupted and reasonably unimpaired business
operation in the event of failure of the service provider's own systems or
equipment due to the Year 2000 Problem, excluding a general failure of or
interruption in its communications and delivery infrastructure. The service
providers to which this provision relates consists solely of the following
service providers: Legg Mason Fund Adviser, Inc.; Legg Mason Capital Management,
Inc.; Bartlett & Co.; LM Institutional Advisors, Inc.; State Street Bank and
Trust Company; and Boston Financial Data Services, Inc.
7. COVENANTS. From the date of this Agreement and thereafter until the
expiration or termination of the Commitments and until its Note or Notes and
other liabilities are paid in full, each Fund agrees with respect to itself and,
if it is comprised of Portfolios, the relevant Portfolio, that, unless the
Majority Banks shall otherwise expressly consent in writing, to:
7.1 FINANCIAL STATEMENTS AND OTHER REPORTS. Subject to the last
sentence of this SECTION 7. 1, furnish to the Agent, with sufficient copies
for each Bank:
(a) AUDIT REPORTS. As soon as available and in any event within 60
days after each of its Fiscal Years, a copy of its annual audited
Statement of Assets and Liabilities, including a statement of investments,
prepared in conformity with GAAP and certified by an independent certified
public accountant who shall be satisfactory to the Majority Banks,
together with a certificate from such accountant (i) acknowledging to the
Agent such accountant's understanding that the Agent and the Banks are
relying on such Statement of Assets and Liabilities, (ii) containing a
computation of, and showing compliance with, the financial ratio contained
in SECTION 7.13 and (iii) to the effect that, in making the examination
necessary for the signing of such Statement of Assets and Liabilities,
such accountant has not become aware of any Event of Default or Unmatured
Event of Default that has occurred and is continuing, or if such
accountant has become aware of any such event, describing it and the
steps, if any, being taken to cure it;
(b) SEMI-ANNUAL ASSET STATEMENTS. Within 60 days after the end of
the first six months of its Fiscal Year, a copy of its published
semi-annual asset statement, prepared in conformity with GAAP;
(c) BORROWING BASE CERTIFICATE. In addition to each Borrowing
Certificate provided pursuant to SECTION 2.3, not later than 7 days after
the end of each calendar quarter, or at any other time reasonably
requested by the Agent, a certificate of a designated officer of its
Adviser, acting on its behalf, in the form set forth as EXHIBIT F hereto
(a "BORROWING BASE CERTIFICATE"), certifying, as of the end of such
quarter, as to the current Borrowing Base of it or, if it is comprised of
Portfolios, such Portfolio to the extent Loans were made during such
quarter or are outstanding at the end of such quarter, and showing all
calculations used in determining such amounts;
(d) OFFICER'S CERTIFICATE. Within 15 days after the end of each
calendar quarter during which a Loan was outstanding at the end of such
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quarter, a certificate of a designated officer of the borrowing Fund's or
Portfolio's Adviser, acting on such Fund's or Portfolio's behalf,
certifying to the effect that, to the best of such Adviser's knowledge, no
Event of Default or Unmatured Event of Default has occurred and is
continuing and containing a computation of, and showing compliance with,
the financial ratio contained in SECTION 7.13;
(e) SECURITIES AND EXCHANGE COMMISSION AND OTHER REPORTS. Copies of
each filing and report made by it with or to any securities exchange or
the Securities and Exchange Commission (other than any filing or report
not sent to investors) and of each communication (other than marketing and
other non-financial communications sent in the ordinary course of
business) from it to investors generally, promptly upon the filing or
making thereof; and
(f) REQUESTED INFORMATION. Promptly from time to time such other
reports or information as the Agent or any Bank may reasonably request,
including, without limitation, those required pursuant to SECTION 8.5.
Notwithstanding the foregoing, such Fund or Portfolio may fulfill its
obligations to the Agent and the Banks under PARAGRAPHS (a), (b) and (e) of this
SECTION 7.1 by providing to the Agent (with copies sufficient for each Bank)
(without duplication) each report, statement, mailing and distribution (other
than transaction confirmations and dividend statements) sent to shareholders of
such Fund or Portfolio, including, all statements of additional information, for
which the Agent and the Banks shall be deemed to have made specific requests.
7.2 NOTICES. Notify the Agent in writing of any of the following
immediately upon learning of the occurrence thereof, describing the same and, if
applicable, stating the steps being taken by the Person(s) affected with respect
thereto:
(a) DEFAULT. The occurrence of an Event of Default or an
Unmatured Event of Default;
(b) LITIGATION. The institution of any litigation, arbitration
proceeding, or governmental proceeding which, if adversely determined,
could reasonably be expected to have a Material Adverse Effect;
(c) JUDGMENT. The entry of any judgment or decree against such
Fund or Portfolio if the aggregate amount of all judgments and decrees
then outstanding, against such Fund or Portfolio exceeds $1,000,000 or, if
less, 1 % of the Fund's or Portfolio's assets, after deducting (i) the
amount with respect to which such Fund or Portfolio is insured and with
respect to which the insurer has assumed responsibility in writing, and
(ii) the amount for which such Fund or Portfolio is otherwise indemnified
if the terms of such indemnification and the Person providing such
indemnification are satisfactory to the Majority Banks;
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(d) PRICING SERVICE INFORMATION. The occurrence of any change
in the pricing services utilized by such Fund or Portfolio as referred
to in the definition of "Total Assets";
(e) NAME CHANGES. The occurrence of a change of name (whether of
its legal name or a "d/b/a" designation) of such Fund or, if it is
comprised of Portfolios, of the relevant Portfolio. The Fund or, if it is
a Fund comprised of Portfolios, the Fund, on behalf of the affected
Portfolio(s), shall promptly execute and deliver to each Bank a new Note
executed in its new name, together with such other documents in connection
therewith as the Bank shall reasonably request;
(f) OTHER CHANGES. Upon becoming aware of any potential change of
such Fund's or Portfolio's Adviser or distributor or the appointment of
any sub-adviser or any Person acting in a similar capacity to an Adviser
(and in any event not later than 30 days prior to the time as the board of
trustees or directors of such Fund is to consider approval of such change
or appointment or otherwise determines to recommend such change or
appointment (if necessary) to its shareholders for their approval) and,
not later than 30 days prior to the occurrence of any change of such
Fund's or Portfolio's custodian, independent accountant, sponsor or
administrator, notice thereof; PROVIDED that a mailing to shareholders
with respect to any of the foregoing shall not be deemed to be sufficient
notice hereunder; and PROVIDED FURTHER, that if, in the good faith
judgment of the Majority Banks such proposed change will result or has
resulted in a change in the Majority Banks' analysis of the
creditworthiness of such Fund or Portfolio or, in the case of any such
proposed change of such Fund's or Portfolio's Adviser or if a new Adviser,
any sub-adviser or any other Person acting in a similar capacity to an
Adviser is appointed, such Adviser, new Adviser, sub-adviser or other
Person fails to provide the Banks with a letter in the form of EXHIBIT H,
then the Banks may terminate their Commitments to lend to such Fund or
Portfolio hereunder upon giving, 30 days' notice to such Fund or
Portfolio, and at the end of such 30-day period, all Loans outstanding to
such Fund or Portfolio shall become immediately due and payable; and
(g) OTHER EVENTS. The occurrence of such other events as the Agent
may from time to time reasonably specify.
7.3 EXISTENCE. Except as specified in SECTION 7.12(a), maintain
and preserve its existence as a registered investment company and, if it is
comprised of Portfolios, the existence of the relevant Portfolio as a "series"
within the meaning of the Act, and maintain and preserve all rights, privileges,
licenses, copyrights, trademarks, trade names, franchises and other authority to
the extent material and necessary for the conduct of its business in the
ordinary course as conducted from time to time, unless such Fund or Portfolio
has no Loans outstanding and has irrevocably notified the Agent that it shall
not request any Loans hereunder.
7.4 NATURE OF BUSINESS. (a) Continue in, and limit its operations
to, the business of an open-end, management investment company, within the
meaning of the Act, and (b) maintain in full force and effect at all times all
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governmental licenses, registrations, permits and approvals necessary for the
continued conduct of its business, including, without limitation, its
registration with the Securities and Exchange Commission under the Act as an
open-end investment company, unless in the case of this clause (b) only the
failure to do so would not have a Material Adverse Effect.
7.5 BOOKS, RECORDS AND ACCESS. Maintain complete and accurate
books and records in which full and correct entries in conformity with GAAP
shall be made of all dealings and transactions in relation to such Fund's or
Portfolio's business and activities; upon reasonable notice, permit access by
the Agent and the Banks to its books and records during normal business hours
and permit the Agent or a Bank, as the case may be, to make copies of such books
and records; PROVIDED, HOWEVER, that neither the Agent nor the Banks shall have
access to the shareholder lists of the Fund and, as the case may be, its
Portfolios.
7.6 INSURANCE. Maintain in full force and effect insurance to such
extent and against such liabilities as is commonly maintained by companies
similarly situated, including, but not limited to (i) such fidelity bond
coverage as shall be required by Rule 17g-1 promulgated under the Act or any
similar or successor provision and (ii) errors and omissions, director and
officer liability, and other insurance against such risks and in such amounts
(and with such co-insurance and deductibles) as is usually carried by other
companies of established reputation engaged in the same or similar businesses
and similarly situated.
7.7 DIVIDENDS. Not declare or pay any dividends, except for (i)
dividends not in excess of such Fund's or Portfolio's undistributed net
investment income, net short-term capital gains and net gains from foreign
currency transactions; (ii) annual dividends not in excess of such Fund's or
Portfolio's net capital gains for each year in respect of which such annual
dividend is declared or paid; and (iii) any other dividends necessary to reduce
or eliminate any liability of the Fund or the Portfolio for federal, state,
local or foreign income or excise taxes; PROVIDED, HOWEVER, that dividends
declared in good faith, but later recharacterized as a return of capital due to
foreign currency transactions or other unforeseeable events, shall not be deemed
in violation of this section.
7.8 INVESTMENT POLICIES AND RESTRICTIONS.
(a) Without prior written notice to the Agent of at least 30 days (which
notice the Agent shall communicate to the Banks promptly following the receipt
thereof), not rescind, amend or modify any investment policy described as
"fundamental" in any prospectus or any registration statement(s) that may be on
file with the Securities and Exchange Commission with respect thereto
(collectively herein, a "PROPOSED CHANGE"). If, in the judgment of the Majority
Banks, such proposed change will result in a change in such Banks' analysis of
the creditworthiness of such Fund or Portfolio, and if such proposed change is
implemented with respect to such Fund or Portfolio, the Commitments to such Fund
or Portfolio shall, as of the time such fundamental change is implemented,
terminate, and all Loans outstanding from the Banks to such Fund or Portfolio,
as well as all other amounts owing to the Banks from such Fund or Portfolio,
shall thereupon become immediately due and payable.
(b) Except in the case of a "fundamental" investment policy (which, as
contemplated by subparagraph (a) above, requires prior notice), notify the Agent
within 30 days after rescinding, amending or modifying any of the investment
restrictions as set forth in EXHIBIT G hereto with respect to it or, if it is
comprised of Portfolios, of the relevant Portfolio.
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(c) Any notice to the Agent pursuant to this SECTION 7.8 shall be given
in writing pursuant to the procedures described in the last sentence of SECTION
7.1.
7.9 TAXES. Pay when due all of its Taxes, unless and only to the
extent that such Taxes are being contested in good faith and by appropriate
proceedings and such Fund or Portfolio shall have set aside on its books such
reserves or other appropriate provisions therefor as may be required by GAAP.
Such Fund or Portfolio shall at all times comply with all requirements of the
Code applicable to regulated investment companies, to such effect as not to be
subject to federal income taxes on net investment income and net capital gains
distributed to its shareholders.
7.10 COMPLIANCE. Comply with all statutes and governmental rules
and regulations applicable to it, including, without limitation, the Act, except
were non-compliance with any such statute, rule or regulation could not be
reasonably expected to have a Material Adverse Effect.
7.11 PENSION PLANS. Not enter into, or incur any liability
relating to, any Plan.
7.12 MERGER, PURCHASE AND SALE. Not:
(a) be a party to any merger or consolidation; PROVIDED, HOWEVER, that
any Fund or Portfolio can merge or consolidate with any other Person in
accordance with 17 C.F.R. SECTION 270.17a-8 if (i) such merger or consolidation
complies in all respects with the requirements of 17 C.F.R. SECTION 270.17a-8
and all rules promulgated in connection therewith, (ii) the surviving entity
assumes all of the obligations to the Agent and the Banks of the merging or
consolidating Funds and/or Portfolios prior to such merger or consolidation and
(iii) in the judgment of all the Banks the financial condition and investment
policies and restrictions of the surviving entity are not fundamentally
different from those of the merging or consolidating Funds and/or Portfolios
prior to such merger or consolidation;
(b) except as permitted by SECTION 7.12(a) and except for sales or other
dispositions of portfolio assets in the ordinary course of its business, sell,
transfer, convey, lease or otherwise dispose of all or any substantial part of
its assets; or
(c) except as permitted by SECTION 7.12(a), purchase or otherwise
acquire all or substantially all the assets of any Person without the review and
consent thereto of the Banks, which consent shall not be unreasonably withheld.
For purposes of this SECTION 7.12 only, (i) a sale, transfer, conveyance,
lease or other disposition of assets shall be deemed to be a "substantial part"
of the assets of any Fund or Portfolio only if the value of such assets, when
added to the value of all other assets sold, transferred, conveyed, leased or
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otherwise disposed of by such Fund or Portfolio (other than in the normal course
of business and a redemption in kind made pursuant to 17 C.F.R. SECTION
270.18f-1) during the same Fiscal Year, exceeds 15% of such Fund's or
Portfolio's Total Assets determined as of the end of the immediately preceding
Fiscal Year and (ii) a redemption in kind of securities made pursuant to 17
C.F.R. SECTION 270.18f-I shall not be deemed to be a transaction covered by this
SECTION 7.12.
7.13 ASSET COVERAGE RATIO. Not at any time permit its Asset
Coverage Ratio or, if it is comprised of Portfolios, the Asset Coverage Ratio of
the relevant Portfolio, to be less than 4 to 1 or such other more restrictive
ratio as may be set forth in any prospectus or statement of additional
information with respect to such Fund or Portfolio.
7.14 LIENS. Not create or permit to exist any Lien with respect to
any property, revenues or assets now owned or hereafter acquired, except (i)
Liens in favor of the Agent and the Banks, if any, (ii) Liens for current Taxes
not delinquent or Taxes being contested in good faith and by appropriate
proceedings and as to which such reserves or other appropriate provisions as may
be required by GAAP are being maintained, (iii) Liens as are necessary in
connection with a secured letter of credit opened by such Fund or Portfolio in
connection with the Fund's or the Portfolio's trustees/directors' and officers'
errors and omissions liability insurance policy, (iv) Liens in connection with
advances of cash or securities made, or in connection with any taxes, charges,
expenses, assessments, claims or liabilities incurred, by a Fund's or
Portfolio's custodian and (v) Liens in connection with the payment of initial
and variation margin in connection with authorized futures and options
transactions and collateral arrangements with respect to options, futures
contracts, options on futures contracts, when-issued or delayed delivery
securities or other authorized investments or portfolio management techniques.
7.15 GUARANTIES. Not become or be a guarantor or surety of, or
otherwise become or be responsible in any manner (whether by agreement to
purchase any obligations, stock, assets, goods or services, or to supply or
advance any funds, assets, goods or services, or otherwise) with respect to, any
undertaking of any other Person, except for the endorsement, in the ordinary
course of collection, of instruments payable to it or its order.
7.16 OTHER AGREEMENTS. Not enter into any agreement containing any
provision that would be violated or breached by such Fund's or Portfolio's
performance of its obligations hereunder or under any instrument or document
delivered or to be delivered by such Fund or Portfolio hereunder or in
connection herewith.
7.17 TRANSACTIONS WITH RELATED PARTIES. Not enter into or be a
party to any transaction or arrangement, including, without limitation, the
purchase, sale, lease or exchange of property or the rendering of any service,
with any Related Party, except in the ordinary course of and pursuant to the
reasonable requirements of such Fund's or Portfolio's business and upon fair and
reasonable terms no less favorable to such Fund or Portfolio than would be
obtainable in a comparable arm's-length transaction with a Person not a Related
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Party; PROVIDED, HOWEVER, that a transaction or arrangement that does not
violate the Act and the regulations of the Securities and Exchange Commission
thereunder shall be deemed to be in compliance with this SECTION 7.17.
7.18 PAYMENT OF MANAGEMENT FEES. At any time that (x) an Event of
Default or an Unmatured Event of Default shall have occurred and be continuing
with respect to such Fund or Portfolio and (y) Loans are outstanding with
respect to such Fund or Portfolio, not pay, or cause to be paid, any management
or advisory fees of any type in respect of such Fund or Portfolio to its
Adviser, whether pursuant to the terms of an investment advisory agreement or
not; PROVIDED, HOWEVER, that notwithstanding the foregoing, such Fund or
Portfolio shall not be prohibited to record on its financial statement accruals
with respect to such management or advisory fees.
7.19 OTHER INDEBTEDNESS. Not incur or permit to exist any
Indebtedness, other than (i) the Loans, (ii) other Indebtedness payable to the
Banks, (iii) reverse repurchase transactions in an amount not exceeding that
permitted by the Fund's or Portfolio's investment restrictions and (iv) advances
of cash or securities made, or in connection with any taxes, charges, expenses,
assessments, claims or liabilities incurred, by a Fund's or Portfolio's
custodian.
7.20 CHANGES TO TRUST AGREEMENT, ETC. Not make or permit to be
made any material changes to its Trust Agreement or constituent documents, as
the case may be, without the prior written consent of the Majority Banks.
7.21 VIOLATION OF INVESTMENT RESTRICTIONS, ETC. Not violate or
take any action which would result in a violation of any of the investment
restrictions or fundamental investment policies of such Fund or the relevant
Portfolio of such Fund as from time to time in effect, except for such
inadvertent violations as would not, individually or in the aggregate, have a
Material Adverse Effect upon the financial condition or business of such Fund or
Portfolio.
7.22 PROCEEDS OF LOANS. To utilize the proceeds of each Loan made
to it in strict accordance with the designated usage for such Loan as set forth
in the Borrowing Certificate with respect to such Loan.
8. CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Banks to
make any Loan to a Fund or, in the case of a Fund comprised of Portfolios, a
Portfolio, or, in the case of SECTION 2.4, to continue or convert any Eurodollar
Loan to any Fund or Portfolio into a subsequent Interest Period, is subject to
the satisfaction of each of the following conditions precedent:
8.1 NOTICE. The Agent shall have received timely notice of such
Loan in accordance with SECTION 2.3 or 2.4, as applicable.
8.2 DEFAULT. Before and after giving effect to such Loan, no Event
of Default or Unmatured Event of Default shall have occurred and be continuing
with respect to such Fund or Portfolio.
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8.3 WARRANTIES. Before and after giving effect to such Loan, the
warranties in SECTION 6 (other than the warranty in SECTION 6.7 and the warranty
contained in the last sentence of SECTION 6.6) with respect to such Fund or
Portfolio, as the case may be, shall be true and correct as though made on the
date of such Loan, except for such changes as are specifically permitted
hereunder.
8.4 CERTIFICATION. Each request for a Loan shall be deemed to be a
certification that the conditions precedent set out in SECTIONS 8.2 and 8.3 have
been satisfied.
8.5 BORROWING CERTIFICATE. The Agent shall have received a
Borrowing request from such Fund or, in the case of a Fund comprised of
Portfolios, the relevant Portfolio as contemplated by SECTION 2.3.
8.6 MINIMUM NET ASSET VALUE. The Net Asset Value of such Fund
or Portfolio at the time of a Borrowing request shall be at least
$10,000,000.
9. CONDITIONS PRECEDENT TO AND CONSEQUENCES OF EFFECTIVENESS OF
AMENDMENTS. The amendment, restatement and replacement effected
by this Agreement shall become effective on the date (the "REFINANCING DATE") on
which the conditions precedent specified in this SECTION 9 shall have been
satisfied or waived by the Agent and all the Banks that are signatories to this
document. The occurrence of the Refinancing shall be subject to (i) the receipt
by the Agent of duly executed counterparts of this amended and restated
Agreement signed by all the parties hereto (or evidence satisfactory to the
Agent that all the parties hereto have executed counterparts of this Agreement
and dispatched them to the Agent) and (ii) the delivery to the Agent of all of
the following, each duly executed and dated on or about the date hereof:
9.1 NOTES. Notes in favor of each Bank from each New Borrower
Party and new Notes from each Original Borrower Party in favor of each of Bank
of America and State Street Bank and Trust Company, the Original Borrower
Parties, Bank of America and State Street Bank and Trust Company agreeing that,
upon receipt by the Agent of such new Notes, the corresponding Notes of the
Original Borrower Parties previously delivered to such Banks shall cease to be
of further force and effect.
9.2 RESOLUTIONS. A copy, duly certified by the secretary or an
assistant secretary of such Fund or Portfolio, of (i) the resolutions of such
Fund's or Portfolio's trustees or directors authorizing or ratifying the
execution and delivery of this Agreement and such Fund's Notes or, in the case
of a Fund comprised of one or more Portfolios, the Notes of each such Portfolio,
and authorizing the Borrowings hereunder, (ii) all documents evidencing other
necessary trust or corporate action, as the case may be, and (iii) all approvals
or consents, if any, with respect to this Agreement and the aforesaid Note(s).
9.3 INCUMBENCY CERTIFICATE. A certificate of the secretary or an
assistant secretary of such Fund certifying the names of the Fund's officers
and/or other persons authorized to sign this Agreement, the Notes of such Fund
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or, as appropriate, such Fund's Portfolio(s), and all other documents or
certificates to be delivered hereunder, together with the true signatures of
such officers.
9.4 OPINION. An opinion of counsel to such Fund or Portfolio,
addressed to the Agent and the Banks, substantially in the form of EXHIBIT I.
9.5 NET ASSET VALUE CERTIFICATE. A certificate of the net asset
value of such Fund and, if the Fund is comprised of Portfolios, the Portfolio on
whose behalf the Loan is being made.
9.6 CONSENT OF INVESTMENT ADVISER. A letter from the Fund's or
Portfolio's Adviser addressed to the Agent and the Banks, substantially in the
form of EXHIBIT H.
9.7 FORM U-1. Its Form U-1 duly completed and executed as
contemplated by Regulation U of the Federal Reserve Board.
9.8 CONSEQUENCES OF EFFECTIVENESS. On the Refinancing Date the
Existing Agreement shall be automatically amended and restated to read as set
forth herein. On and after the Refinancing Date the rights and obligations of
the parties hereto shall be governed by this Agreement; PROVIDED that rights and
obligations of the parties hereto with respect to the period prior to the
Refinancing Date shall continue to be governed by the provisions of the Existing
Agreement. On the Refinancing Date, the Pro Rata Shares of Bank of America and
State Street Bank and Trust Company shall immediately become the percentages set
forth opposite the name of such Bank on SCHEDULE I hereto. With effect from an
including the Refinancing Date, each Person listed on the signature pages hereof
which is not a party to the Existing Agreement shall become a party to this
Agreement.
10. ADDITION OF NEW PARTIES.
10.1 NEW PARTIES. Subject to the prior consent of each of the
Banks, which may be granted or withheld in its sole discretion, one or more
Funds or Portfolios may become parties hereunder by delivering to the Agent a
notice in the form of EXHIBIT C and such other documentation and financial
information with respect to such Fund or Portfolio as the Banks may request.
11. EVENTS OF DEFAULT AND REMEDIES.
11.1 EVENTS OF DEFAULT. Each of the following shall constitute an
Event of Default with respect to a Fund or Portfolio, as the case may be, under
this Agreement (it being understood that an Event of Default with respect to a
Fund or Portfolio, as the case may be, shall not constitute an Event of Default
with respect to any other Fund or other Portfolio of that Fund):
(a) NON-PAYMENT. Default in the payment when due of any principal
of, or interest on, any Loan made to such Fund or Portfolio, as the case
may be, or any fee hereunder payable by such Fund or Portfolio, as the
case may be.
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(b) NON-PAYMENT OF OTHER INDEBTEDNESS. Default in the payment when
due, whether by acceleration or otherwise (subject to any applicable grace
period), of any Indebtedness of, or guaranteed by, such Fund or Portfolio,
as the case may be, in excess of 5% of such Fund's or Portfolio's, as the
case may be, then respective total Net Asset Value.
(c) ACCELERATION OF OTHER INDEBTEDNESS. Any event or condition
shall occur that results in the acceleration of the maturity of any
Indebtedness of, or guaranteed by, such Fund or Portfolio, as the case may
be, or enables the holder or holders of such other Indebtedness or any
trustee or agent for such holders (any required notice of default having
been given and any applicable grace period having expired) to accelerate
the maturity of such other Indebtedness in excess of 5% of such Fund's or
Portfolio's, as the case may be, then respective total Net Asset Value.
(d) OTHER OBLIGATIONS. Default in the payment when due, whether by
acceleration or otherwise, or in the performance or observance (subject to
applicable grace periods, if any) of (i) any obligation or agreement of
such Fund or Portfolio, as the case may be, to or with the Agent or any
Bank (other than any obligation or agreement of such Fund or Portfolio
hereunder or under such Fund's or Portfolio's Note), or (ii) any material
obligation or agreement of such Fund or Portfolio, as the case may be, to
or with any other Person, except only to the extent that the existence of
any such default is being contested by such Fund or Portfolio, as the case
may be, in good faith and by appropriate proceedings and such Fund or
Portfolio, as the case may be, shall have set aside on its books such
reserves or other appropriate provisions therefor as may be required by
GAAP.
(e) INSOLVENCY. The Fund or Portfolio, as the case may be, becomes
insolvent, or generally fails to pay, or admits in writing its inability
to pay, its debts as they mature, or applies for, consents to or
acquiesces in, the appointment of a trustee, receiver or other custodian
for such Fund or Portfolio, as the case may be, or for a substantial part
of its property, or makes a general assignment for the benefit of
creditors; or, in the absence of such application, consent or
acquiescence, a trustee, receiver or other custodian is appointed for such
Fund or Portfolio, as the case may be, or for a substantial part of the
property of such Fund or Portfolio, as the case may be, and is not
discharged within 30 days; or any bankruptcy, reorganization, debt
arrangement or other proceeding under any bankruptcy or insolvency law, or
any dissolution or liquidation proceeding, is instituted by or against
such Fund or Portfolio, as the case may be, and, if instituted against
such Fund or Portfolio, as the case may be, is consented to or acquiesced
in by such Fund or Portfolio, as the case may be, or remains for 30 days
undismissed; or any warrant of attachment or similar legal process is
issued against any substantial part of the property of such Fund or
Portfolio, as the case may be, which is not released within 30 days of
service.
(f) AGREEMENTS. Such Fund or Portfolio, as the case may be, shall
(i) default in the performance of its agreement under SECTION 7.13 or (ii)
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default in the performance of its other agreements herein set forth (and
not constituting an Event of Default under any of the other subsections of
this SECTION 11.1), and such default shall continue for 30 days (or 3 days
in the case of such Fund's or Portfolio's, as the case may be, agreement
contained in the last sentence of the definition of "Total Assets") after
notice thereof to such Fund or Portfolio, as the case may be, from the
Agent or a Bank.
(g) WARRANTY. Any warranty made by such Fund or Portfolio, as the
case may be, herein, or in any schedule, statement, report, notice,
certificate or other writing furnished by such Fund or Portfolio, as the
case may be, on or as of the date as of which the facts set forth therein
are stated or certified, is untrue or misleading in any material respect
when made or deemed made; or any certification made or deemed made by such
Fund or Portfolio, as the case may be, to the Agent and the Banks is
untrue or misleading, in any material respect on or as of the date made or
deemed made.
(h) LITIGATION. There shall be entered against such Fund or
Portfolio, as the case may be, one or more judgments or decrees in excess
of $1,000,000.00 in the aggregate at any one time outstanding, excluding
those judgments or decrees (i) that shall have been stayed or discharged
less than 30 calendar days from the entry thereof and (ii) those judgments
and decrees for and to the extent which such Fund or Portfolio, as the
case may be, is insured and with respect to which the insurer has assumed
responsibility in writing or for and to the extent which such Fund or
Portfolio, as the case may be, is otherwise indemnified if the terms of
such indemnification and the Person providing such indemnification are
satisfactory to the Majority Banks.
(i) MATERIAL ADVERSE CHANGE. The Majority Banks shall have
determined in good faith that a Material Adverse Change has occurred.
(j) INVESTMENT COMPANY ACT. Such Fund or Portfolio, as the case
may be, shall no longer be in compliance with the Act after giving effect
to all notice and cure periods thereunder where such non-compliance or
lack of good standing would have a Material Adverse Effect upon the
financial condition or business of such Fund or Portfolio, as the case may
be.
(k) INVESTMENT ADVISER; CUSTODIAN. Such Fund's or Portfolio's, as
the case may be, Adviser shall cease to be an investment adviser of such
Fund or Portfolio, or State Street Bank and Trust Company shall cease to
be the custodian of such Fund's or Portfolio's assets; PROVIDED, HOWEVER,
that, it shall be an Event of Default if, in the case of Bartlett Europe
Fund only, State Street Bank and Trust Company shall cease to be the
custodian of its domestic assets or The Chase Manhattan Bank shall cease
to be the sub-custodian of its foreign assets.
(l) INVESTMENT RESTRICTIONS; INVESTMENT POLICIES. Such Fund or
Portfolio, as the case may be, shall violate or take any action that would
result in a violation of any of the investment restrictions or fundamental
investment policies of such Fund or Portfolio as from time to time in
effect where such violation would have a Material Adverse Effect upon such
Fund or Portfolio.
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11.2 REMEDIES. If any Event of Default described in SECTION 11.1
shall have occurred and be continuing, the Agent may, and following the
direction of the Majority Banks shall, declare the Commitments to be terminated
with respect to the applicable Fund or Portfolio, as the case may be, and such
Fund's or Portfolio's, as the case may be, obligations under its Notes to be due
and payable, whereupon the Commitments shall immediately terminate with respect
to such Fund or Portfolio, as the case may be, and such Fund's or Portfolio's,
as the case may be, Notes shall become immediately due and payable, all without
advance notice of any kind (except that if an event described in SECTION 11.1(e)
occurs, the Commitments shall immediately terminate with respect to such Fund or
Portfolio, as the case may be, and the obligations under the Notes with respect
to such Fund or Portfolio, as the case may be, shall become immediately due and
payable without declaration or advance notice of any kind). The Agent shall
promptly advise such Fund or Portfolio, as the case may be, of any such
declaration, but failure to do so shall not impair the effect of such
declaration. If an Event of Default shall have occurred, the Agent may exercise
on behalf of itself and the Banks all rights and remedies available to it and
the Banks against such Fund or Portfolio under the Credit Documents or
applicable law.
12. THE AGENT
12.1. APPOINTMENT AND AUTHORIZATION. Each Bank hereby irrevocably
(subject to SECTION 12.9) appoints, designates and authorizes the Agent to take
such action on its behalf under the provisions of this Agreement and each other
Credit Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other Credit
Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Credit Document, the Agent shall not have any duties
or responsibilities, except those expressly set forth herein, nor shall the
Agent have or be deemed to have any fiduciary relationship with any Bank, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Credit Document or
otherwise exist against the Agent.
12.2. DELEGATION OF DUTIES. The Agent may execute any of its duties
under this Agreement or any other Credit Document by or through agents,
employees or attorneys-in-fact and shall be entitled to advice of counsel
concerning, all matters pertaining to such duties. The Agent shall not be
responsible for the negligence or misconduct of any agent or attorney-in-fact
that it selects with reasonable care.
12.3. LIABILITY OF AGENT. None of the Agent-Related Persons shall
(i) be liable to the Banks for any action taken or omitted to be taken by any of
them under or in connection with this Agreement or any other Credit Document or
the transactions contemplated hereby (except for its own gross negligence or
willful misconduct) or (ii) be responsible in any manner to any of the Banks for
any recital, statement, representation or warranty made by a Fund or Portfolio
or any officer or agent thereof contained in this Agreement or in any other
Credit Document, or in any certificate, report, statement or other document
referred to or provided for in, or received by the Agent under or in connection
with, this Agreement or any other Credit Document, or the validity,
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effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Credit Document, or for any failure of a Fund or Portfolio or any
other party to any Credit Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Bank to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in or conditions of this Agreement or any other Credit
Document or to inspect the properties, books or records of a Fund or Portfolio.
12.4. RELIANCE BY AGENT. (a) The Agent shall be entitled to rely,
and shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement, or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including counsel to
the Funds), independent accountants and other experts selected by the Agent. The
Agent shall be fully justified in failing or refusing to take any action under
this Agreement or any other Credit Document unless it shall first receive such
advice or concurrence of the Majority Banks as it deems appropriate, and if it
so requests, it shall first be indemnified to its satisfaction by the Banks
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action (other than liability or expense
arising from its gross negligence or willful misconduct). The Agent shall in all
cases be fully protected from any claim by any Bank in acting, or in refraining
from acting, under this Agreement or any other Credit Document in accordance
with a request or consent of the Majority Banks and such request, and any action
taken or failure to act pursuant thereto shall be binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions specified
in SECTION 9, each Bank that has executed this Agreement shall be deemed to have
consented to, approved or accepted, or be satisfied with each document or other
matter either sent by the Agent to such Bank for consent, approval, acceptance
or satisfaction, or required thereunder to be consented to, approved by,
acceptable or satisfactory to the Bank.
12.5. NOTICE OF EVENT OF DEFAULT. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Event of Default, except with
respect to defaults in the payment of principal, interest and fees required to
be paid to the Agent for the account of the Banks, unless the Agent shall have
received written notice from a Bank or a Fund referring to this Agreement,
describing such Event of Default and stating that such notice is a "notice of
default". The Agent will notify the Banks of its receipt of any such notice. The
Agent shall take such action with respect to such Event of Default as may be
requested by the Majority Banks in accordance with SECTION 11.2; PROVIDED,
HOWEVER, that unless and until the Agent has received any such request, the
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Event of Default as it shall deem
advisable or in the best interest of the Banks.
12.6. CREDIT DECISION. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Funds and the Portfolios, shall be deemed to constitute any representation or
warranty by any Agent-Related Person to any Bank. Each Bank represents to the
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Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition, and creditworthiness of the
Funds and the Portfolios, and all applicable bank regulatory laws relating to
the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Funds and the Portfolios hereunder.
Each Bank also represents that it will, independently and without reliance upon
any Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Credit Documents and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition, and creditworthiness of the Funds and the Portfolios.
Except for notices, reports and other documents expressly herein required to be
furnished to the Banks by the Agent, the Agent shall not have any duty or
responsibility to provide any Bank with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition, or creditworthiness of the Funds and the Portfolios which may come
into the possession of any of the Agent-Related Persons.
12.7. INDEMNIFICATION OF AGENT. Whether or not the transactions
contemplated hereby are consummated, the Banks shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of the Funds
and without limiting the obligation of the Funds to do so), pro rata, from and
against any and all Indemnified Liabilities; PROVIDED, HOWEVER, that no Bank
shall be liable for the payment to the Agent-Related Persons of any portion of
such Indemnified Liabilities resulting solely from such Person's gross
negligence or willful misconduct. Without limitation of the foregoing, each Bank
shall reimburse the Agent upon demand for its ratable share of any costs or
out-of-pocket expenses (including Attorney Costs) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Credit Document, or any
document contemplated by or referred to herein, to the extent that the Agent is
not reimbursed for such expenses by or on behalf of the Funds; PROVIDED that the
obligations of the Banks to pay or reimburse BofA for Attorney Costs incurred in
the preparation and delivery of this document and the other Credit Documents
delivered in connection with the closing of the amendment and restatement of
this Agreement shall not exceed $25,000. The undertaking in this Section shall
survive the payment of all obligations hereunder and under the Notes and the
resignation or replacement of the Agent.
12.8. AGENT IN INDIVIDUAL CAPACITY. BofA and its Affiliates may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Funds, the
Portfolios and their Affiliates as though BofA were not the Agent hereunder and
without notice to or consent of the Banks. The Banks acknowledge that, pursuant
to such activities, BofA or its Affiliates may receive information regarding the
Funds, the Portfolios or their Affiliates (including information that may be
subject to confidentiality obligations in favor of the Funds, the Portfolios or
their Affiliates) and acknowledge that the Agent shall be under no obligation to
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provide such information to them. With respect to its Loans, BofA shall have the
same rights and powers under this Agreement as any other Bank and may exercise
the same as though it were not the Agent, and the terms "Bank" and "Banks"
include BofA in its individual capacity.
12.9. SUCCESSOR AGENT. The Agent may, and at the request of the
Majority Banks shall, resign as Agent upon 30 days' notice to the Banks, the
Funds and the Portfolios. If the Agent resigns under this Agreement, the
Majority Banks shall appoint from among the Banks a successor agent for the
Banks, which successor agent shall be subject to approval by the Funds and the
Portfolios. If no successor agent is appointed prior to the effective date of
the resignation of the Agent, the Agent may appoint, after consulting with the
Banks, the Funds and the Portfolios, a successor agent from among the Banks.
Upon the acceptance of its appointment as successor agent hereunder, such
successor agent shall succeed to all the rights, powers and duties of the
retiring Agent and the term "Agent" shall mean such successor agent, and the
retiring Agent's appointment, powers and duties as Agent shall be terminated.
After any retiring Agent's resignation hereunder as Agent, the provisions of
this SECTION 12 and SECTIONS 13.3 and 13.4 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement. If no successor agent has accepted appointment as Agent by the date
which is 30 days following a retiring Agent's notice of resignation, the
retiring Agent's resignation shall nevertheless thereupon become effective, the
Banks shall perform all of the duties of the Agent hereunder and the Funds and
Portfolios shall make any payments otherwise required to be made by them
hereunder to the Agent to the Banks directly until such time, if any, as the
Majority Banks appoint a successor agent as provided for above.
13. GENERAL.
13.1 WAIVER AND AMENDMENTS. No failure or delay on the part of the
Banks in the exercise of any power or right, and no course of dealing between
any Fund or Portfolio and the Banks, shall operate as a waiver of such power or
right, nor shall any single or partial exercise of any power or right preclude
other or further exercise thereof or the exercise of any other power or right.
The remedies provided for herein are cumulative and not exclusive of any
remedies which may be available to the Banks at law or in equity. No notice to
or demand on a Fund or Portfolio not required hereunder or under such Fund's or
Portfolio's Notes shall in any event entitle such Fund or Portfolio to any other
or further notice or demand in similar or other circumstances or constitute a
waiver of the right of the Banks to any other or further action in any
circumstances without notice or demand. No amendment or waiver of any provision
of any Credit Document, and no consent with respect to any departure by a Fund
or Portfolio therefrom, shall be effective unless the same shall be in writing
and adopted by the Majority Banks and each Fund and Portfolio, and then any such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given; PROVIDED that no such amendment, waiver or
consent shall, unless in writing and signed by each Bank, do any of the
following:
(a) increase or extend the Commitment of any Bank (or reinstate
any Commitment terminated pursuant to SECTION 11.2),
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(b) postpone or delay any date fixed by any Credit Document for
any payment of principal of or interest on the Loans or any fees or other
amounts in connection therewith,
(c) reduce the principal of or interest on any Loan,
(d) reduce any fees or other amounts payable to any of the Banks
under any Credit Document, or
(e) amend the definition of "Majority Banks" or any provision of
this SECTION 13.1;
and PROVIDED further, that no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Majority Banks or all Banks,
as the case may be, affect the rights or duties of the Agent under any Credit
Document.
13.2 NOTICES. Except as otherwise expressly provided herein, any
notice hereunder to each Fund or Portfolio, the Agent or the Banks shall be in
writing (including telegraphic or telecopy communication) and shall be given to
the intended recipient at its address or telecopier number set forth on SCHEDULE
II hereto or at such other address or telecopier number as such Person may, by
written notice, designate as its address or telecopier number for purposes of
notice hereunder. All such notices shall be deemed to be given when transmitted
by telecopier, delivered to the telegraph office, personally delivered or, in
the case of a mailed notice, when sent by registered or certified mail, postage
prepaid, in each case addressed as specified in this SECTION 13.2; PROVIDED,
HOWEVER, that notices to the Agent under SECTIONS 1.1 (definition of the term
"Termination Date"), 2.3, 2.4, 4.2 and 4.3 shall not be effective until actually
received by the Agent.
13.3 EXPENSES. Subject to the provisions of SECTION 2.6, each
Fund and Portfolio shall:
(i) whether or not any Loan is made hereunder, pay or reimburse BofA
(including in its capacity as Agent) within five Banking Days after demand for
all reasonable costs and expenses incurred by BofA (including in its capacity as
Agent) in connection with the development, preparation, delivery, administration
and execution of, and any amendment, supplement, waiver or modification to (in
each case, whether or not consummated), this Agreement, any Credit Document and
any other documents prepared in connection herewith or therewith, and the
consummation of the transactions contemplated hereby and thereby, including
reasonable Attorney Costs incurred by BofA (including in its capacity as Agent)
with respect thereto; PROVIDED, HOWEVER, that notwithstanding the foregoing, the
obligations of the Funds and Portfolios to pay or reimburse BofA for Attorney
Costs incurred in the preparation and delivery of this document and the other
Credit Documents delivered in connection with the closing of the amendment and
restatement of this Agreement shall not exceed $25,000.
(ii) pay or reimburse the Agent, the Arranger and each Bank within five
Banking Days after demand for all costs and expenses (including reasonable
Attorney Costs) incurred by them in connection with the enforcement, attempted
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enforcement, or preservation of any rights or remedies under this Agreement or
any other Credit Document during the existence of an Event of Default or after
acceleration of the Loans (including in connection with any "workout" or
restructuring regarding the Loans and including in any insolvency proceeding or
appellate proceeding).
13.4. FUNDS INDEMNIFICATION.
(a) Subject to the provisions of SECTION 2.6, whether or not the
transactions contemplated hereby are consummated, the Funds and Portfolios shall
indemnify and hold the Agent-Related Persons, and each Bank and each of its
respective officers, directors, employees, counsel, agents and attorneys-in-fact
(each, an "INDEMNIFIED PERSON"), harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, charges, expenses and disbursements (including Attorney Costs) of any
kind or nature whatsoever which may at any time (including at any time following
repayment of the Loans and the termination, resignation or replacement of the
Agent or replacement of any Bank) be imposed on, incurred by or asserted against
any such Person in any way relating to or arising out of this Agreement or any
document contemplated by or referred to herein, or the transactions contemplated
hereby, or any action taken or omitted by any such Person under or in connection
with any of the foregoing, including with respect to any investigation,
litigation or proceeding (including any insolvency proceeding or appellate
proceeding) related to or arising out of this Agreement or the Loans or the use
of the proceeds thereof, whether or not any Indemnified Person is a party
thereto (all the foregoing, collectively, the "INDEMNIFIED LIABILITIES");
PROVIDED that (i) no Fund or Portfolio shall have an obligation hereunder to any
Indemnified Person with respect to Indemnified Liabilities resulting solely from
the gross negligence or willful misconduct of such Indemnified Person and (ii)
each Fund and Portfolio shall be liable only for its portion of the Indemnified
Liabilities and such Fund or Portfolio shall not be liable for any portion of
the Indemnified Liabilities of any other Fund or Portfolio. The Funds shall from
time to time notify the Agent of the manner in which the Indemnified Liabilities
are to be allocated among the Funds and Portfolios.
(b) Promptly after receipt by an Indemnified Person under subsection (a)
above of notice of the commencement of any action, such Indemnified Person
shall, if a claim in respect thereof is to be made against a Fund or Portfolio
under such subsection, promptly notify such Fund or Portfolio in writing of the
commencement thereof, but the omission so to notify such Fund or Portfolio shall
not relieve it from any liability which it may have to any Indemnified Person
otherwise than under such subsection. In case any such action shall be brought
against any Indemnified Person and it shall notify the relevant Fund or
Portfolio of the commencement thereof, the indemnifying Fund or Portfolio shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other Fund or Portfolio similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such Indemnified Person
(who shall not, except with the consent of the Indemnified Person, be counsel to
the indemnifying Fund(s) or Portfolio(s)), and, upon such assumption, the
indemnifying Fund(s) and/or Portfolio(s) shall no longer be responsible for the
Attorney Costs of counsel retained by such Indemnified Person; PROVIDED that in
no event shall any settlement or compromise of any such claims, actions or
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demands be made without the consent of the Indemnified Person, the consent of
which shall not be unreasonably withheld.
(c) The agreements in this SECTION 13.4 shall survive payment of all
other obligations of the Funds and Portfolios hereunder and under the Notes.
13.5 INFORMATION. The Agent and the Banks agree not to disclose
without the prior consent of any Fund or Portfolio any information with respect
to such Fund or Portfolio which is furnished pursuant to this Agreement and
which is designated by or on behalf of the Fund or Portfolio as confidential,
except that the Agent or any Bank may disclose any such information (a) as has
become generally available to the public other than by breach of this SECTION
13.5, (b) as may be required by law or legal process, (c) to examiners and
regulatory agencies having jurisdiction over the Agent or any Bank and (d) to
potential participants and assignees, provided that any such participant or
assignee has been made aware of this SECTION 13.5 and agreed in writing to be
bound by its provisions.
13.6 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
13.7 LAW. This Agreement and the Notes shall be contracts made
under and governed by the internal laws of the State of Illinois.
13.8 SUCCESSORS. (a) This Agreement shall be binding upon the
Funds, the Portfolios, the Agent and the Banks and their respective successors
and assigns and shall inure to the benefit of the Funds, the Portfolios, the
Agent and the Banks and the permitted successors and assigns of the Agent and
the Banks.
(b) None of the Agent, any Bank, any Fund or any Portfolio may assign
its rights or duties hereunder without the consent of the other parties hereto;
PROVIDED, HOWEVER, that any Bank may, with the consent of the Funds and
Portfolios, which consent shall not be unreasonably withheld, at any time assign
and delegate to one or more Eligible Lenders (each an "ASSIGNEE") all, or any
ratable part of all, of the Loans, the Commitments and the other rights and
obligations of such Bank hereunder, in a minimum amount of $5,000,000; PROVIDED,
HOWEVER, that the Funds and Portfolios and the Agent may continue to deal solely
and directly with such Bank in connection with the interest so assigned to an
Assignee until (i) written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee,
shall have been given to the Funds and Portfolios and the Agent by such Bank and
the Assignee; (ii) such Bank and its Assignee shall have delivered to the Funds
and Portfolios and the Agent an Assignment and Acceptance in the form of Exhibit
J ("ASSIGNMENT AND ACCEPTANCE") together with any Note or Notes subject to such
assignment; (iii) the Agent has acknowledged receipt in writing of the
Assignment and Acceptance; and (iv) the assignor Bank or the Assignee has paid
to the Agent a processing fee in the amount of $3,500. From and after the date
- 41 -
<PAGE>
that the Agent notifies the assignor Bank that it has received an executed
Assignment and Acceptance and payment of the above-referenced processing fee,
(i) the Assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, shall have the rights and obligations of a Bank under
the Credit Documents, and (ii) the assignor Bank shall, to the extent that
rights and obligations hereunder and under the other Credit Documents have been
assigned by it pursuant to such Assignment and Acceptance, relinquish its rights
and be released from its obligations under the Credit Documents. A Bank may,
without the consent of any of the Funds or the Portfolios, grant a security
interest in a Note and, in connection therewith, assign its rights in such Note,
to any Federal Reserve Bank in accordance with applicable law.
(c) Any Bank may at any time sell to one or more Eligible Lenders (each,
a "PARTICIPANT") participating interests in any Loans, the Commitment of such
Bank and the other interests of such Bank in any Loans, (the "ORIGINATING BANK")
under the Credit Documents; PROVIDED, HOWEVER, that: (i) the Originating Bank's
obligations under this Agreement shall remain unchanged, (ii) the Originating
Bank shall remain solely responsible for the performance of such obligations,
(iii) the Funds and Portfolios and the Agent shall continue to deal solely and
directly with the Originating Bank in connection with the Originating Bank's
rights and obligations under the Credit Documents, and (iv) no Bank shall
transfer or grant any participating interest under which the Participant has
rights to approve any amendment to, or any consent or waiver with respect to,
any Credit Document, except to the extent such amendment, consent or waiver
would require unanimous consent of the Banks as described in the first proviso
to SECTION 13.1. In the case of any such participating interest, the Participant
shall be entitled to the benefit of SECTIONS 5.1, 5.3, 5.4, 5.5 and 13.4 as
though it were also a Bank hereunder (and the Originating Bank shall not be
entitled to the benefits of such sections with respect to the portion of any
Loans in which it has sold a participating interest), and if amounts outstanding
under the Credit Documents are due and unpaid, or shall have been declared or
shall have become due and payable upon the occurrence of an Event of Default,
each Participant shall be deemed to have the right of set-off in respect of its
participating interest in amounts owing under the Credit Documents to the same
extent as if the amount of its participating interest were owing directly to it
as a Bank under this Agreement.
- 42 -
<PAGE>
13.9 WAIVER OF JURY TRIAL. EACH OF THE AGENT, THE BANKS AND EACH
FUND AND PORTFOLIO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (i) UNDER THIS AGREEMENT OR UNDER ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (ii) ARISING FROM ANY BANKING
RELATIONSHIP ARISING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH
ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
13.10 DISCLAIMER. None of the shareholders, trustees, officers,
employees and other agents of any Fund or Portfolio shall be personally bound by
or liable for any indebtedness, liability or obligation hereunder, under any
Note or under any judgment on this Agreement or any Note nor shall resort be had
to their private property for the satisfaction of any obligation or claim
hereunder or thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
LEGG MASON VALUE TRUST, INC.
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON TOTAL RETURN TRUST, INC.
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON SPECIAL INVESTMENT
TRUST, INC.
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON INVESTORS TRUST, INC., ON
BEHALF OF LEGG MASON
AMERICAN LEADING COMPANIES TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
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<PAGE>
LEGG MASON INVESTORS TRUST, INC., ON
BEHALF OF LEGG MASON BALANCED
TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON INVESTORS TRUST, INC., ON
BEHALF OF LEGG MASON U.S. SMALL-
CAPITALIZATION VALUE TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON GLOBAL TRUST, INC., ON
BEHALF OF LEGG MASON GLOBAL
GOVERNMENT TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON GLOBAL TRUST, INC., ON
BEHALF OF LEGG MASON INTERNATIONAL
EQUITY TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON GLOBAL TRUST, INC., ON
BEHALF OF LEGG MASON EMERGING
MARKETS TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
- 44 -
<PAGE>
LEGG MASON TAX-FREE INCOME FUND, ON
BEHALF OF LEGG MASON
MARYLAND TAX-FREE INCOME TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON TAX-FREE INCOME FUND, ON
BEHALF OF LEGG MASON PENNSYLVANIA
TAX-FREE INCOME TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON TAX-FREE INCOME FUND, ON
BEHALF OF LEGG MASON TAX-FREE
INTERMEDIATE-TERM INCOME TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON INCOME TRUST, INC., ON
BEHALF OF LEGG MASON U.S.
GOVERNMENT INTERMEDIATE-TERM
PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON INCOME TRUST, INC., ON
BEHALF OF LEGG MASON INVESTMENT
GRADE INCOME PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON INCOME TRUST, INC., ON
BEHALF OF LEGG MASON HIGH YIELD
PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
- 45 -
<PAGE>
LEGG MASON FOCUS TRUST, INC.
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LEGG MASON LIGHT STREET TRUST, INC.,
ON BEHALF OF LEGG MASON MARKET
NEUTRAL TRUST
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
BARTLETT CAPITAL TRUST, ON BEHALF OF
BARTLETT VALUE INTERNATIONAL FUND
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
BARTLETT CAPITAL TRUST, ON BEHALF OF
BARTLETT BASIC VALUE FUND
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
BARTLETT CAPITAL TRUST, ON BEHALF OF
BARTLETT EUROPE FUND
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
BARTLETT CAPITAL TRUST, ON BEHALF OF
BARTLETT FINANCIAL SERVICES FUND
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
- 46 -
<PAGE>
LM INSTITUTIONAL FUND ADVISORS II,
INC., ON BEHALF OF LM VALUE
INSTITUTIONAL PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LM INSTITUTIONAL FUND ADVISORS II,
INC., ON BEHALF OF LM MID CAP
INSTITUTIONAL PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LM INSTITUTIONAL FUND ADVISORS II,
INC., ON BEHALF OF LM TOTAL RETURN
INSTITUTIONAL PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LM INSTITUTIONAL FUND ADVISORS II,
INC., ON BEHALF OF BATTERYMARCH
INTERNATIONAL EQUITY PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LM INSTITUTIONAL FUND ADVISORS II,
INC., ON BEHALF OF BATTERYMARCH
EMERGING MARKETS PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
LM INSTITUTIONAL FUND ADVISORS II,
INC., ON BEHALF OF BRANDYWINE SMALL
CAP VALUE PORTFOLIO
By: /s/ Marie K. Karpinski
----------------------------
Title: Vice President and Treasurer
----------------------------
- 47 -
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, as
Agent
By: /s/ John Hayes
-------------------------
Title: Vice President
-------------------------
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, as a
Bank
By: /s/ John Hayes
-------------------------
Title: Vice President
-------------------------
FIRST UNION NATIONAL BANK
By: /s/ John Bresnan
------------------------
Title: Senior Vice President
-------------------------
STATE STREET BANK AND TRUST
COMPANY
By: /s/ Anne Marie Gualtieri
------------------------
Title: Vice President
-------------------------
- 48 -
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, NW
2ND FLOOR
WASHINGTON, DC 20036
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
www.kl.com
May 28, 1999
Legg Mason Value Trust, Inc.
100 Light Street
Baltimore, MD 21202
Dear Sir or Madam:
You have requested our opinion, as counsel to Legg Mason Value Trust, Inc.
("Company"), as to certain matters regarding the issuance of shares of common
stock of the Company ("Shares").
We have, as counsel, participated in various corporate and other matters
relating to the Company. We have examined certified copies of the Articles of
Incorporation and By-Laws, the minutes of meetings of the directors and other
documents relating to the organization and operation of the Company, and we are
generally familiar with its business affairs. Based upon the foregoing, it is
our opinion that the issuance of the Shares has been duly authorized by the
Company and that, when sold in accordance with the terms contemplated by the
Company's effective Registration Statement, the Shares will have been legally
issued, fully paid and nonassessable by the Company.
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 26 to the Company's Registration Statement on Form
N-1A (File No. 2-75766) being filed with the Securities and Exchange Commission.
We also consent to the reference to our firm in the Statement of Additional
Information filed as part of the Registration Statement.
Sincerely,
KIRKPATRICK & LOCKHART LLP
By: /s/ Arthur C. Delibert
----------------------
Arthur C. Delibert
