<PAGE>
As filed with the Securities and Exchange Commission on July 13, 1995.
1933 Act File No. 2-97908
1940 Act File No. 811-4308
--------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No:_________ [ ]
Post-Effective Amendment No:__16___ [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: __17____
LEGG MASON TOTAL RETURN TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 M Street, N.W.
(Name and Address of South Lobby -Ninth Floor
Agent for Service) Washington, D.C. 20036-5891
It is proposed that this filing will become effective:
[___] immediately upon filing pursuant to Rule 485(b)
[_X_] on August 1 , 1995 pursuant to Rule 485(b)
[___] 60 days after filing pursuant to Rule 485(a)(i)
[___] on ________________________, 1995 pursuant to Rule 485(a)(i)
[___] 75 days after filing pursuant to Rule 485(a)(ii)
[___] on ________________________, 1995 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.
Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and filed the notice required by such Rule
for its most recent fiscal year on May 31, 1995.
<PAGE>
Legg Mason Total Return Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and
documents.
Cover Sheet
Table of Contents
Cross Reference Sheets
Part A - Prospectus--Primary Shares
Prospectus--Navigator Shares
Part B -Statement of Additional Information
Part C -Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Total Return Trust, Inc.
(Primary Shares)
Form N-1A Cross Reference Sheet
-------------------------------
Part A Item No. Prospectus Caption
--------------- ------------------
1 Cover Page
2 Prospectus Highlights; Fund Expenses
3 Financial Highlights; Performance
Information
4 Investment Objective and Policies;
Description of the Funds and Their Shares
5 Fund Expenses; The Funds' Management and
Investment Adviser; The Funds' Distributor
6 Prospectus Highlights; Dividends and Other
Distributions; Shareholder Services; Tax
Treatment of Dividends and Other
Distributions; How Your Shareholder Account
Is Maintained; Description of the Funds and
Their Shares
7 How You Can Invest In the Funds; How Your
Shareholder Account Is Maintained; How Net
Asset Value Is Determined; The Funds'
Distributor; Investing Through Tax-Deferred
Retirement Plans
8 How You Can Redeem Your Primary Shares
9 Not Applicable
<PAGE>
Legg Mason Total Return Trust, Inc.
Navigator Total Return Trust
Form N-1A Cross Reference Sheet
-------------------------------
Part A Item No. Prospectus Caption
--------------- ------------------
1 Cover Page
2 Fund Expenses
3 Financial Highlights; Performance
Information
4 Investment Objective and Policies;
Description of the Funds and Their Shares
5 Fund Expenses; The Funds' Management and
Investment Adviser; The Funds' Distributor
6 Dividends and Other Distributions;
Shareholder Services; Tax Treatment of
Dividends and Other Distributions;
Description of the Funds and Their Shares
7 How To Purchase and Redeem Shares; How
Shareholder Accounts Are Maintained; How Net
Asset Value Is Determined; The Funds'
Distributor
8 How To Purchase and Redeem Shares
9 Not Applicable
<PAGE>
Legg Mason Total Return Trust, Inc.
Primary Shares
Navigator Shares
Form N-1A Cross Reference Sheet
-------------------------------
Statement of Additional
Part B Item No. Information Caption
--------------- -----------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About Investment
Limitations and Policies; Portfolio
Transactions and Brokerage
14 The Funds' Directors and Officers
15 The Funds' Directors and Officers
16 The Funds' Investment Adviser; The Funds'
Distributor; The Funds' Directors and
Officers; The Funds' Independent
Accountants; The Funds' Legal Counsel; The
Funds' Custodian and Transfer and Dividend -
Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Fund Shares; Additional
Purchase and Redemption Information
20 Additional Tax Information; Tax-Deferred
Retirement Plans
21 Portfolio Transactions and Brokerage; The
Funds' Distributor; The Funds' Custodian and
Transfer and Dividend - Disbursing Agent
22 Performance Information
23 Financial Statements
<PAGE>
LEGG MASON EQUITY FUNDS: PRIMARY SHARES
Prospectus
The Legg Mason Value Trust, Inc. ("Value Trust") is a diversified,
open-end management investment company seeking long-term growth of
capital. Value Trust invests principally in those equity securities which
its investment adviser, Legg Mason Fund Adviser, Inc. ("Adviser"),
believes are undervalued and therefore offer above-average potential for
capital appreciation. The Adviser believes that Value Trust shares may be
appropriate for investments by Individual Retirement Accounts, Keogh
Plans, Simplified Employee Pension Plans and other qualified retirement
plans (collectively referred to as "Retirement Plans") whose principal
investment objective is capital appreciation. Other investors who seek
capital appreciation may also invest in Value Trust shares.
The Legg Mason Total Return Trust, Inc. ("Total Return Trust") is a
diversified, open-end management investment company seeking capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. In attempting to
achieve this objective, the Adviser selects a diversified portfolio,
composed of dividend-paying common stocks and securities convertible into
common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common
stock which do not pay current dividends but which offer prospects for
capital appreciation and future income; and debt instruments of various
maturities. Total Return Trust may write covered put and call options.
The Adviser believes that Total Return Trust shares may be appropriate for
investments by Retirement Plans. Due to Total Return Trust's investment
objective, however, investors should not expect capital appreciation
comparable to funds devoted solely to growth, or income comparable to
funds devoted to maximum current income.
The Legg Mason Special Investment Trust, Inc. ("Special Investment
Trust") is a diversified, open-end management investment company seeking
capital appreciation. Special Investment Trust invests principally in
equity securities of companies with market capitalizations of less than
$2.5 billion which, in the opinion of the Adviser, have one or more of the
following characteristics: they are not closely followed by, or are out
of favor with, investors generally, and the Adviser believes they are
undervalued in relation to their long-term earning power or asset values;
unusual developments have occurred which suggest the possibility that the
market value of the securities will increase; or they are involved in
actual or anticipated reorganizations or restructurings under the
Bankruptcy Code. Special Investment Trust also invests in the securities
of companies with larger capitalizations which have one or more of these
characteristics.
Value Trust, Total Return Trust and Special Investment Trust (each
separately referred to as a "Fund" and collectively referred to as the
"Funds") offer two classes of shares, Primary Class ("Primary Shares") and
Navigator Class ("Navigator Shares"). Primary Shares offered in this
<PAGE>
Prospectus are available to all investors except certain institutions (see
page [ ]). No initial sales charge is payable on purchases, and no
redemption charge is payable on sales, of Primary Shares of the Funds.
Each Fund pays management fees to the Adviser and distribution fees to
Legg Mason Wood Walker, Incorporated ("Legg Mason"), as described in this
Prospectus.
This Prospectus sets forth concisely the information about the Funds
that a prospective investor ought to know before investing. It should be
read and retained for future reference. A Statement of Additional
Information about the Funds dated July 31, 1995 has been filed with the
Securities and Exchange Commission ("SEC") and, as amended or supplemented
from time to time, is incorporated herein by this reference. The Statement
of Additional Information is available without charge upon request from
the distributor, Legg Mason (address and telephone numbers listed below).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: July 31, 1995
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000
800-822-5544
2
<PAGE>
Prospectus Highlights
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
Type of Funds: Each Fund is an open-end, diversified
management investment company. You may
purchase or redeem Primary Shares through a
brokerage account with Legg Mason or certain
of its affiliates. See "How You Can Invest in
the Funds," page [ ], and "How You Can Redeem
Your Primary Shares," page [ ].
Investment Objectives
and Policies: The investment objective of Value Trust is
long-term growth of capital. Value Trust
attempts to meet this objective primarily
through the purchase of equity securities
which the Adviser believes are undervalued in
relation to their long-term earning power or
asset value.
The investment objective of Total Return Trust
is to obtain capital appreciation and current
income in order to achieve an attractive total
investment return consistent with reasonable
risk. Total Return Trust attempts to meet
this objective primarily through the purchase
of securities which, in the Adviser's opinion,
offer potential for capital appreciation
and/or attractive current yields.
The investment objective of Special Investment
Trust is capital appreciation. Special
Investment Trust attempts to meet this
objective by investing principally in the
equity securities of companies with market
capitalizations of less than $2.5 billion
which the Adviser believes have one or more of
the following characteristics: they are not
closely followed by, or are out of favor with,
investors generally, and the Adviser believes
they are undervalued in relation to their
long-term earning power or asset values;
unusual developments have occurred which
suggest the possibility that the market value
of the securities will increase; or they are
involved in actual or anticipated
3
<PAGE>
reorganizations or restructurings under the
Bankruptcy Code.
Of course, there can be no assurance that any
Fund will achieve its objective. See
"Investment Objectives and Policies," page
[ ].
Distributor: Legg Mason Wood Walker, Incorporated
Investment Adviser: Legg Mason Fund Adviser, Inc.
Transfer and Shareholder
Servicing Agent: Boston Financial Data Services
Custodian: State Street Bank and Trust Company
Exchange Privilege: All Funds in the Legg Mason Family of Funds.
See "Exchange Privilege," page [ ].
Dividends: Declared and paid quarterly for Value Trust
and Total Return Trust. Declared and paid
after the end of each taxable year of Special
Investment Trust. See "Dividends and Other
Distributions," page [ ].
Reinvestment: All dividends and other distributions are
automatically reinvested in Primary Shares
unless cash payments are requested.
Initial Purchase: $1,000 minimum, generally.
Subsequent Purchase: $100 minimum, generally.
Purchase Methods: Send bank/personal check or wire federal
funds. See "How You Can Invest in the Funds,"
page [ ].
Public Offering Price
Per Share: Net asset value
4
<PAGE>
Expenses
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of the Funds will bear directly or indirectly. The expenses and
fees set forth in the table are based on average net assets and annual
Fund operating expenses related to Primary Shares for the year ended March
31, 1995.
Shareholder Transaction Expenses For Each Fund
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees None
<TABLE>
<CAPTION>
Annual Fund Operating Expenses -- Primary Shares
(as a percentage of average net assets)
Special
Total Return Investment Trust
Value Trust Trust
<S> <C> <C> <C>
Management fees 0.78% 0.75% 0.79%
12b-1 fees 0.95% 1.00% 1.00%
Other expenses 0.12% 0.19% 0.16%
Total operating expenses 1.85%(1) 1.94%(1) 1.95%(1)
</TABLE>
(1) Total operating expenses have been restated to reflect current
12b-1 fees.
For further information concerning the Funds' expenses, please
see "The Funds' Management and Investment Adviser" and "The Funds'
Distributor," page [ ]. Because each Fund pays 12b-1 fees with respect
to Primary Shares, long-term investors in Primary Shares may pay more in
distribution expenses than the economic equivalent of the maximum front-
end sales charge permitted by the National Association of Securities
Dealers, Inc. ("NASD").
Example of Effect of Fund Expenses
The following examples illustrate the expenses that you would pay
on a $1,000 investment in Primary Shares over various time periods
assuming (1) a 5% annual rate of return and (2) redemption at the end of
5
<PAGE>
each time period. As noted in the table above, the Funds charge no
redemption fees of any kind.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Value Trust $19 $58 $100 $217
Total Return Trust $20 $61 $105 $226
Special Investment Trust $20 $61 $105 $227
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent
the projected or actual performance of, Primary Shares of the Funds. The
above tables and examples should not be considered representations of past
or future expenses. Actual expenses may be greater or less than those
shown. The actual expenses attributable to Primary Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which Legg Mason waives its
fees and reimburses all or a portion of each Fund's expenses and the
extent to which Primary Shares incur variable expenses, such as transfer
agency costs.
6
<PAGE>
Financial Highlights(1)
Effective December 1, 1994, the Funds commenced the sale of Navigator
Shares. Navigator Shares are currently offered for sale only to
institutional clients of the Fairfield Group, Inc. ("Fairfield") for
investment of their own funds and funds for which they act in a fiduciary
capacity, to clients of Legg Mason Trust Company ("Trust Company") for
which Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. Navigator Shares pay no 12b-1
distribution fees and may pay lower transfer agency fees. The information
for Primary Shares reflects the 12b-1 fees paid by that Class.
The financial highlights tables that follow have been derived from
each Fund's financial statements which have been audited by Coopers &
Lybrand L.L.P., independent accountants. Each Fund's financial statements
for the year ended March 31, 1995 and the report of Coopers & Lybrand
L.L.P. thereon are included in that Fund's annual report and are
incorporated by reference in the Statement of Additional Information. The
annual report for each Fund is available to shareholders without charge by
calling your Legg Mason or affiliated investment executive or Legg Mason's
Funds Marketing Department at 800-822-5544.
7
<PAGE>
<TABLE>
<CAPTION>
VALUE TRUST
---------------------------------------------------------------------------------------------------------
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995(2) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of year $18.76 $18.50 $17.81 $15.69 $13.38
Net investment income .12 .10 .08 .18 .25
Net realized and unrealized
gain (loss) on investments 1.40 1.70 .92 2.12 2.34
Total from investment
operations 1.52 1.80 1.00 2.30 2.59
Distributions to
shareholders from:
Net investment income (.01) (.05) (.11) (.18) (.28)
Net realized gain on
investments -- (.04) (.20) -- --
Net asset value, end of
year $20.27 $20.21 $18.50 $17.81 $15.69
Total return 8.11%(3) 9.77% 5.65% 14.76% 19.53%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.82%(4) 1.81%(5) 1.82%(5) 1.86%(5) 1.90%(5)
Net investment income 1.8%(4) 0.5% 0.5% 1.1% 1.7%
Portfolio turnover rate 20.1% 20.1% 25.5% 21.8% 39.4%
Net assets, end of year
(in thousands) $36,519 $986,325 $912,418 $878,394 $745,833
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
VALUE TRUST
---------------------------------------------------------------------------------------------------------------------
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of year $14.19 $14.16 $12.14 $15.07 $15.34 $11.55
Net investment income .32 .33 .21 .21 .21 .25
Net realized and unrealized
gain (loss) on investments (.74) .77 1.99 (1.54) 1.11 4.15
Total from investment
operations (.42) 1.10 2.20 (1.33) 1.32 4.40
Distributions to
shareholders from:
Net investment income (.36) (.33) (.18) (.20) (.20) (.18)
Net realized gain on
investments (.03) (.74) -- (1.40) (1.39) (.43)
Net asset value, end of year $13.38 $14.19 $14.16 $12.14 $15.07 $15.34
Total return (2.88)% 7.74% 18.33% (8.42)% 9.89% 39.75%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 1.90%(5) 1.86%(5) 1.96%(5) 1.97%(5) 2.00%(5) 2.07%(5)
Net investment income 2.5% 2.2% 1.6% 1.5% 1.5% 2.0%
Portfolio turnover rate 38.8% 30.7% 29.7% 47.8% 42.5% 32.6%
Net assets, end of year
(in thousands) $690,053 $808,780 $720,961 $665,689 $819,348 $599,004
</TABLE>
(1) All share and per share figures reflect the 2-for-1 stock split
effective July 29, 1991.
(2) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
(3) Not annualized. The annualized total return for the period would
have been 24.46%.
9
<PAGE>
(4) Annualized.
(5) Includes distribution fee of 1.0% through May 11, 1987 and 0.95%
thereafter.
10
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN TRUST
--------------------------------------------------------------------------------------------------------------------------
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995(2) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $12.66 $13.54 $13.61 $11.64 $ 9.64
Net investment income .15 .33 .36 .39(3) .34
Net realized and
unrealized gain (loss)
on investments .25 (.19) .24 1.89 1.91
Total from investment
operations .40 .14 .60 2.28 2.25
Distributions to
shareholders from:
Net investment income (.06) (.29) (.33) (.31) (.25)
Net realized gain on
investments (.17) (.60) (.34) -- --
Net asset value, end of
period $12.83 $12.79 $13.54 $13.61 $11.64
Total return 2.28%(6) 1.09% 4.57% 19.88% 23.59%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.86%(7) 1.93%(8) 1.94%(8) 1.95%(3)(8) 2.34% (8)
Net investment income 3.6% (7) 2.5% 2.7% 3.1%(3) 3.1%
Portfolio turnover rate 61.9% 61.9% 46.6% 40.5% 38.4%
Net assets, end of
period $4,823 $194,767 $184,284 $139,034 $52,360
(in thousands)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN TRUST
----------------------------------------------------------------------------------------------------------------------
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986(1)
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $10.03 $10.06 $ 8.86 $11.63 $10.78 $10.00
Net investment income .28 .21 .15 .18 .18 .13(4)
Net realized and
unrealized gain (loss)
on investments (.31) .15 1.18 (1.35) .90 .65
Total from investment
operations (.03) .36 1.33 (1.17) 1.08 .78
Distributions to
shareholders from:
Net investment income (.29) (.21) (.13) (.21) (.19) --
Net realized gain on
investments (.07) (.18) -- (1.39) (.04) --
Net asset value, end of
period $ 9.64 $10.03 $10.06 $ 8.86 $11.63 $10.78
Total return (0.05)% 3.48% 15.16% (10.17)% 10.24% 7.80%(5)
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 2.50% (8) 2.39%(8) 2.40%(8) 2.30%(8) 2.40%(8) 2.20%(7)(8)
Net investment income 3.1% 2.0% 1.6% 1.9% 1.7% 3.8% (7)
Portfolio turnover rate 62.1% 39.2% 25.7% 50.1% 82.7% 40.0% (7)
Net assets, end of
period $22,822 $26,815 $30,102 $35,394 $47,028 $44,357
(in thousands)
</TABLE>
12
<PAGE>
(1) For the period November 21, 1985 (commencement of operations) to
March 31, 1986.
(2) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
(3) Net of fees waived by the Adviser in excess of an indefinite
voluntary expense limitation of 1.95% beginning November 1, 1992.
(4) Excludes investment advisory fees and other expenses in excess of a
1.2% Adviser-imposed expense limitation.
(5) Not annualized. The annualized total return for the period would
have been 21.73%.
(6) Not annualized. The annualized total return for the period would
have been 6.88%.
(7) Annualized.
(8) Includes distribution fee of 1.0%.
13
<PAGE>
<TABLE>
<CAPTION>
SPECIAL INVESTMENT TRUST
---------------------------------------------------------------------------------------------------------
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995(2) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value,
beginning of period $19.11 $21.56 $17.91 $17.00 $14.59
Net investment income .07 (.06) (.11) .03 .12
Net realized and unrealized
gain (loss) on investments .85 (1.31) 3.93 1.66 2.83
Total from investment
operations .92 (1.37) 3.82 1.69 2.95
Distributions to shareholders
from:
Net investment income -- -- (.03) -- (.14)
Net realized gain on
investments -- (.23) (.14) (.78) (.40)
Net asset value, end of
period $20.03 $19.96 $21.56 $17.91 $17.00
Total return 4.81%(5) (6.37%) 21.35% 10.50% 20.46%
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses
Net investment income 0.90%(6) 1.93%(7) 1.94%(7) 2.00%(7) 2.10% (7)
1.0%(6) (0.2)% (0.6)% 0.2% 0.8%
Portfolio turnover rate 27.5% 27.5% 16.7% 32.5% 56.9%
Net assets, end of period
(in thousands) $26,123 $612,093 $565,486 $322,572 $201,772
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SPECIAL INVESTMENT TRUST
--------------------------------------------------------------------------------------------------------------------------
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986(1)
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value,
beginning of period $13.58 $11.84 $10.14 $12.80 $11.53 $10.00
Net investment income .18 .12 .06(3) .13(3) --(3) .04(3)
Net realized and unrealized
gain (loss) on investments 2.42 1.70 1.65 (1.825) 1.51 1.49
Total from investment
operations 2.60 1.82 1.71 (1.695) 1.51 1.53
Distributions to shareholders
from:
Net investment income (.27) (.08) (.01) (.075) (.02) --
Net realized gain on
investments (1.32) -- -- (.89) (.22) --
Net asset value, end of
period $14.59 $13.58 $11.84 $10.14 $12.80 $11.53
Total return 21.46% 15.37% 16.99% (14.18)% 13.39% 15.3%(4)
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses
Net investment income 2.30% (7) 2.30%(7) 2.50%(7) 2.50%(7) 2.50%(7) 2.50%(6)(7)
1.4% 1.0% 0.7% 1.0% -- 1.2% (6)
Portfolio turnover rate 75.6% 115.9% 122.4% 158.9% 77.0% 41.0%(6)
Net assets, end of period
(in thousands) $106,770 $68,240 $44,450 $43,611 $55,822 $34,337
</TABLE>
(1) For the period December 30, 1985 (commencement of operations) to
March 31, 1986.
(2) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
15
<PAGE>
(3) Excludes investment advisory fees and other expenses in excess of a
2.5% Adviser-imposed expense limitation.
(4) Not annualized. The annualized total return for the period would
have been 60.70%.
(5) Not annualized. The annualized total return for the period would
have been 14.51%.
(6) Annualized.
(7) Includes distribution fee of 1.0%.
16
<PAGE>
Performance Information
From time to time the Funds may quote the total return of each
class of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
Cumulative total return shows the fund's performance over a specific
period of time. Average annual total return is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns. For comparison
purposes, Value Trust's total return is compared with total returns of the
Value Line Geometric Average, an index of approximately 1,700 stocks
("Value Line Index"), and Standard & Poor's 500 Stock Composite Index
("S&P Stock Index"), two unmanaged indexes of widely held common stocks.
No adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in
each Fund will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost. Returns of Value Trust
would have been lower if the Adviser and/or Legg Mason had not waived
certain fees for the fiscal years ended March 31, 1989 through 1995.
Returns of Total Return Trust would have been lower if the Adviser and/or
Legg Mason had not waived certain fees for the fiscal years ended March
31, 1986 through 1995. Returns of Special Investment Trust would have
been lower if the Adviser and/or Legg Mason had not waived certain fees
for the fiscal years ended March 31, 1986 through 1995.
Performance figures reflect past performance only and are not
intended to and do not indicate future performance. Further information
about each Fund's performance is contained in its Annual Report to
Shareholders, which may be obtained without charge by calling your Legg
Mason or affiliated investment executive or Legg Mason's Funds Marketing
Department at 800-822-5544.
Total returns as of March 31, 1995 were as follows:
17
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
Legg Mason Value Legg Mason Total Legg Mason Special
Trust Return Trust Investment Trust Value Line Index S&P Stock Index
---------------- --------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +5.12% +15.54%
Five Years +54.50 +56.57 +83.68 +38.57 +71.50
Ten Years +177.23 N/A N/A +102.99 +284.58
Life of Class +584.27(1) +99.17(2) +178.15(3) +244.66(1) +586.40(1)
Navigator Class:
Life of Class(4) +8.11 +2.28 +4.81 +6.37 +11.37
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
Legg Mason Value Legg Mason Total Legg Mason Special
Trust Return Trust Investment Trust Value Line Index S&P Stock Index
---------------- --------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +5.12% +15.54%
Five Years +9.09 +9.38 +12.93 +6.74 +11.39
Ten Years +10.73 N/A N/A +7.34 +14.42
Life of Class +16.00(1) +7.64(2) +11.69(3) +10.02(1) +16.03(1)
</TABLE>
(1) For the period April 16, 1982 (commencement of operations of Value
Trust) to March 31, 1995.
(2) For the period November 21, 1985 (commencement of operations of Total
Return Trust) to March 31, 1995.
(3) For the period December 30, 1985 (commencement of operations of
Special Investment Trust) to March 31, 1995.
18
<PAGE>
(4) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
The S&P Stock Index and Value Line Index figures assume reinvestment
of dividends paid by their component stocks. Tax consequences are not
included in the illustration, nor are brokerage or other fees calculated
in the S&P Stock Index and Value Line Index figures.
19
<PAGE>
Investment Objectives and Policies
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Funds' Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
Value Trust's objective is long-term growth of capital. The Adviser
believes that the Fund's objective can be best met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. The
Adviser believes, however, that purchasing securities depressed by
temporary factors will provide investment returns superior to those
obtained when premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund may invest in debt securities, including government,
corporate and money market securities, for temporary defensive purposes
and, consistent with its investment objective, during periods when or
20
<PAGE>
under circumstances where the Adviser believes the return on certain debt
securities may equal or exceed the return on equity securities. The Fund
may invest in debt securities of both foreign and domestic issuers of any
maturity without regard to rating, and may invest its assets in such
securities without regard to a percentage limit. Although not a
fundamental policy subject to shareholder vote, 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 rated below
investment grade, i.e., rated lower than BBB by Standard & Poor's Ratings
Group ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's") or, if
unrated, deemed by the Adviser to be of comparable quality. The Adviser
currently anticipates that no debt securities rated below B or, if
unrated, of comparable quality, will be purchased and that purchases of
securities rated BB or Ba or below will not exceed 5% of the Fund's total
assets.
Total Return Trust's objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may invest its assets in such securities without regard to a percentage
limit. The Adviser currently anticipates that under normal market
conditions, the Fund will invest no more than 50% of its total assets in
intermediate-term and long-term debt securities, and no more than 5% of
its total assets in debt securities rated below investment grade, i.e.,
rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed by
the Adviser to be of comparable quality. The Adviser currently
anticipates that no debt securities rated below B or, if unrated, of
comparable quality, will be purchased.
Special Investment Trust's objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities of companies with market capitalizations of less than $2.5
billion which the Adviser believes have one or more of the following
characteristics:
21
<PAGE>
1. Equity securities of companies which generally are not closely
followed by, or are out of favor with, investors, and which appear to be
undervalued in relation to their long-term earning power or asset values.
A security may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated developments affecting the issuer.
2. Equity securities of companies in which unusual and possibly
non-repetitive developments are taking place which, in the opinion of the
Adviser, may cause the market values of the securities to increase. Such
developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. Equity securities of companies involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. No more than
20% of the Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of possible loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
22
<PAGE>
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the Fund
may not be widely traded, and that the Fund's position in such securities
may be substantial in relation to the market for such securities.
Accordingly, it may be difficult for the Fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active
monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
assets may be invested in debt securities rated below BBB by S&P, or below
Baa by Moody's, and unrated securities deemed by the Adviser to be of
comparable quality. The Adviser currently anticipates that no debt
securities rated below B, or if unrated, of comparable quality, will be
purchased and that purchases of securities rated BB or Ba or below will
not exceed 5% of the Fund's total assets.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be rated in one of the four highest rating categories by
S&P or Moody's or, if unrated by S&P or Moody's, deemed by the Adviser to
be of comparable quality.
FOR EACH FUND:
Moody's considers debt securities rated Baa to have speculative
characteristics; changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity for the issuers of such
securities to make principal and interest payments than is the case for
23
<PAGE>
higher-grade debt securities. Debt securities rated below BBB or Baa and
securities unrated by either of the above services which are deemed by the
Adviser to be of comparable quality are regarded as high yield/high risk
securities and are considered predominantly speculative.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Adviser to determine, to
the extent possible, that the planned investment is sound. Each Fund does
not intend to invest in securities that are in default, or where, in the
Adviser's opinion, default appears likely.
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. 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. Although
not a fundamental policy subject to shareholder vote, the Adviser
currently anticipates that each Fund will invest no more than 25% of its
total assets in foreign securities.
The Funds may also invest in American depositary receipts ("ADRs"),
which are securities issued by domestic banks evidencing their ownership
of specific foreign securities. ADRs may be sponsored or unsponsored;
issuers of securities underlying unsponsored ADRs are not contractually
obligated to disclose material information in the U.S. Accordingly, there
may be less information available about such issuers than there is with
respect to domestic companies and issuers of securities underlying
sponsored ADRs. Although ADRs are denominated in U.S. dollars, the
underlying security often is not; thus, the value of the ADR may be
subject to exchange controls and variations in the exchange rate.
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in money market instruments,
including repurchase agreements. A repurchase agreement is an agreement
under which either U.S. government obligations or high-quality liquid debt
24
<PAGE>
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
State Street Bank and Trust Company ("State Street"), the Funds'
custodian, 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 the Adviser to
present minimal risk of default during the term of the agreement based on
guidelines established by the Funds' Boards of Directors. The Funds will
not enter into repurchase agreements of more than seven days' duration if
more than 10% of their net assets would be invested in such agreements and
other illiquid investments.
The Funds may engage in securities lending. However, the Funds do not
currently intend to loan securities with a value exceeding 5% of their
total assets. For further information concerning securities lending, see
the Statement of Additional Information.
Futures and Options Transactions
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 it invests. For example, a Fund
may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. The
Funds may sell an interest rate futures contract to offset price changes
of debt securities they already own. This strategy is intended to minimize
any price changes in the debt securities the Funds own (whether increases
or decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Funds.
The Funds may purchase a call option on an interest rate futures
contract to hedge against a market advance in debt securities that the
Funds plan to acquire at a future date. The purchase of such an option is
analogous to the purchase of a call option on an individual debt security
that can be used as a temporary substitute for a position in the security
itself. The Funds may purchase put options on stock index futures
contracts. This is analogous to the purchase of protective put options on
individual stocks where a level of protection is sought below which no
additional economic loss would be incurred by the Funds. The Funds may
purchase and write options in combination with each other to adjust the
25
<PAGE>
risk and return of the overall position. For example, the Funds may
purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Funds' resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of the premium
and transaction costs), the Funds 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, the Funds would expect to profit
from a written put option, although their gain would be limited to the
amount of the premium they received. If stock prices remain the same over
time, it is likely that the Funds will also profit, because they should be
able to close out the option at a lower price. If stock prices fall, the
Funds would expect to suffer a loss.
By purchasing a call option, the Funds would attempt to participate
in potential price increases of the underlying index, with results similar
to those obtainable from purchasing a futures contract, but with risk
limited to the cost of the option if stock prices fell. At the same time,
the Funds 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, the Funds would seek to
mitigate the effects of a price decline. At the same time, the Funds would
give up some ability to participate in security price increases when
writing call options.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the Adviser in managing the Funds'
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the Adviser is not
successful in employing such instruments in managing the Funds'
investments or in predicting interest rate changes, each 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
26
<PAGE>
correlation, between price movements of the investments being hedged. It
is also possible that the Funds may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that the Funds may need to sell a portfolio security at a
disadvantageous time, due to the need for the Funds to maintain "cover" or
to segregate securities in connection with hedging transactions and that
the Funds may be unable to close out or liquidate its hedged position. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options
if the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested.
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract involves an obligation to purchase or
sell a specific amount of a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. By entering into
a foreign currency contract, a Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. A Fund may enter into these contracts for the
purpose of hedging against risk arising from its investment in securities
denominated in foreign currencies or when it anticipates investing in such
securities. Forward currency contracts involve certain costs and risks,
including the risk that anticipated currency movements will not be
accurately predicted, causing a Fund to sustain losses on these contracts.
Investment Limitations
Each Fund has adopted certain fundamental investment limitations
that, like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting securities of the Fund.
For these purposes a "vote of the holders of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
These investment limitations are set forth in the Statement of Additional
Information under "Additional Information About Investment Limitations and
Policies." Other Fund policies, unless described as fundamental, can be
changed by action of the Board of Directors.
27
<PAGE>
How You Can Invest in the Funds
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason or with an affiliate that has a dealer agreement
with Legg Mason (Legg Mason is a wholly owned subsidiary of Legg Mason,
Inc., a financial services holding company). Your Legg Mason or
affiliated investment executive will be pleased to explain the shareholder
services available from the Funds and answer any questions your may have.
Documents available from your Legg Mason or affiliated investment
executive should be completed if you invest in shares of the Funds through
an Individual Retirement Account ("IRA"), Self-Employed Individual
Retirement Plan ("Keogh Plan"), Simplified Employee Pension Plan ("SEP")
or other qualified retirement plan.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds, is $1,000, and the minimum investment for each purchase of
additional shares is $100, except as noted below. Initial investments in
an IRA account established on behalf of a nonworking spouse of a
shareholder who has an IRA invested in the Funds require a minimum amount
of only $250. Subsequent investments in an IRA or similar plan require a
minimum amount of $100. However, once an account is established, the
minimum amount for subsequent investments will be waived if an investment
in an IRA or similar plan will bring the investment for the year to the
maximum amount permitted under the Internal Revenue Code of 1986, as
amended ("Code"). For those investing through the Funds' Future First
Systematic Investment Plan, payroll deduction plans and plans involving
automatic payment of funds from financial institutions or automatic
investment of dividends from certain unit investment trusts, minimum
initial and subsequent investments are lower. Each Fund may change these
minimum amount requirements at their discretion.
Primary Shares purchased on behalf of an IRA, Keogh Plan, SEP or
other qualified retirement plan will be processed at the net asset value
next determined after Legg Mason's Funds Processing receives a check for
the amount of the purchase. Other Primary Share purchases will be
processed at the net asset value next determined after your Legg Mason or
affiliated investment executive has received your order; payment must be
made within three business days to Legg Mason. Orders received by your
Legg Mason or affiliated investment executive before the close of business
of the New York Stock Exchange ("Exchange") (normally 4:00 p.m. Eastern
time) ("close of the Exchange") on any day the Exchange is open will be
executed at the net asset value determined as of the close of the Exchange
on that day. Orders received by your Legg Mason or affiliated investment
executive after the close of the Exchange or on days the Exchange is
closed will be executed at the net asset value determined as of the close
of the Exchange on the next day the Exchange is open. See "How Net Asset
28
<PAGE>
Value is Determined," page [ ]. Each Fund reserves the right to reject
any order for its shares or to suspend the offering of shares for a period
of time.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Funds:
1. Through Your Legg Mason or Affiliated Investment Executive
Shares may be purchased through any Legg Mason or affiliated
investment executive. An investment executive will be pleased to open an
account for you, explain to you the shareholder services available from
the Funds and answer any questions you may have. After you have
established a Legg Mason or affiliated account, you can order shares from
your investment executive in person, by telephone or by mail.
2. Through the Future First Systematic Investment Plan
You may also buy shares through the Future First Systematic
Investment Plan. Under this plan, you may arrange for automatic monthly
investments in the Funds of $50 or more by authorizing Boston Financial
Data Services ("BFDS"), the Funds' transfer agent, to prepare a check each
month drawn on your checking account. There is no minimum initial
investment. Please contact any Legg Mason or affiliated investment
executive for further information.
3. Through Automatic Investments
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in shares. Persons interested in establishing such automatic
investment programs should contact the Funds through any Legg Mason or
affiliated investment executive.
How Your Shareholder Account is Maintained
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. No certificates are issued
unless you specifically request them in writing. Shareholders who elect to
receive certificates can redeem their shares only by mail. Certificates
will be issued in full shares only. No certificates will be issued for
shares of any Fund prior to 15 business days after purchase of such shares
by check unless the Fund can be reasonably assured during that period that
payment for the purchase of such shares has been collected. Shares may not
be held in, or transferred to, an account with any brokerage firm other
than Legg Mason or its affiliates.
29
<PAGE>
How You Can Redeem Your Primary Shares
There are two ways you can redeem your Primary Shares. First, you may
give your Legg Mason or affiliated investment executive an order for
redemption of your shares. Please have the following information ready
when you call: the name of the Fund, the number of shares to be redeemed
and your shareholder account number. Second, you may send a written
request for redemption to "Legg Mason Funds Processing, [insert complete
Fund name], P.O. Box 1476, Baltimore, Maryland 21203-1476."
Requests for redemption in "good order," as described below, received
by your Legg Mason or affiliated investment executive before the close of
the Exchange on any day when the Exchange is open, will be transmitted to
BFDS, transfer agent for the Fund, for redemption at the net asset value
per share determined as of the close of the Exchange on that day. Requests
for redemption received by your Legg Mason or affiliated investment
executive after the close of the Exchange will be executed at the net
asset value determined as of the close of the Exchange on its next trading
day. A redemption request received by your Legg Mason or affiliated
investment executive may be treated as a request for repurchase and, if it
is accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Proceeds from your redemption will settle in your Legg Mason
brokerage account two days after trade date. However, each Fund reserves
the right to take up to seven days to make payment upon redemption if, in
the judgment of the Adviser, the respective Fund could be adversely
affected by immediate payment. (The Statement of Additional Information
describes several other circumstances in which the date of payment may be
postponed or the right of redemption suspended.) The proceeds of your
redemption or repurchase may be more or less than your original cost. If
the shares to be redeemed or repurchased were paid for by check (including
certified or cashier's checks), within 15 business days of the redemption
or repurchase request, the proceeds will not be disbursed unless the Fund
can be reasonably assured that the check has been collected.
A redemption request will be considered to be received in "good
order" only if:
1. You have indicated in writing the number of Primary Shares to be
redeemed, the complete Fund name and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates
representing the shares that have been issued to you, and you have
endorsed the certificates for transfer or an accompanying stock power
exactly as the name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
30
<PAGE>
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Legg Mason or
affiliated investment executive.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. The Funds may
be liable for losses due to unauthorized or fraudulent instructions if
they do not follow reasonable procedures. Telephone redemption privileges
are available automatically to all shareholders unless certificates have
been issued. Shareholders who do not wish to have telephone redemption
privileges should call their Legg Mason or affiliated investment executive
for further instructions.
To redeem your Legg Mason retirement account, a Distribution Request
Form must be completed and returned to Legg Mason Client Services for
processing. This form can be obtained through your Legg Mason or
affiliated investment executive or Legg Mason Client Services in
Baltimore, Maryland.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having your
account closed.
How Net Asset Value Is Determined
Net asset value per Primary Share of each Fund is determined daily as
of the close of the Exchange, on every day that the Exchange is open, by
subtracting the liabilities attributable to those Primary Shares from the
total assets attributable to such shares and dividing the result by the
number of those Primary Shares outstanding. Securities owned by each Fund
for which market quotations are readily available are valued at current
market value. In the absence of readily available market quotations,
securities are valued at fair value as determined by each Fund's Board of
Directors. Where a security is traded on more than one market, which may
include foreign markets, the securities are generally valued on the market
considered by the Adviser to be the primary market. Securities with
remaining maturities of 60 days or less are valued at amortized cost.
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Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
Dividends and Other Distributions
Each Fund declares dividends to holders of Primary Shares out of its
investment company taxable income (which consists of net investment
income, any net short-term capital gain and any net gains from certain
foreign currency transactions) attributable to those shares. Value Trust
and Total Return Trust declare and pay dividends from net investment
income quarterly; they pay dividends from any net short-term capital gains
and net gains from foreign currency transactions annually. Special
Investment Trust declares and pays dividends from its investment company
taxable income following the end of each taxable year. Each Fund also
distributes substantially all of its net capital gain (the excess of net
long-term capital gain over net short-term capital loss) after the end of
the taxable year in which the gain is realized. A second distribution of
net capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Dividends and other distributions, if
any, on shares held in an IRA, Keogh Plan, SEP or other qualified
retirement plan and by shareholders maintaining a Systematic Withdrawal
Plan generally are reinvested in Primary Shares of the distributing Fund
on the payment dates. Other shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares
of the distributing Fund;
2. Receive dividends in cash and other distributions in Primary
Shares of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in Primary Shares of another Legg Mason fund. Please contact
your investment executive for additional information about this option.
If no election is made, both dividends and other distributions will
be credited to your Fund account in Primary Shares at the net asset value
of the shares determined as of the close of the Exchange on the
reinvestment date. Shares received pursuant to any of the first three
(reinvestment) elections above also will be credited to your account at
that net asset value. Shareholders electing to receive dividends or other
distributions in cash will be sent a check or will have their Legg Mason
account credited after the payment date. You may elect at any time to
change your option by notifying the applicable Fund in writing at: [insert
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<PAGE>
complete Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland 21203-1476. Your election must be received at least
10 days before the record date in order to be effective for dividends and
other distributions paid to shareholders as of that date.
Tax Treatment of Dividends and Other Distributions
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of federal
income tax on that part of its investment company taxable income and net
capital gain that is distributed to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Fund shares) are taxable to its shareholders
(other than IRAs, Keogh Plans, SEPs, other qualified retirement plans and
other tax-exempt investors) as ordinary income to the extent of the Fund's
earnings and profits. Distributions of each Fund's net capital gain
(whether paid in cash or reinvested in Fund shares), when designated as
such, are taxable to those shareholders as long-term capital gain,
regardless of how long they have held their Fund shares.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. Each Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of any other Legg Mason fund
generally will have similar tax consequences. See "Shareholder Services--
Exchange Privilege," page [ ]. If shares of a Fund are purchased within
30 days before or after redeeming other shares of that Fund at a loss, all
or part of that loss will not be deductible and instead will increase the
basis of the newly purchased shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
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The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Funds, depending on the laws of your home
state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each Fund's annual notice
to shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
Shareholder Services
Confirmations and Reports
You will receive from Legg Mason a confirmation after each
transaction involving Primary Shares (except a reinvestment of dividends,
capital gain distributions and shares purchased through the Future First
Systematic Investment Plan or through automatic investments). An account
statement will be sent to you monthly unless there has been no activity in
the account or you are purchasing shares only through the Future First
Systematic Investment Plan or through automatic investments, in which case
an account statement will be sent quarterly. Reports will be sent to each
Fund's shareholders at least semiannually showing its portfolio and other
information; the annual report for each Fund will contain financial
statements audited by its respective independent accountants.
Shareholder inquiries should be addressed to "[insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476."
Systematic Withdrawal Plan
You may elect to make systematic withdrawals from your Fund account
of a minimum of $50 on a monthly basis if you are purchasing or already
own shares with a net asset value of $5,000 or more. Shareholders should
not purchase shares of a Fund while they are participating in the
Systematic Withdrawal Plan with respect to that Fund. Please contact your
Legg Mason or affiliated investment executive for further information.
Exchange Privilege
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of the following
funds in the Legg Mason Family of Funds, provided that such shares are
eligible for sale in your state of residence:
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
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Legg Mason Tax Exempt Trust, Inc.
A money market fund seeking high current income exempt from federal
income tax, preservation of capital, and liquidity.
Legg Mason U. S. Government Money Market Portfolio
A money market fund seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Value Trust, Inc.
A mutual fund seeking long-term growth of capital.
Legg Mason Special Investment Trust, Inc.
A mutual fund seeking capital appreciation by investing principally
in issuers with market capitalizations of less than $2.5 billion.
Legg Mason Total Return Trust, Inc.
A mutual fund seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk.
Legg Mason American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Legg Mason Global Equity Trust
A mutual fund seeking maximum long-term total return, by investing in
common stocks of companies located in at least three different countries.
Legg Mason U. S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U. S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Legg Mason Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, primarily
through investment in a diversified portfolio of investment grade debt
securities.
Legg Mason High Yield Portfolio
A mutual fund seeking primarily a high level of current income and
secondarily, capital appreciation, by investing principally in lower-
rated, fixed-income securities.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by foreign
35
<PAGE>
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions.
Legg Mason Maryland Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Legg Mason Pennsylvania Tax-Free Income Trust*
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Legg Mason Tax-Free Intermediate-Term Income Trust*(1)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
____________
*Shares of these funds are sold with an initial sales charge.
(1)Effective August 1, 1995 through January 31, 1996, the 2.00% sales
charge will be waived for all new accounts and subsequent investments into
existing accounts. After January 31, 1996, any exchanges of these shares
will be subject to the full sales charge, if any, since no sales charge
was paid on the shares purchased during this period.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds from the redemption of Fund shares to be exchanged
that were originally purchased by exchange from a fund on which the same
or higher initial sales charge previously was paid. There is no charge for
the exchange privilege, but each Fund reserves the right to terminate or
limit the exchange privilege of any shareholder who makes more than four
exchanges from the Fund in one calendar year. To obtain further
information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your Legg Mason
or affiliated investment executive. To effect an exchange by telephone,
please call your Legg Mason or affiliated investment executive with the
information described in "How You Can Redeem Your Primary Shares," page [
]. The other factors relating to telephone redemptions described in that
section apply also to telephone exchanges. Please read the prospectus for
the other fund(s) carefully before you invest by exchange. Each Fund
reserves the right to modify or terminate the exchange privilege upon 60
days' notice to shareholders.
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<PAGE>
There is no assurance the money market funds will be able to maintain
a $1.00 share price. None of the funds is insured or guaranteed by the
U.S. Government.
Investing Through Tax-Deferred Retirement Plans
An investment in shares of the Funds may be appropriate for IRAs,
Keogh Plans, SEPs and other qualified retirement plans. Investors who are
considering establishing such a plan may wish to consult their attorneys
or tax advisers with respect to individual tax questions. Your Legg Mason
or affiliated investment executive can make available to you forms of
plans. The option of investing in these plans through regular payroll
deductions may be arranged with Legg Mason and your employer. Additional
information with respect to these plans is available upon request from any
Legg Mason or affiliated investment executive.
The Funds' Management and Investment Adviser
Board of Directors
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
Adviser
Pursuant to a separate advisory agreement with each Fund ("Advisory
Agreement"), which was approved by its Board of Directors, the Adviser, a
wholly owned subsidiary of Legg Mason, Inc., serves as each Fund's
investment adviser. The Adviser administers and acts as the portfolio
manager for each Fund and has responsibility for the actual investment
management of the Funds, including the responsibility for making decisions
and placing orders to buy, sell or hold a particular security. The Adviser
acts as adviser, manager or consultant to sixteen investment company
portfolios which had aggregate assets under management of approximately
$4.6 billion as of June 30, 1995. The Adviser's address is 111 South
Calvert Street, Baltimore, Maryland 21202.
William H. Miller, III co-managed the Value Trust from its inception
in 1982 to November 1990, when he assumed primary responsibility for the
day-to-day management. Mr. Miller has been responsible for the day-to-day
management of the Total Return Trust since November 1990. Nancy T. Dennin
joined Mr. Miller as co-manager of the Total Return Trust on January 1,
1992. Mr. Miller has also been primarily responsible for the day-to-day
management of the Special Investment Trust since its inception in 1985.
Mr. Miller is a portfolio manager and President of the Adviser. Mr.
Miller has been employed by the Adviser since 1982. Mrs. Dennin is a Vice
President of the Adviser and has been employed by the Adviser since 1985.
From 1985 through 1991, Mrs. Dennin analyzed various industries for the
Adviser including financial services, retail, apparel and insurance.
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<PAGE>
The Adviser receives for its services a management fee from each Fund
attibutable to the net assets of Primary Shares, calculated daily and
payable monthly. The Adviser receives a fee at an annual rate of 1.0% of
the Value Trust's average daily net assets for the first $100 million of
average net assets; 0.75% of average daily net assets between $100 million
and $1 billion; and 0.65% of average daily net assets exceeding $1
billion. The Adviser receives from Total Return Trust, a management fee at
an annual rate of 0.75% of the average daily net assets of the Fund. The
Adviser receives from Special Investment Trust, a management fee at an
annual rate of 1.0% of the average daily net assets of the Fund for the
first $100 million of average net assets and 0.75% of average daily net
assets exceeding $100 million. The advisory fee paid by each Fund is
higher than fees paid by most other funds to their investment advisers.
For the Total Return Trust, the Adviser has agreed to waive indefinitely
its fees in any month to the extent the Total Return Trust's expenses
related to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 1.95% of
the Fund's average daily net assets. During the fiscal year ended March
31, 1995, Value Trust paid a management fee of 0.78% of its average daily
net assets, Total Return Trust paid a management fee of 0.75% of its
average daily net assets, and Special Investment Trust paid a management
fee of 0.79% of its average daily net assets.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
The Funds' Distributor
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares, including any compensation to its investment
executives, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1995, Legg Mason received from BFDS $222,259, $52,972, and
$178,389, respecitively for performing such services in connection with
Value Trust, Total Return Trust and Special Investment Trust.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940
("1940 Act"). The Plan provides that as compensation for its ongoing
38
<PAGE>
services to investors in Primary Shares and its activities and expenses
related to the sale and distribution of Primary Shares, Legg Mason
receives from each Fund an annual distribution fee payable from the assets
attributable to Primary Shares, of up to: 0.75% of the average daily net
assets attributable to Primary Shares of the Total Return Trust and
Special Investment Trust and 0.70% of the average daily net assets
attributable to Primary Shares of Value Trust; and an annual service fee
equal to 0.25% of the average daily net assets attributable to Primary
Shares of each of the Funds. The distribution fee and service fee are
calculated daily and paid monthly. The fees received by Legg Mason during
any year may be more or less than its cost of providing distribution and
shareholder services for Primary Shares. Legg Mason has agreed to waive
indefinitely distribution fees in any month to the extent the Total Return
Trust's expenses related to Primary Shares (exclusive of taxes, interest,
brokerage costs and extraordinary expenses) exceed an annual rate of 1.95%
of the Total Return Trust's average daily net assets.
NASD rules limit the amount of annual distribution fees that may be
paid by mutual funds and impose a ceiling on the cumulative distribution
fees received. Each Fund's Plan complies with those rules.
The Chairman, President and Treasurer of each Fund are employed by
Legg Mason.
Description of Each Corporation and its Shares
Value Trust, Total Return Trust and Special Investment Trust were
established as Maryland corporations on January 20, 1982, May 22, 1985 and
October 31, 1985, respectively. Value Trust has authorized capital of 200
million shares of common stock, par value $0.001 per share. Total Return
Trust and Special Investment Trust each have authorized capital of 100
million shares of common stock, par value $0.001 per share. Each Fund
currently offers two Classes of Shares --Class A (known as "Primary
Shares") and Class Y (known as "Navigator Shares"). The two Classes
represent interests in the same pool of assets. A separate vote is taken
by a Class of Shares of a Fund if a matter affects just that Class of
Shares. Each Class of Shares may bear certain differing Class-specific
expenses. Salespersons and others entitled to receive compensation for
selling or servicing Fund shares may receive more with respect to one
Class than another.
The initial and subsequent investment minimums for Navigator Shares
are $50,000 and $100, respectively. Investments in Navigator Shares may
be made through investment executives of Fairfield Group, Inc., Horsham,
Pennsylvania, or Legg Mason.
Each Fund pays no Rule 12b-1 fee with respect to Navigator Shares.
The per share net asset value of Navigator Shares, and dividends and
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<PAGE>
distributions (if any) paid to Navigator shareholders, are generally
expected to be higher than those of Primary Shares of the Funds, because
of the lower expenses attributable to Navigator Shares. The per share net
asset value of the classes of shares will tend to converge, however,
immediately after the payment of ordinary income dividends. Navigator
Shares of the Funds may be exchanged for the corresponding class of shares
of certain other Legg Mason funds. Investments by exchange into other
Legg Mason funds are made at the per share net asset value, determined on
the same business day as redemption of the Navigator Shares the investors
wish to redeem.
The Boards of Directors of the Funds do not anticipate that there
will be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). Each Fund will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be
deemed liable for misstatements or omission regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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Table of Contents
Prospectus Highlights
Fund Expenses
Performance Information
Investment Objectives and Policies
How You Can Invest in the Funds
How Your Shareholder Account is Maintained
How You Can Redeem Your Primary Shares
How Net Asset Value Is Determined
Dividends And Other Distributions
Tax Treatment Of Dividends And Other Distributions
Shareholder Services
Investing Through Tax-Deferred Retirement Plans
The Funds' Management and Investment Adviser
The Funds' Distributor
Description of each Corporation and its Shares
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
No person has been authorized to give any information or to make
any representations not contained in this Prospectus or the
Statement of Additional Information in connection with the
offering made by the Prospectus and, if given or made, such
information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus
does not constitute an offering by the Fund or by the principal
underwriter in any jurisdiction in which such offering may not
lawfully be made.
<PAGE>
NAVIGATOR EQUITY FUNDS
Prospectus
Shares of Navigator Value Trust, Navigator Total Return Trust and
Navigator Special Investment Trust (collectively referred to as "Navigator
Shares") represent separate classes ("Navigator Classes") of common stock
in Legg Mason Value Trust, Inc. ("Value Trust"), Legg Mason Total Return
Trust, Inc. ("Total Return Trust") and Legg Mason Special Investment
Trust, Inc. ("Special Investment Trust") (each separately referred to as a
"Fund" and collectively referred to as the "Funds"), respectively.
The Navigator Classes of Shares, described in this Prospectus,
are currently offered for sale only to institutional clients of the
Fairfield Group, Inc. ("Fairfield") for investment of their own funds and
funds for which they act in a fiduciary capacity, to clients of Legg Mason
Trust Company ("Trust Company") for which Trust Company exercises
discretionary investment management responsibility (such institutional
investors are referred to collectively as "Institutional Clients" and
accounts of the customers with such Clients ("Customers") are referred to
collectively as "Customer Accounts"), to qualified retirement plans
managed on a discretionary basis and having net assets of at least $200
million, and to The Legg Mason Profit Sharing Plan and Trust. Navigator
Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for
individuals.
Navigator Shares are sold and redeemed without any purchase or
redemption charge imposed by the Funds, although Institutional Clients may
charge their Customer Accounts for services provided in connection with
the purchase or redemption of shares. See "How to Purchase and Redeem
Shares." Each Fund will pay management fees to Legg Mason Fund Adviser,
Inc., but Navigator Shares pay no distribution fees.
Mutual fund shares are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution.
Shares are not insured by the FDIC, the Federal Reserve Board, or any
other agency, and are subject to investment risk, including the possible
loss of the principal amount invested.
This Prospectus sets forth concisely the information about the
Funds that a prospective investor ought to know before investing. It
should be read and retained for future reference. A Statement of
Additional Information about the Funds dated July 31, 1995 has been filed
with the Securities and Exchange Commission ("SEC") and, as amended or
supplemented from time to time, is incorporated herein by this reference.
The Statement of Additional Information is available without charge upon
request from the distibrutor, Legg Mason Wood Walker, Incorporated ("Legg
Mason") (address and telephone numbers listed below).
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: July 31, 1995
Value Trust is a diversified, open-end management investment
company seeking long-term growth of capital. Value Trust invests
principally in those equity securities which its investment adviser, Legg
Mason Fund Adviser, Inc. ("Adviser"), believes are undervalued and
therefore offer above-average potential for capital appreciation. The
Adviser believes that Value Trust Primary Shares may be appropriate for
investments by Individual Retirement Accounts, Keogh Plans, Simplified
Employee Pension Plans and other qualified retirement plans (collectively
referred to as "Retirement Plans") whose principal investment objective is
capital appreciation. Other investors who seek capital appreciation may
also invest in Value Trust shares.
Total Return Trust is a diversified, open-end management
investment company seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk. In attempting to achieve this objective, the Adviser
selects a diversified portfolio, composed of dividend-paying common stocks
and securities convertible into common stock which, in the opinion of the
Adviser, offer the potential for long-term growth; common stocks or
securities convertible into common stock which do not pay current
dividends but which offer prospects for capital appreciation and future
income; and debt instruments of various maturities. Total Return Trust
may write covered put and call options. The Adviser believes that Total
Return Trust Primary Shares may be appropriate for investments by
Retirement Plans. Due to Total Return Trust's investment objective,
however, investors should not expect capital appreciation comparable to
funds devoted solely to growth, or income comparable to funds devoted to
maximum current income.
Special Investment Trust is a diversified, open-end management
investment company seeking capital appreciation. Special Investment Trust
invests principally in equity securities of companies with market
capitalizations of less than $2.5 billion which, in the opinion of the
Adviser, have one or more of the following characteristics: they are not
closely followed by, or are out of favor with, investors generally, and
the Adviser believes they are undervalued in relation to their long-term
earning power or asset values; unusual developments have occurred which
suggest the possibility that the market value of the securities will
increase; or they are involved in actual or anticipated reorganizations or
restructurings under the Bankruptcy Code. Special Investment Trust also
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<PAGE>
invests in the securities of companies with larger capitalizations which
have one or more of these characteristics.
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410-539-0000 800-822-5544
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Expenses
The purpose of the following tables is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of the Funds will bear directly or indirectly. The expenses and
fees set forth in the tables are based on average net assets and annual
Fund operating expenses related to Navigator Shares for the period ended
March 31, 1995.
Shareholder Transaction Expenses For Each Fund
Maximum sales charge on purchases or
reinvested dividends None
Redemption or exchange fees None
Annual Fund Operating Expenses -- Navigator Shares
(as a percentage of average net assets)
Special
Total Return Investment
Value Trust Trust Trust
Management fees 0.78% 0.75% 0.79%
12b-1 fees None None None
Other expenses 0.04% 0.11% 0.11%
Total operating expenses 0.82% 0.86% 0.90%
For further information concerning the Funds' expenses, please
see "The Funds' Management and Investment Adviser," page [ ].
Example of Effect of Fund Expenses
The following examples illustrate the expenses that you would pay
on a $1,000 investment in Navigator Shares over various time periods
assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period. As noted in the table above, the Funds charge no
redemption fees of any kind.
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1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Value Trust $8 $26 $45 $101
Total Return Trust $9 $27 $48 $106
Special Investment Trust $9 $29 $50 $111
This example assumes that all dividends and other distributions
are reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent
the projected or actual performance of, Navigator Shares of the Funds.
The above tables and examples should not be considered representations of
past or future expenses. Actual expenses may be greater or less than those
shown. The actual expenses attributable to Navigator Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which Legg Mason waives its
fees and reimburses all or a portion of each Fund's expenses and the
extent to which Navigator Shares incur variable expenses, such as transfer
agency costs.
5
<PAGE>
Financial Highlights(1)
Effective December 1, 1994, the Funds commenced the sale of
Navigator Shares. Navigator Shares pay no 12b-1 distribution fees and may
pay lower transfer agency fees. The information for Primary Shares
reflects the 12b-1 fees paid by that Class.
The financial highlights tables that follow have been derived
from each Fund's financial statements which have been audited by Coopers &
Lybrand L.L.P., independent accountants. Each Fund's financial statements
for the year ended March 31, 1995 and the report of Coopers & Lybrand
L.L.P. thereon are included in that Fund's annual report and are
incorporated by reference in the Statement of Additional Information. The
annual report for each Fund is available to shareholders without charge by
calling your Legg Mason or affiliated investment executive or Legg Mason's
Funds Marketing Department at 800-822-5544.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE TRUST
-----------------------------------------------------------------------------------------------------------------
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995(2) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of year $18.76 $18.50 $17.81 $15.69 $13.38
Net investment income .12 .10 .08 .18 .25
Net realized and unrealized
gain (loss) on investments 1.40 1.70 .92 2.12 2.34
Total from investment
operations 1.52 1.80 1.00 2.30 2.59
Distributions to
shareholders from:
Net investment income (.01) (.05) (.11) (.18) (.28)
Net realized gain on
investments -- (.04) (.20) -- --
Net asset value, end of
year $20.27 $20.21 $18.50 $17.81 $15.69
Total return 8.11%(3) 9.77% 5.65% 14.76% 19.53%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.82%(4) 1.81%(5) 1.82%(5) 1.86%(5) 1.90%(5)
Net investment income 1.8%(4) 0.5% 0.5% 1.1% 1.7%
Portfolio turnover rate 20.1% 20.1% 25.5% 21.8% 39.4%
Net assets, end of year
(in thousands) $36,519 $986,325 $912,418 $878,394 $745,833
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
VALUE TRUST
--------------------------------------------------------------------------------------------------------------------------
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of year $14.19 $14.16 $12.14 $15.07 $15.34 $11.55
Net investment income .32 .33 .21 .21 .21 .25
Net realized and unrealized
gain (loss) on investments (.74) .77 1.99 (1.54) 1.11 4.15
Total from investment
operations (.42) 1.10 2.20 (1.33) 1.32 4.40
Distributions to
shareholders from:
Net investment income (.36) (.33) (.18) (.20) (.20) (.18)
Net realized gain on
investments (.03) (.74) -- (1.40) (1.39) (.43)
Net asset value, end of
year $13.38 $14.19 $14.16 $12.14 $15.07 $15.34
Total return (2.88)% 7.74% 18.33% (8.42)% 9.89% 39.75%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 1.90%(5) 1.86%(5) 1.96%(5) 1.97%(5) 2.00%(5) 2.07%(5)
Net investment income 2.5% 2.2% 1.6% 1.5% 1.5% 2.0%
Portfolio turnover rate 38.8% 30.7% 29.7% 47.8% 42.5% 32.6%
Net assets, end of year
(in thousands) $690,053 $808,780 $720,961 $665,689 $819,348 $599,004
</TABLE>
(1) All share and per share figures reflect the 2-for-1 stock split
effective July 29, 1991.
8
<PAGE>
(2) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
(3) Not annualized. The annualized total return for the period would
have been 24.46%.
(4) Annualized.
(5) Includes distribution fee of 1.0% through May 11, 1987 and 0.95%
thereafter.
9
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN TRUST
-----------------------------------------------------------------------------------------------------------------------
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995(2) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $12.66 $13.54 $13.61 $11.64 $ 9.64
Net investment income .15 .33 .36 .39(3) .34
Net realized and unrealized
gain (loss) on investments .25 (.19) .24 1.89 1.91
Total from investment
operations .40 .14 .60 2.28 2.25
Distributions to
shareholders from:
Net investment income (.06) (.29) (.33) (.31) (.25)
Net realized gain on
investments (.17) (.60) (.34) -- --
Net asset value, end of
period $12.83 $12.79 $13.54 $13.61 $11.64
Total return 2.28%(6) 1.09% 4.57% 19.88% 23.59%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.86%(7) 1.93%(8) 1.94%(8) 1.95%(3)(8) 2.34% (8)
Net investment income 3.6% (7) 2.5% 2.7% 3.1%(3) 3.1%
Portfolio turnover rate 61.9% 61.9% 46.6% 40.5% 38.4%
Net assets, end of period
(in thousands) $4,823 $194,767 $184,284 $139,034 $52,360
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN TRUST
--------------------------------------------------------------------------------------------------------------------------
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986(1)
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $10.03 $10.06 $ 8.86 $11.63 $10.78 $10.00
Net investment income .28 .21 .15 .18 .18 .13(4)
Net realized and unrealized
gain (loss) on investments (.31) .15 1.18 (1.35) .90 .65
Total from investment
operations (.03) .36 1.33 (1.17) 1.08 .78
Distributions to
shareholders from:
Net investment income (.29) (.21) (.13) (.21) (.19) --
Net realized gain on
investments (.07) (.18) -- (1.39) (.04) --
Net asset value, end of
period $ 9.64 $10.03 $10.06 $ 8.86 $11.63 $10.78
Total return (0.05)% 3.48% 15.16% (10.17)% 10.24% 7.80%(5)
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 2.50% (8) 2.39%(8) 2.40%(8) 2.30%(8) 2.40%(8) 2.20%(7)(8)
Net investment income 3.1% 2.0% 1.6% 1.9% 1.7% 3.8% (7)
Portfolio turnover rate 62.1% 39.2% 25.7% 50.1% 82.7% 40.0% (7)
Net assets, end of period
(in thousands) $22,822 $26,815 $30,102 $35,394 $47,028 $44,357
</TABLE>
(1) For the period November 21, 1985 (commencement of operations) to
March 31, 1986.
11
<PAGE>
(2) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
(3) Net of fees waived by the Adviser in excess of an indefinite
voluntary expense limitation of 1.95% beginning November 1, 1992.
(4) Excludes investment advisory fees and other expenses in excess of a
1.2% Adviser-imposed expense limitation.
(5) Not annualized. The annualized total return for the period would
have been 21.73%.
(6) Not annualized. The annualized total return for the period would
have been 6.88%.
(7) Annualized.
(8) Includes distribution fee of 1.0%.
12
<PAGE>
<TABLE>
<CAPTION>
SPECIAL INVESTMENT TRUST
----------------------------------------------------------------------------------------------------------------------
NAVIGATOR PRIMARY CLASS
CLASS
Years Ended March 31, 1995(2) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $19.11 $21.56 $17.91 $17.00 $14.59
Net investment income .07 (.06) (.11) .03 .12
Net realized and unrealized
gain (loss) on investments .85 (1.31) 3.93 1.66 2.83
Total from investment
operations .92 (1.37) 3.82 1.69 2.95
Distributions to
shareholders from:
Net investment income -- -- (.03) -- (.14)
Net realized gain on
investments -- (.23) (.14) (.78) (.40)
Net asset value, end of
period $20.03 $19.96 $21.56 $17.91 $17.00
Total return
4.81%(5) (6.37%) 21.35% 10.50% 20.46%
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 0.90%(6) 1.93%(7) 1.94%(7) 2.00%(7) 2.10% (7)
Net investment income 1.0%(6) (0.2)% (0.6)% 0.2% 0.8%
Portfolio turnover rate 27.5% 27.5% 16.7% 32.5% 56.9%
Net assets, end of period
(in thousands) $26,123 $612,093 $565,486 $322,572 $201,772
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SPECIAL INVESTMENT TRUST
--------------------------------------------------------------------------------------------------------------------------
PRIMARY CLASS
Years Ended March 31, 1991 1990 1989 1988 1987 1986(1)
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of period $13.58 $11.84 $10.14 $12.80 $11.53 $10.00
Net investment income .18 .12 .06(3) .13(3) --(3) .04(3)
Net realized and unrealized
gain (loss) on investments 2.42 1.70 1.65 (1.825) 1.51 1.49
Total from investment
operations 2.60 1.82 1.71 (1.695) 1.51 1.53
Distributions to
shareholders from:
Net investment income (.27) (.08) (.01) (.075) (.02) --
Net realized gain on
investments (1.32) -- -- (.89) (.22) --
Net asset value, end of
period $14.59 $13.58 $11.84 $10.14 $12.80 $11.53
Total return 21.46% 15.37% 16.99% (14.18)% 13.39% 15.3%(4)
Ratios/Supplemental Data:
Ratios to average net
assets:
Expenses 2.30% (7) 2.30%(7) 2.50%(7) 2.50%(7) 2.50%(7) 2.50%(6)(7)
Net investment income 1.4% 1.0% 0.7% 1.0% -- 1.2% (6)
Portfolio turnover rate 75.6% 115.9% 122.4% 158.9% 77.0% 41.0% (6)
Net assets, end of period
(in thousands) $106,770 $68,240 $44,450 $43,611 $55,822 $34,337
</TABLE>
(1) For the period December 30, 1985 (commencement of operations) to
March 31, 1986.
14
<PAGE>
(2) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
(3) Excludes investment advisory fees and other expenses in excess of a
2.5% Adviser-imposed expense limitation.
(4) Not annualized. The annualized total return for the period would
have been 60.70%.
(5) Not annualized. The annualized total return for the period would
have been 14.51%.
(6) Annualized.
(7) Includes distribution fee of 1.0%.
15
<PAGE>
Performance Information
From time to time the Funds may quote the total return of each
class of shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
Cumulative total return shows the fund's performance over a specific
period of time. Average annual total return is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns. For comparison
purposes, Value Trust's total return is compared with total returns of the
Value Line Geometric Average, an index of approximately 1,700 stocks
("Value Line Index"), and Standard & Poor's 500 Stock Composite Index
("S&P Stock Index"), two unmanaged indexes of widely held common stocks.
No adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in
each Fund will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost. Returns of Value Trust
would have been lower if the Adviser and/or Legg Mason had not waived
certain fees for the fiscal years ended March 31, 1989 through 1995.
Returns of the Total Return Trust would have been lower if the Adviser
and/or Legg Mason had not waived certain fees for the fiscal years ended
March 31, 1986 through 1995. Returns of the Special Investment Trust
would have been lower if the Adviser and/or Legg Mason had not waived
certain fees for the fiscal years ended March 31, 1986 through 1995.
Performance figures reflect past performance only and are not
intended to and do not indicate future performance. Further information
about each Fund's performance is contained in its Annual Report to
Shareholders, which may be obtained without charge by calling your Legg
Mason or affiliated investment executive or Legg Mason's Funds Marketing
Department at 800-822-5544.
Total returns as of March 31, 1995 were as follows:
16
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
Legg Mason Total
Legg Mason Value Return Legg Mason Special
Trust Trust Investment Trust Value Line Index S&P Stock Index
---------------- ---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +5.12% +15.54%
Five Years +54.50 +56.57 +83.68 +38.57 +71.50
Ten Years +177.23 N/A N/A +102.99 +284.58
Life of Class +584.27(1) +99.17(2) +178.15(3) +244.66(1) +586.40(1)
Navigator Class:
Life of Class(4) +8.11 +2.28 +4.81 +6.37 +11.37
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
Legg Mason Value Legg Mason Total Legg Mason Special
Trust Return Trust Investment Trust Value Line Index S&P Stock Index
---------------- ---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Primary Class:
One Year +9.77% +1.09% -6.37% +5.12% +15.54%
Five Years +9.09 +9.38 +12.93 +6.74 +11.39
Ten Years +10.73 N/A N/A +7.34 +14.42
Life of Class +16.00(1) +7.64(2) +11.69(3) +10.02(1) +16.03(1)
</TABLE>
(1) For the period April 16, 1982 (commencement of operations of Value
Trust) to March 31, 1995.
(2) For the period November 21, 1985 (commencement of operations of Total
Return Trust) to March 31, 1995.
(3) For the period December 30, 1985 (commencement of operations of
Special Investment Trust) to March 31, 1995.
17
<PAGE>
(4) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to March 31, 1995.
The S&P Stock Index and Value Line Index figures assume reinvestment
of dividends paid by their component stocks. Tax consequences are not
included in the illustration, nor are brokerage or other fees calculated
in the S&P Stock Index and Value Line Index figures.
Investment Objectives and Policies
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Funds' Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
Value Trust's objective is long-term growth of capital. The Adviser
believes that the Fund's objective can be best met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. The
Adviser believes, however, that purchasing securities depressed by
temporary factors will provide investment returns superior to those
obtained when premium prices are paid for issues currently in favor.
18
<PAGE>
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund may invest in debt securities, including government,
corporate and money market securities, for temporary defensive purposes
and, consistent with its investment objective, during periods when or
under circumstances where the Adviser believes the return on certain debt
securities may equal or exceed the return on equity securities. The Fund
may invest in debt securities of both foreign and domestic issuers of any
maturity without regard to rating, and may invest its assets in such
securities without regard to a percentage limit. Although not a
fundamental policy subject to shareholder vote, 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 rated below
investment grade, i.e., rated lower than BBB by Standard & Poor's Ratings
Group ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's") or, if
unrated, deemed by the Adviser to be of comparable quality. The Adviser
currently anticipates that no debt securities rated below B or, if
unrated, of comparable quality, will be purchased and that purchases of
securities rated BB or Ba or below will not exceed 5% of the Fund's total
assets.
Total Return Trust's objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may invest its assets in such securities without regard to a percentage
limit. The Adviser currently anticipates that under normal market
conditions, the Fund will invest no more than 50% of its total assets in
intermediate-term and long-term debt securities, and no more than 5% of
its total assets in debt securities rated below investment grade, i.e.,
rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed by
the Adviser to be of comparable quality. The Adviser currently
19
<PAGE>
anticipates that no debt securities rated below B or, if unrated, of
comparable quality, will be purchased.
Special Investment Trust's objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities of companies with market capitalizations of less than $2.5
billion which the Adviser believes have one or more of the following
characteristics:
1. Equity securities of companies which generally are not closely
followed by, or are out of favor with, investors, and which appear to be
undervalued in relation to their long-term earning power or asset values.
A security may be undervalued because of many factors, including market
decline, poor economic conditions, tax-loss selling, or actual or
anticipated developments affecting the issuer.
2. Equity securities of companies in which unusual and possibly
non-repetitive developments are taking place which, in the opinion of the
Adviser, may cause the market values of the securities to increase. Such
developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. Equity securities of companies involved in actual or anticipated
reorganizations or restructurings under the Bankruptcy Code. No more than
20% of the Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of possible loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
20
<PAGE>
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the Fund
may not be widely traded, and that the Fund's position in such securities
may be substantial in relation to the market for such securities.
Accordingly, it may be difficult for the Fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active
monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
assets may be invested in debt securities rated below BBB by S&P, or below
Baa by Moody's, and unrated securities deemed by the Adviser to be of
comparable quality. The Adviser currently anticipates that no debt
securities rated below B, or if unrated, of comparable quality, will be
purchased and that purchases of securities rated BB or Ba or below will
not exceed 5% of the Fund's total assets.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
21
<PAGE>
investments will be rated in one of the four highest rating categories by
S&P or Moody's or, if unrated by S&P or Moody's, deemed by the Adviser to
be of comparable quality.
FOR EACH FUND:
Moody's considers debt securities rated Baa to have speculative
characteristics; changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity for the issuers of such
securities to make principal and interest payments than is the case for
higher-grade debt securities. Debt securities rated below BBB or Baa and
securities unrated by either of the above services which are deemed by the
Adviser to be of comparable quality are regarded as high yield/high risk
securities and are considered predominantly speculative.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Adviser to determine, to
the extent possible, that the planned investment is sound. Each Fund does
not intend to invest in securities that are in default, or where, in the
Adviser's opinion, default appears likely.
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. 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. Although
not a fundamental policy subject to shareholder vote, the Adviser
currently anticipates that each Fund will invest no more than 25% of its
total assets in foreign securities.
The Funds may also invest in American depositary receipts ("ADRs"),
which are securities issued by domestic banks evidencing their ownership
of specific foreign securities. ADRs may be sponsored or unsponsored;
22
<PAGE>
issuers of securities underlying unsponsored ADRs are not contractually
obligated to disclose material information in the U.S. Accordingly, there
may be less information available about such issuers than there is with
respect to domestic companies and issuers of securities underlying
sponsored ADRs. Although ADRs are denominated in U.S. dollars, the
underlying security often is not; thus, the value of the ADR may be
subject to exchange controls and variations in the exchange rate.
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in money market instruments,
including repurchase agreements. 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
State Street Bank and Trust Company ("State Street"), the Funds'
custodian, 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 the Adviser to
present minimal risk of default during the term of the agreement based on
guidelines established by the Funds' Boards of Directors. The Funds will
not enter into repurchase agreements of more than seven days' duration if
more than 10% of their net assets would be invested in such agreements and
other illiquid investments.
The Funds may engage in securities lending. However, the Funds do not
currently intend to loan securities with a value exceeding 5% of their
total assets. For further information concerning securities lending, see
the Statement of Additional Information.
Futures and Options Transactions
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 it invests. For example, a Fund
may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. The
Funds may sell an interest rate futures contract to offset price changes
of debt securities they already own. This strategy is intended to minimize
any price changes in the debt securities the Funds own (whether increases
or decreases) caused by interest rate changes, because the value of the
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futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Funds.
The Funds may purchase a call option on an interest rate futures
contract to hedge against a market advance in debt securities that the
Funds plan to acquire at a future date. The purchase of such an option is
analogous to the purchase of a call option on an individual debt security
that can be used as a temporary substitute for a position in the security
itself. The Funds may purchase put options on stock index futures
contracts. This is analogous to the purchase of protective put options on
individual stocks where a level of protection is sought below which no
additional economic loss would be incurred by the Funds. The Funds may
purchase and write options in combination with each other to adjust the
risk and return of the overall position. For example, the Funds may
purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Funds' resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of the premium
and transaction costs), the Funds 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, the Funds would expect to profit
from a written put option, although their gain would be limited to the
amount of the premium they received. If stock prices remain the same over
time, it is likely that the Funds will also profit, because they should be
able to close out the option at a lower price. If stock prices fall, the
Funds would expect to suffer a loss.
By purchasing a call option, the Funds would attempt to participate
in potential price increases of the underlying index, with results similar
to those obtainable from purchasing a futures contract, but with risk
limited to the cost of the option if stock prices fell. At the same time,
the Funds 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, the Funds would seek to
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mitigate the effects of a price decline. At the same time, the Funds would
give up some ability to participate in security price increases when
writing call options.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the Adviser in managing the Funds'
portfolio. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the Adviser is not
successful in employing such instruments in managing the Funds'
investments or in predicting interest rate changes, each 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. It
is also possible that the Funds may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that the Funds may need to sell a portfolio security at a
disadvantageous time, due to the need for the Funds to maintain "cover" or
to segregate securities in connection with hedging transactions and that
the Funds may be unable to close out or liquidate its hedged position. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options
if the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of that Fund's
total assets would be so invested.
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract involves an obligation to purchase or
sell a specific amount of a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. By entering into
a foreign currency contract, a Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. A Fund may enter into these contracts for the
purpose of hedging against risk arising from its investment in securities
denominated in foreign currencies or when it anticipates investing in such
securities. Forward currency contracts involve certain costs and risks,
including the risk that anticipated currency movements will not be
accurately predicted, causing a Fund to sustain losses on these contracts.
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Investment Limitations
Each Fund has adopted certain fundamental investment limitations
that, like their investment objective, can be changed only by a vote of
the holders of a majority of the outstanding voting securities of the
Fund. For these purposes a "vote of the holders of a majority of the
outstanding voting securities" of the Fund means the affirmative vote of
the lesser of (1) more than 50% of the outstanding shares of the Fund or
(2) 67% or more of the shares present at a shareholders' meeting if more
than 50% of the outstanding shares are represented at the meeting in
person or by proxy. These investment limitations are set forth in the
Statement of Additional Information under "Additional Information About
Investment Limitations and Policies." Other Fund policies, unless
described as fundamental, can be changed by action of the Board of
Directors.
How to Purchase and Redeem Shares
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason. (Legg Mason and Fairfield are wholly owned subsidiaries of Legg
Mason, Inc., a financial services holding company.)
Purchase of Shares
The minimum investment is $50,000 for the initial purchase of
Navigator Shares and $100 for each subsequent investment. Each Fund
reserves the right to change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after
the close of the Exchange or on days the Exchange is closed will be
executed at the net asset value determined as of the close of the Exchange
on the next day the Exchange is open. See "How Net Asset Value is
Determined" on page 21. Each Fund reserves the right to reject any order
for its shares or to suspend the offering of shares for a period of time.
In addition to Institutional Clients purchasing shares directly from
Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
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No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in the Funds. Information
concerning these services and any applicable charges will be provided by
the Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
Redemption of Shares
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
investment executives or Legg Mason Funds Processing at 1-800-822-5544.
Callers should have available the number of shares (or dollar amount) to
be redeemed and their account number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange, on any day when the Exchange is open, will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the Fund. Such payments will
normally be transmitted on the next business day following receipt of a
valid request for redemption. However, each Fund reserves the right to
take up to seven days to make payment upon redemption if, in the judgment
of the Adviser, that Fund could be adversely affected by immediate
payment. (The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.) The proceeds of redemption or repurchase may be
more or less than the original cost. If the shares to be redeemed or
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repurchased were paid for by check (including certified or cashier's
checks) within 15 business days of the redemption or repurchase request,
the proceeds may not be disbursed unless the Fund can be reasonably
assured that the check has been collected.
Each Fund will not be responsible for the authenticity of redemption
instructions received by telephone, provided it follows reasonable
procedures to identify the caller. Each Fund may request identifying
information from callers or employ identification numbers. Each Fund may
be liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders unless certificates have been
issued. Shareholders who do not wish to have telephone redemption
privileges should call their investment executive for further
instructions.
Because of the relatively high cost of maintaining small accounts, a
Fund may elect to close any account with a current value of less than $500
by redeeming all of the shares in the account and mailing the proceeds to
the investor. However, the Funds will not redeem accounts that fall below
$500 solely as a result of a reduction in net asset value per share. If a
Fund elects to redeem the shares in an account, the investor will be
notified that the account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having the
account closed.
How Shareholder Accounts are Maintained
A shareholder account is established automatically for each investor.
Any shares the investor purchases or receives as a dividend or other
distribution will be credited directly to the account at the time of
purchase or receipt. No certificates are issued unless the shareholder
specifically requests them in writing. Shareholders who elect to receive
certificates can redeem their shares only by mail. Certificates will be
issued in full shares only. No certificates will be issued for shares
prior to 15 business days after purchase of such shares by check unless
the Fund can be reasonably assured during that period that payment for the
purchase of such shares has been collected. Shares may not be held in, or
transferred to, an account with any brokerage firm other than Fairfield,
Legg Mason or their affiliates.
Every shareholder of record will receive a confirmation of each new
share transaction with a Fund, which will also show the total number of
shares being held in safekeeping by the Fund's transfer agent for the
account of the shareholder.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
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Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers. Institutional
Clients purchasing or holding Navigator Shares on behalf of their
Customers are responsible for the transmission of purchase and redemption
orders (and the delivery of funds) to the Fund on a timely basis.
How Net Asset Value Is Determined
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to those Navigator Shares from
the total assets attributable to such shares and dividing the result by
the number of those Navigator Shares outstanding. Securities owned by each
Fund for which market quotations are readily available are valued at
current market value. In the absence of readily available market
quotations, securities are valued at fair value as determined by each
Fund's Board of Directors. Where a security is traded on more than one
market, which may include foreign markets, the securities are generally
valued on the market considered by the 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.
Dividends and Other Distributions
Each Fund declares dividends to holders of Navigator Shares out of
its investment company taxable income (which consists of net investment
income, any net short-term capital gain and any net gains from certain
foreign currency transactions) attributable to those shares. Value Trust
and Total Return Trust declare and pay dividends from net investment
income quarterly; they pay dividends from any net short-term capital gains
and net gains from foreign currency transactions annually. Special
Investment Trust declares and pays dividends from its investment company
taxable income following the end of each taxable year. Each Fund also
distributes substantially all of its net capital gain (the excess of net
long-term capital gain over net short-term capital loss) after the end of
the taxable year in which the gain is realized. A second distribution of
net capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Shareholders may elect to:
1. Receive both dividends and other distributions in Navigator
Shares of the distributing Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund
and other distributions in cash; or
4. Receive both dividends and other distributions in cash.
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In certain cases, shareholders may reinvest dividends and other
distributions in shares of another Navigator fund. A shareholder should
contact its investment executive for additional information about this
option. Qualified retirement plans that obtained Navigator Shares through
exchange generally receive dividends and other distributions in additional
shares.
If no election is made, both dividends and other distributions will
be credited to the Institutional Client's account in Navigator Shares at
the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also will be credited to your
account at that net asset value. If an investor elects to receive
dividends or other distributions in cash, a check will be sent. Investors
purchasing through Fairfield may elect at any time to change the
distribution option by notifying the applicable Fund in writing at:
[insert complete Fund name], c/o Fairfield Group, Inc., 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Those purchasing through Legg Mason
should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
Tax Treatment of Dividends and Other Distributions
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Code"), so that it will be relieved of federal income tax on that part
of its investment company taxable income (generally consisting of net
investment income, any net short-term capital gain and any net gains from
certain foreign currency transactions) and net capital gain that is
distributed to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Fund shares) are taxable to their
shareholders (other than tax-exempt investors) as ordinary income to the
extent of each Fund's earnings and profits. Distributions of each Fund's
net capital gain (whether paid in cash or reinvested in Fund shares), when
designated as such, are taxable to those shareholders as long-term capital
gain, regardless of how long they have held their Fund shares.
Each Fund sends each shareholder a notice following the end of each
calendar year specifying, among other things, the amounts of all ordinary
income dividends and other distributions paid (or deemed paid) during that
year.
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A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of any other Navigator fund
generally will have similar tax consequences. See "Shareholder Services--
Exchange Privilege," page [ ]. If Fund shares are purchased within 30
days before or after redeeming other Fund shares at a loss, all or part of
that loss will not be deductible and instead will increase the basis of
the newly purchased shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, an investor may also be subject to state, local or
foreign taxes on distributions from the Funds, depending on the laws of
its home state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each Fund's annual notice
to shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
Shareholder Services
Confirmations and Reports
Shareholders will receive from Legg Mason a confirmation after each
transaction involving Navigator Shares (except a reinvestment of dividends
and capital gain distributions). An account statement will be sent to each
shareholder monthly unless there has been no activity in the account, in
which case an account statement will be sent quarterly. Reports will be
sent to each Fund's shareholders at least semiannually showing its
portfolio and other information; the annual report for each Fund will
contain financial statements audited by its independent accountants.
Confirmations for purchases and redemptions of Navigator Shares made
by Institutional Clients acting in a fiduciary, advisory, custodial, or
other similar capacity on behalf of persons maintaining Customer Accounts
at Institutional Clients will be sent to the Institutional Client.
Beneficial ownership of shares by Customer Accounts will be recorded by
the Institutional Client and reflected in the regular account statements
provided by them to their customers.
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Shareholder inquiries should be addressed to "[insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476," or "Fairfield Group, Inc., 200 Gibraltar Road, Horsham,
Pennsylvania 19044."
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Exchange Privilege
Holders of Navigator Shares are entitled to exchange them for
Navigator Shares of the following funds, provided the shares to be
acquired are eligible for sale under applicable state securities laws:
Navigator Money Market Fund, Inc. -- Prime Obligations Portfolio
A money market fund seeking to provide as high a level of current
interest income as is consistent with liquidity and relative stability of
principal.
Navigator Tax-Free Money Market Fund, Inc.
A money market fund seeking to provide its shareholders with as high
a level of current interest income that is exempt from federal income
taxes as is consistent with liquidity and relative stability of principal.
Navigator Value Trust
A mutual fund seeking long-term growth of capital.
Navigator Total Return Trust
A mutual fund seeking capital appreciation and current income in
order to achieve an attractive total investment return consistent with
reasonable risk.
Navigator Special Investment Trust
A mutual fund seeking capital appreciation by investing principally
in issuers with market capitalizations of less than $2.5 billion.
Navigator American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Navigator U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Navigator Maryland Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Navigator Pennsylvania Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
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Navigator Tax-Free Intermediate-Term Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Investments by exchange into other Navigator funds are made at the
per share net asset value next determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your investment
executive. To effect an exchange by telephone, please call your investment
executive with the information described in the section "How to Purchase
and Redeem Shares," page 9. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders. There is no
assurance the money market funds will be able to maintain a $1.00 share
price. None of the funds is insured or guaranteed by the U.S. Government.
The Funds' Management and Investment Adviser
Board of Directors
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
Adviser
Pursuant to a separate advisory agreement with each Fund ("Advisory
Agreement"), which was approved by its Board of Directors, the Adviser, a
wholly owned subsidiary of Legg Mason, Inc., serves as each Fund's
investment adviser. The Adviser administers and acts as the portfolio
manager for each Fund and has responsibility for the actual investment
management of the Funds, including the responsibility for making decisions
and placing orders to buy, sell or hold a particular security. The Adviser
acts as adviser, manager or consultant to sixteen investment company
portfolios which had aggregate assets under management of approximately
$4.6 billion as of June 30, 1995. The Adviser's address is 111 South
Calvert Street, Baltimore, Maryland 21202.
William H. Miller, III co-managed Value Trust from its inception in
1982 to November 1990, when he assumed primary responsibility for the day-
to-day management. Mr. Miller has been responsible for the day-to-day
management of the Total Return Trust since November 1990. Nancy T. Dennin
joined Mr. Miller as co-manager of the Total Return Trust on January 1,
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1992. Mr. Miller has also been primarily responsible for the day-to-day
management of the Special Investment Trust since its inception in 1985.
Mr. Miller is a portfolio manager and President of the Adviser. Mr.
Miller has been employed by the Adviser since 1982. Mrs. Dennin is a Vice
President of the Adviser and has been employed by the Adviser since 1985.
From 1985 through 1991, Mrs. Dennin analyzed various industries for the
Adviser including financial services, retail, apparel and insurance.
The Adviser receives for its services a management fee from each Fund
attibutable to the net assets of Navigator Shares, calculated daily and
payable monthly. The Adviser receives a fee at an annual rate of 1.0% of
the Value Trust's average daily net assets for the first $100 million of
average net assets; 0.75% of average daily net assets between $100 million
and $1 billion; and 0.65% of average daily net assets exceeding $1
billion. The Adviser receives from Total Return Trust, a management fee at
an annual rate of 0.75% of the average daily net assets of the Fund. The
Adviser receives from Special Investment Trust, a management fee at an
annual rate of 1.0% of the average daily net assets of the Fund for the
first $100 million of average net assets and 0.75% of average daily net
assets exceeding $100 million. The advisory fee paid by each Fund is
higher than fees paid by most other funds to their investment advisers.
For the Total Return Trust, the Adviser has agreed to waive indefinitely
its fees in any month to the extent the Total Return Trust's expenses
related to Navigator Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceed during any month an annual rate of 0.95% of
the Fund's average daily net assets. During the fiscal year ended March
31, 1995, Value Trust paid a management fee of 0.78% of its average daily
net assets (annualized), Total Return Trust paid a management fee of 0.75%
of its average daily net assets (annualized), and Special Investment Trust
paid a management fee of 0.79% of its average daily net assets
(annualized).
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
The Funds' Distributor
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. Each Underwriting
Agreement obligates Legg Mason to pay certain expenses in connection with
the offering of shares, including any compensation to its investment
executives, the printing and distribution of prospectuses, statements of
additional information and periodic reports used in connection with the
offering to prospective investors, after the prospectuses, statements of
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additional information and reports have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for any
supplementary sales literature and advertising costs. Legg Mason also
assists BFDS with certain of its duties as transfer agent; for the year
ended March 31, 1995, Legg Mason received from BFDS $222,259, $52,972, and
$178,389, respecitively, for performing such services in connection with
Value Trust, Total Return Trust and Special Investment Trust.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
is a registered broker-dealer with principal offices located at 200
Gibraltar Road, Horsham, Pennsylvania 19044. Fairfield may sell
Navigator Shares pursuant to a Dealer Agreement with the Funds'
Distributor, Legg Mason. Neither Fairfield nor Legg Mason receives
compensation from the Funds for selling Navigator Shares.
The Chairman, President and Treasurer of each Fund are employed by
Legg Mason.
Description of each Corporation and its Shares
Value Trust, Total Return Trust and Special Investment Trust were
established as Maryland corporations on January 20, 1982, May 22, 1985 and
October 31, 1985, respectively. Value Trust has authorized capital of 200
million shares of common stock, par value $0.001 per share. Total Return
Trust and Special Investment Trust each have authorized capital of 100
million shares of common stock, par value $0.001 per share. Each Fund
currently offers two Classes of Shares -- Class A (known as "Primary
Shares") and Class Y (known as "Navigator Shares"). The two Classes
represent interests in the same pool of assets. A separate vote is taken
by a Class of Shares of a Fund if a matter affects just that Class of
Shares. Each Class of Shares may bear certain differing Class-specific
expenses. Salespersons and others entitled to receive compensation for
selling or servicing Fund shares may receive more with respect to one
Class than another.
The initial and subsequent investment minimums for Primary Shares are
$1,000 and $100, respectively. Investments in Primary Shares may be made
through a Legg Mason or affiliated investment executive, through the
Future First Systematic Investment Plan or through automatic investment
arrangements. For information about Primary Shares, call 800-822-5544.
Holders of Primary Shares bear distribution and service fees under
Rule 12b-1 at the rate of 1.0% of the net assets attributable to Primary
Shares of Special Investment Trust and Total Return Trust and 0.95% of the
net assets attributable to Primary Shares of Value Trust. Investors in
Primary Shares may elect to receive dividends and/or capital gain
distributions in cash through the receipt of a check or a credit to their
Legg Mason account. The per share net asset value of the Navigator
Shares, and dividends and distributions (if any) paid to Navigator
shareholders, are generally expected to be higher than those of Primary
Shares of the Fund, because of the lower expenses attributable to
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Navigator Shares. The per share net asset value of the Classes of Shares
will tend to converge, however, immediately after the payment of ordinary
income dividends. Primary Shares of the Funds may be exchanged for the
corresponding Class of Shares of other Legg Mason Funds. Investments by
exchange into the Legg Mason Funds sold with an initial sales charge are
made at the per share net asset value, plus the sales charge, determined
on the same business day as redemption of the Fund shares the investors in
Primary Shares wish to redeem.
The Boards of Directors of the Funds do not anticipate that there
will be any conflicts among the interests of the holders of the different
Classes of Fund shares. On an ongoing basis, the Boards will consider
whether any such conflict exists and, if so, take appropriate action.
Shareholders of each Fund are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of each Fund are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the Investment
Company Act of 1940 requires a shareholder vote on certain matters
(including the election of directors, approval of an advisory contract,
and approval of a plan of distribution pursuant to Rule 12b-1). Each Fund
will call a special meeting of the shareholders at the request of 10% or
more of the shares entitled to vote; shareholders wishing to call such a
meeting should submit a written request to the Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be
deemed liable for misstatements or omission regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
37
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Table of Contents
Prospectus Highlights
Fund Expenses
Performance Information
Investment Objectives and Policies
How To Purchase and Redeem Shares
How Your Shareholder Account is Maintained
How Net Asset Value Is Determined
Dividends And Other Distributions
Tax Treatment Of Dividends And Other Distributions
Shareholder Services
The Funds' Management and Investment Adviser
The Funds' Distributor
Description of each Corporation and its Shares
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000 800-822-5544
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 M Street, N.W., Washington, DC 20036
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of
Additional Information in connection with the offering made by the
Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. The Prospectus does not constitute an offering by the
Fund or by the principal underwriter in any jurisdiction in which
such offering may not lawfully be made.
<PAGE>
LEGG MASON VALUE TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
PRIMARY SHARES
NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
Mutual fund shares are not deposits or obligations of, or guaranteed
or endorsed by, any bank or other depository institution. Shares are not
insured by the FDIC, the Federal Reserve Board, or any other agency, and
are subject to investment risk, including the possible loss of the
principal amount invested.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus for Primary Shares or
Navigator Shares (both dated July 31, 1995), as appropriate, which have
been filed with the Securities and Exchange Commission ("SEC"). Copies of
the Prospectuses are available without charge from the Funds at (410) 539-
0000.
The Legg Mason Value Trust, Inc. ("Value Trust") is a mutual fund
seeking long-term growth of capital. Value Trust invests principally in
those equity securities which its investment adviser, Legg Mason Fund
Adviser, Inc. ("Adviser"), believes are undervalued and therefore offer
above-average potential for capital appreciation. Other investors who
seek capital appreciation may also invest in Value Trust shares.
The Legg Mason Total Return Trust, Inc. ("Total Return Trust") is a
mutual fund seeking capital appreciation and current income in order to
achieve an attractive total investment return consistent with reasonable
risk. In attempting to achieve this objective, the Adviser selects a
diversified portfolio, composed of dividend-paying common stocks and
securities convertible into common stock which, in the opinion of the
Adviser, offer the potential for long-term growth; common stocks or
securities convertible into common stock which do not pay current
dividends but which offer prospects for capital appreciation and future
income; and debt instruments of various maturities. Total Return Trust
may write covered put and call options.
The Legg Mason Special Investment Trust, Inc. ("Special Investment
Trust") is a mutual fund seeking capital appreciation. Special Investment
Trust invests principally in equity securities of companies with market
capitalizations of less than $2.5 billion which, in the opinion of the
Adviser, have one or more of the following characteristics: they are not
closely followed by, or are out of favor with, investors generally, and
the Adviser believes they are undervalued in relation to their long-term
earning power or asset values; unusual developments have occurred which
<PAGE>
suggest the possibility that the market value of the securities will
increase; or they are involved in actual or anticipated reorganizations or
restructurings under the Bankruptcy Code. Special Investment Trust may
also invest in the securities of companies with larger capitalizations
which have one or more of these characteristics.
July 31, 1995
Shares of Navigator Value Trust, Navigator Total Return Trust and
Navigator Special Investment Trust (collectively referred to as "Navigator
Shares") represent interests in Value Trust, Total Return Trust and
Special Investment Trust, respectively, that are currently offered for
sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they
act in a fiduciary capacity, to clients of Legg Mason Trust Company
("Trust Company") for which Trust Company exercises discretionary
investment management responsibility (such institutional investors are
referred to collectively as "Institutional Clients" and accounts of the
customers with such Clients ("Customers") are referred to collectively as
"Customer Accounts"), to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, and to
The Legg Mason Profit Sharing Plan and Trust. The Navigator Class of
Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for
individuals.
The Primary Class of shares of Value Trust, Total Return Trust and
Special Investment Trust (collectively referred to as "Primary Shares") is
offered for sale to all other investors and may be purchased directly by
individuals.
Navigator and Primary Shares of Value Trust, Total Return Trust and
Special Investment Trust (each separately referred to as "Fund" and
collectively referred to as the "Funds") are sold and redeemed without any
purchase or redemption charge, although Institutions may charge their
Customer Accounts for services provided in connection with the purchase or
redemption of Navigator Shares. Each Fund pays management fees to the
Adviser. Primary Shares pay a 12b-1 distribution fee, but Navigator
Shares pay no distribution fees. See "The Fund's Distributor."
LEGG MASON WOOD WALKER,
Incorporated
-------------------------------------------------------------------------
111 South Calvert Street
P.O. Box 1476
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of each Fund described in
the Prospectuses, each Fund has adopted certain fundamental investment
limitations that cannot be changed except by vote of the Fund's
shareholders. Each Fund may not:
1. Borrow money, except from banks or through reverse
repurchase agreements for temporary purposes, in an aggregate amount not
to exceed 10% of the value of the total assets of the respective Fund at
the time of borrowing; provided that borrowings, including reverse
repurchase agreements, in excess of 5% of such value will be only from
banks (although not a fundamental policy subject to shareholder approval,
each Fund will not purchase securities if borrowings, including reverse
purchase agreements, exceed 5% of its total assets);
2. With respect to 75% of total assets, invest more than 5%
of its total assets (taken at market value) in securities of any one
issuer, other than the U.S. Government, or its agencies and
instrumentalities, or purchase more than 10% of the voting securities of
any one issuer;
3. Purchase securities on "margin", except for short-term
credits necessary for clearance of portfolio transactions and except that
each Fund may make margin deposits in connection with the use of futures
contracts and options on futures contracts;
4. Invest more than 25% of its total assets (taken at market
value) in any one industry;
5. Purchase or sell commodities and commodity contracts, but
this limitation shall not prevent each Fund from purchasing or selling
options and futures contracts;
6. Underwrite the securities of other issuers, except
insofar as each Fund may be deemed an underwriter under the Securities Act
of 1933, as amended, in disposing of a portfolio security;
7. Make loans, except loans of portfolio securities and
except to the extent that the purchase of a portion of an issue of
publicly distributed notes, bonds or other evidences of indebtedness or
deposits with banks and other financial institutions may be considered
loans;
8. Purchase or sell real estate, except that each Fund may
invest in securities collateralized by real estate or interests therein or
in securities issued by companies that invest in real estate or interests
therein (as a non-fundamental policy changeable without a shareholder
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vote, each Fund will not purchase or sell interests in real estate limited
partnerships); or
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."
If a percentage restriction described 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 or in the amount
of net assets of a Fund will not be considered a violation of any of the
restrictions.
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 Investment Company Act of 1940 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.
As non-fundamental policies, changeable without shareholder vote,
each Fund will not: (i) not invest more than 5% of its total assets (taken
at market value) in securities of companies that, including their
predecessors, have been in operation less than three years; (ii) purchase
or sell interests in oil and gas or other mineral exploration or
development programs or purchase or sell oil, gas or mineral leases; (iii)
invest in securities issued by other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer commission or profit, other than
a customary brokerage commission, is involved and only if immediately
thereafter not more than 10% of that Fund's total assets (taken at market
value) would be invested in such securities.
Unless otherwise stated, the investment policies and limitations
contained in this Statement of Additional Information are not fundamental,
and can be changed without shareholder approval.
The following information applies to each Fund:
Foreign Securities
The costs associated with investment in foreign issuers,
including withholding taxes, brokerage commissions and custodial fees, are
higher than those associated with investment in domestic issuers. In
addition, foreign securities transactions may be subject to difficulties
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associated with the settlement of such transactions. Delays in settlement
could result in temporary periods when assets of a Fund are uninvested and
no return is earned thereon. The inability of a Fund to make intended
security purchases due to settlement problems could cause a Fund to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result in losses to a Fund due
to subsequent declines in value of the portfolio security or, if a Fund
has entered into a contract to sell the security, could result in
liability to the purchaser.
Since each Fund may invest in securities denominated in
currencies other than the U.S. dollar and since each Fund may hold foreign
currencies, a Fund may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rates between such
currencies and the U.S. dollar. Changes in the currency exchange rates
may influence the value of each Fund's shares, and also may affect the
value of dividends and interest earned by that Fund and gains and losses
realized by that Fund. Exchange rates are determined by the forces of
supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments, other economic and
financial conditions, government intervention, speculation and other
factors.
In addition to purchasing foreign securities, each Fund may
invest in American Depositary Receipts ("ADRs"). Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use
in the domestic market. Usually issued by a U.S. bank or trust company,
ADRs are receipts that demonstrate ownership of the underlying securities.
For purposes of each Fund's investment policies and limitations, ADRs are
considered to have the same classification as the securities underlying
them.
Illiquid Securities
Each Fund may invest up to 10% 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 restricted
securities other than those the Adviser has determined are liquid pursuant
to guidelines established by each Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated
transactions, pursuant to a registration statement filed under the
Securities Act of 1933, or pursuant to an exemption from registration. A
Fund may be required to pay part or all of the costs of such registration,
and a considerable period may elapse between the time a decision is made
to sell a restricted security and the time the registration statement
becomes effective. Judgment plays a greater role in valuing illiquid
securities than those for which a more active market exists.
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<PAGE>
SEC regulations permit the sale of certain restricted securities
to qualified institutional buyers. The Adviser, acting pursuant to
guidelines established by the 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.
Risks of Lower Rated Debt Securities
Debt securities rated B by Moody's Investors Service, Inc.
("Moody's") are deemed by Moody's to generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small. Standard & Poor's Ratings Group ("S&P") states that debt
rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
Lower rated debt securities are especially affected by adverse
changes in the industries in which the issuers are engaged and by changes
in the financial condition of the issuers. Highly leveraged issuers may
also experience financial stress during periods of rising interest rates.
The market for lower rated debt securities expanded rapidly in
the 1980's, which growth paralleled a long economic expansion. In the late
1980's, the prices of many lower rated debt securities declined,
indicating that many issuers of such securities might experience financial
difficulties. The yields on lower rated debt securities rose
dramatically, reflecting the risk that holders of such securities could
lose a substantial portion of their value as a result of the issuers'
financial restructuring or default. There can be no assurance that such
declines will not recur.
The market for lower rated debt securities generally is thinner
and less active than that for higher quality securities, which may limit
each Fund's ability to sell such securities at fair value. Judgment plays
a greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower rated securities, especially in a thinly traded
market.
If an investment grade security purchased by a Fund is
subsequently given a rating below investment grade, the Adviser will
consider that fact in determining whether to retain that security in that
Fund's portfolio.
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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 Standard & Poor's 500 Composite Stock Price Index ("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 in liquid high-quality
debt securities, such as U.S. government 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 its 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.
6
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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
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<PAGE>
ability to establish and close out positions on the exchanges is subject
to the maintenance of a liquid secondary market.
Each Fund may invest up to 10% of its assets in illiquid
securities. The term "illiquid securities" includes purchased OTC
options. Assets used as cover for OTC options written by the Fund also
will be deemed illiquid securities, unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC options
it writes for a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the
option.
Cover for Options and Futures Strategies
Each Fund will not use leverage in its hedging strategies
involving options and futures contracts. Each Fund will hold securities,
options or futures positions whose values are expected to offset ("cover")
its obligations under the transactions. Each Fund will not enter into
hedging strategies involving options and futures contracts that expose the
Fund to an obligation to another party unless it owns either (i) an
offsetting ("covered") position in securities, options or futures
contracts or (ii) has cash, receivables and liquid debt securities with a
value sufficient at all times to cover its potential obligations. Each
Fund will comply with guidelines established by the SEC with respect to
coverage of these strategies by mutual funds and, if the guidelines so
require, will set aside cash and/or liquid, high-grade debt 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
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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.
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
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<PAGE>
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.
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Also as a non-fundamental policy, each Fund will purchase and
write puts and calls on securities, stock index futures or options on
stock index futures, or on financial futures, only if: (a) (i) such
options or futures are offered through the facilities of a national
securities association approved by the Commissioner under Rule 260.105.35
of the California Blue Sky Regulations or are listed on a national
securities or commodities exchange or (ii) such options are OTC options
and (A) the OTC options involved are not readily available on an exchange
market, (B) at the time of purchase of any OTC option there is, in the
judgment of the Fund's investment adviser, an active OTC market which will
provide liquidity and pricing for such options and (C) any dealer involved
in the purchase or sale of the OTC option has a net worth of at least $20
million as reported on its most recent financial statement; (b) the
aggregate premiums paid on all such options which are held by the Fund at
any time do not exceed 20% of that Fund's total net assets; and (c) the
aggregate margin deposits required on all such futures or options on
futures contracts held at any time do not exceed 5% of the Fund's total
assets.
Under regulations adopted by the Commodity Futures Trading
Commission ("CFTC"), futures contracts and related options may be used by
each Fund (a) for hedging purposes, without quantitative limits, and (b)
for other purposes to the extent that the amount of margin deposit on all
such non-hedging futures contacts owned by the Fund, together with the
amount of premiums paid by that Fund on all such non-hedging options held
on futures contracts, does not exceed 5% of the market value of that
Fund's total assets.
The foregoing limitations, as well as those set forth in each
Fund's prospectus regarding the Fund's investment in futures and related
options transactions, do not apply to options attached to, or acquired or
traded together with their underlying securities, and do not apply to
securities that incorporate features similar to options, such as rights,
certain debt securities and indexed securities.
The above limitations on each Fund's investments in futures
contracts and options may be changed as regulatory agencies permit.
However, each Fund will not modify the above limitations to increase its
permissible futures and options activities without supplying additional
information, as appropriate, in a current Prospectus or Statement of
Additional Information.
Indexed Securities
Indexed securities are securities whose prices are indexed to the
prices of securities indexes, currencies or other financial statistics.
Indexed securities typically are debt securities or deposits whose value
at maturity and/or coupon rate is determined by reference to a specific
11
<PAGE>
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 Adviser will only
purchase indexed securities of issuers which it 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 total assets in indexed securities. Indexed
securities may fluctuate according to a multiple of changes in the
underlying instrument and, in that respect, have a leverage-like effect on
a Fund.
Forward Currency Contracts
Each Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. Each Fund will not
speculate with forward currency contracts or foreign currencies.
Each Fund may enter into forward currency contracts with respect
to specific transactions. For example, when a Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency,
or when a Fund anticipates the receipt in a foreign currency of dividend
or interest payments on a security that it holds, the Fund may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment, as the case may be, by entering into a forward
contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the
underlying transaction. A Fund will thereby be able to protect itself
against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the
payment is declared, and the date on which such payments are made or
received.
Each Fund also may use forward currency contracts in connection
with portfolio positions to lock-in the U.S. dollar value of those
positions or to shift the Fund's exposure to foreign currency fluctuations
from one country to another. For example, when the Adviser believes that
the currency of a particular foreign country may suffer a substantial
decline relative to the U.S. dollar or another currency, it may enter into
a forward currency contract to sell the amount of the former foreign
currency approximating the value of some or all of a Fund's securities
12
<PAGE>
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 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
liquid, high-grade debt 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
13
<PAGE>
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.
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. Each Fund presently does not intend to lend more than 5% of
its portfolio securities at any given time.
Warrants
Although not a fundamental policy subject to shareholder vote, so
long as a Fund's shares continue to be registered in certain states, that
Fund may not invest more than 5% of the value of its net assets, taken at
the lower of cost or market value, in warrants or invest more than 2% of
the value of such net assets in warrants not listed on the New York or
American Stock Exchanges.
14
<PAGE>
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting each Fund and its shareholders. Investors are
urged to consult their own tax advisers for more detailed information and
for information regarding any federal, state or local taxes that might be
applicable to them.
General
Each Fund intends to continue to qualify for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code of
1986, as amended ("Code"). In order to continue to qualify for that
treatment, each Fund must distribute annually to its shareholders at least
90% of its investment company taxable income (generally, net investment
income plus any net short-term capital gain and any net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. For each Fund, these requirements
include the following: (1) at least 90% of the Fund's gross income each
taxable year must be derived from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition
of securities or foreign currencies, or other income (including gains from
options, futures or forward currency contracts) derived with respect to
its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any
of the following, that were held for less than three months -- options or
futures contracts, or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); (3) at the close of each quarter of
the Fund's taxable year, at least 50% of the value of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed
5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and (4) at
the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in the securities (other
than U.S. government securities or the securities of other RICs) of any
one issuer.
Each Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for that year and
capital gain net income for the one-year period ending on October 31 of
that year, plus certain other amounts.
Dividends and interest received by each Fund may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
15
<PAGE>
possessions that would reduce the yield on its securities. Tax
conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign
investors.
Dividends and Other Distributions
Dividends and other distributions declared by a Fund in December
of any year and payable to shareholders of record on a date in that month
will be deemed to have been paid by the Fund and received by the
shareholders on December 31 if the distributions are paid by the Fund
during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company
taxable income (whether paid in cash or reinvested in Fund shares) may be
eligible for the dividends-received deduction allowed to corporations.
The eligible portion for any Fund may not exceed the aggregate dividends
received by that Fund for the taxable year from domestic corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax. Distributions of net capital gain (the excess of
net long-term capital gain over net short-term capital loss) made by each
Fund do not qualify for the dividends-received deduction.
If Fund shares are sold at a loss after being held for six months
or less, the loss will be treated as a long-term, instead of a short-term,
capital loss to the extent of any capital gain distributions received on
those shares.
Passive Foreign Investment Companies
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general,
meets either of the following tests: (1) at least 75% of its gross income
is passive or (2) an average of at least 50% of its assets produce, or are
held for the production of, passive income. Under certain circumstances,
a Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on
disposition of that stock (collectively "PFIC income"), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly,
will not be taxable to it to the extent that income is distributed to its
shareholders.
16
<PAGE>
Pursuant to proposed regulations, open-end RICs, such as the
Funds, would be entitled to elect to "mark-to-market" their stock in
certain PFICs. "Marking-to-market," in this context, means recognizing as
gain for each taxable year the excess, as of the end of that year, of the
fair market value of such a PFIC's stock over the adjusted basis in that
stock (including mark-to-market gain for each prior year for which an
election was in effect).
Options, Futures, Forward Currency Contracts and Foreign Currencies
The use of hedging instruments, such as writing (selling) and
purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income
tax purposes the character and timing of recognition of the gains and
losses each Fund realizes in connection therewith.
Income from foreign currencies (except certain gains therefrom
that may be excluded by future regulations), and income from transactions
in options, futures and forward currency contracts derived by each Fund
with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income
Requirement. However, income from the disposition of options and futures
contracts (other than those on foreign currencies) will be subject to the
Short-Short Limitation if they are held for less than three months.
Income from the disposition of foreign currencies, and options, futures
and forward contracts thereon, that are not directly related to a Fund's
principal business of investing in securities (or options and futures with
respect thereto) also will be subject to the Short-Short Limitation if
they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining
whether the Fund satisfies the Short-Short Limitation. Thus, only the net
gain (if any) from the designated hedge will be included in gross income
for purposes of this limitation. To the extent this treatment is not
available, a Fund may be forced to defer the closing out of certain
options, futures and forward currency contracts beyond the time when it
otherwise would be advantageous to do so, in order for it to continue to
qualify as a RIC.
Regulated futures contracts and options that are subject to
Section 1256 of the Code (collectively, "Section 1256 contracts") and are
held by a Fund at the end of each taxable year will be required to be
"marked-to-market" for federal income tax purposes (that is, treated as
17
<PAGE>
having been sold at that time at market value). Any unrealized gain or
loss recognized under this mark-to-market rule will be added to any
realized gains and losses on Section 1256 contracts actually sold by the
Fund during the year, and the resulting gain or loss will be treated
(without regard to the holding period) as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. These rules may operate to
increase the amount of dividends, which will be taxable to shareholders,
that must be distributed to meet the Distribution Requirement and avoid
imposition of the Excise Tax, without providing the cash with which to
make the distributions. Each Fund may elect to exclude certain
transactions from Section 1256, although doing so may have the effect of
increasing the relative proportion of short-term capital gain (taxable as
ordinary income when distributed to a Fund's shareholders).
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 upon the exercise plus the
premium received when the option was written exceeds or is less than the
basis of the underlying security.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares
and Navigator Shares. Primary Shares are available from Legg Mason and
certain of its affiliates. Navigator Shares are currently offered for
sale only to Institutional Clients, to clients of Trust Company for which
Trust Company exercises discretionary investment management
responsibility, to qualified retirement plans managed on a discretionary
basis and having net assets of at least $200 million, and to The Legg
Mason Profit Sharing Plan and Trust. 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 additional 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 prepare a check each month drawn on your checking account. Each
month the transfer agent will send a check to your bank for collection,
18
<PAGE>
and the proceeds of the check will be used to buy Primary Shares at the
per share net asset value determined on the day the check is sent to 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 additional Primary
Shares through a plan permitting transfers of funds from a financial
institution. Certain financial institutions may allow the investor, on a
pre-authorized basis, to have $50 or more automatically transferred
monthly for investment in shares of a Fund to:
Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is
drawn on, the investor may be subject to extra charges in order to cover
collection costs. These charges may be deducted from the investor's
shareholder account.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or
more, you may also elect to make systematic withdrawals from your Fund
account of a minimum of $50 on a monthly basis. The amounts paid to you
each month are obtained by redeeming sufficient shares from your account
to provide the withdrawal amount that you have specified. The Systematic
Withdrawal Plan is not currently available for shares held in an
Individual Retirement Account ("IRA"), Self-Employed Individual Retirement
Plan ("Keogh Plan"), Simplified Employee Pension Plan ("SEP") or other
qualified retirement plan. You may change the monthly amount to be paid
to you without charge not more than once a year by notifying Legg Mason or
the affiliate with which you have an account. Redemptions will be made at
the Primary Shares' net asset value per share determined as of the close
of regular trading of the New York Stock Exchange ("Exchange") (normally
4:00 p.m., eastern time) ("close of the Exchange") on the first day of
each month. If the Exchange is not open for business on that day, the
shares will be redeemed at the per share net asset value determined as of
the close of regular trading of the Exchange on the preceding business
day. The check for the withdrawal payment will usually be mailed to you
on the next business day following redemption. If you elect to
participate in the Systematic Withdrawal Plan, dividends and other
distributions on all Primary Shares in your account must be automatically
reinvested in Primary Shares. You may terminate the Systematic Withdrawal
Plan at any time without charge or penalty. Each Fund, its transfer
agent, and Legg Mason Wood Walker, Incorporated ("Legg Mason") also
reserve the right to modify or terminate the Systematic Withdrawal Plan at
any time.
19
<PAGE>
Withdrawal payments are treated as a sale of shares rather than
as a dividend or a capital gain distribution. These payments are taxable
to the extent that the total amount of the payments exceeds the tax basis
of the shares sold. If the periodic withdrawals exceed reinvested
dividends and distributions, the amount of your original investment may be
correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund
in which you have an account if you maintain a Systematic Withdrawal Plan,
because you may incur tax liabilities in connection with such purchases
and withdrawals. Each Fund will not knowingly accept purchase orders from
you for additional shares if you maintain a Systematic Withdrawal Plan
unless your purchase is equal to at least one year's scheduled
withdrawals. In addition, if you maintain a Systematic Withdrawal Plan
you may not make periodic investments under the Future First Systematic
Investment Plan.
Other Information Regarding Redemption
The date of payment for redemption may not be postponed for more
than seven days, and the right of redemption may not be suspended, by a
Fund or its distributor except (i) for any period during which the
Exchange is closed (other than for customary weekend and holiday
closings), (ii) when trading in markets the Fund normally utilizes is
restricted, or an emergency, as defined by rules and regulations of the
SEC, exists, making disposal of the Fund's investments or determination of
its net asset value not reasonably practicable, or (iii) for such other
periods as the SEC by regulation or order may permit for protection of
each Fund's shareholders. In the case of any such suspension, you may
either withdraw your request for redemption or receive payment based upon
the net asset value next determined after the suspension is lifted.
Each Fund reserves the right, under certain conditions, to honor
any request or combination of requests for redemption from the same
shareholder in any 90-day period, totalling $250,000 or 1% of the net
assets of the Fund, whichever is less, by making payment in whole or in
part by 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 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
20
<PAGE>
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas. As described in the Prospectuses,
securities for which market quotations are readily available are valued at
current market value. Securities traded on an exchange or NASD National
Market System securities are normally valued at last sale prices. Other
over-the-counter securities, and securities traded on exchanges for which
there is no sale on a particular day (including debt securities), are
valued at the mean of latest closing bid and asked prices. Short-term
securities, except commercial paper, are valued at cost. Commercial paper
is valued at amortized cost. Securities and other assets quoted in
foreign currencies will be valued in U.S. dollars based on the currency
exchange rates prevailing at the time of the valuation. All other
securities are valued at fair value as determined by or under the
direction of the appropriate Fund's Board of Directors. Premiums received
on the sale of call options are included in the net asset value of each
Class, and the current market value of options sold by a Fund will be
subtracted from net assets of each Class.
PERFORMANCE INFORMATION
The following tables show the value, as of the end of each fiscal
year, of a hypothetical investment of $10,000 made in each Fund at
commencement of operations of each class of Fund shares. The tables
assume that all dividends and other distributions are reinvested in each
respective Fund. They include the effect of all charges and fees
applicable to the respective class of shares the Fund has paid. (There
are no fees for investing or reinvesting in the Funds, 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.
21
<PAGE>
<TABLE>
<CAPTION>
Value Trust:
Primary Shares
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
------------ ---------------------------- ---------------------- ------------
<S> <C> <C> <C>
1983* $16,160 $ 241 $16,401
1984 18,870 555 19,425
1985 23,583 1,100 24,683
1986 32,556 1,954 34,510
1987 35,503 2,421 37,924
1988 32,268 2,461 34,729
1989 37,650 3,459 41,109
1990 39,891 4,399 44,290
1991 37,701 5,313 43,014
1992 44,210 7,204 51,414
1993 50,184 8,819 59,003
1994 52,789 9,548 62,337
1995 57,817 10,610 68,427
</TABLE>
* April 16, 1982 (commencement of operations) to March 31, 1983.
22
<PAGE>
<TABLE>
<CAPTION>
Navigator Shares
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
----------- ---------------------------- ---------------------- -----------
<S> <C> <C> <C>
1995* $10,805 $6 $10,811
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not
reinvested dividends and other distributions, the total value of the
hypothetical investment as of March 31, 1995 would have been $40,420, and
the investor would have received a total of $13,797 in distributions. If
the Adviser had not waived or reimbursed certain Fund expenses in the
1983-1995 fiscal years, returns would have been lower.
23
<PAGE>
<TABLE>
<CAPTION>
Total Return Trust:
Primary Shares
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
----------- ---------------------------- ---------------------- -----------
<S> <C> <C> <C>
1986* $10,780 - $10,780
1987 11,673 $ 211 11,884
1988 10,295 380 10,675
1989 11,690 603 12,293
1990 11,875 846 12,721
1991 11,499 1,216 12,715
1992 13,885 1,830 15,715
1993 16,234 2,605 18,839
1994 16,637 3,064 19,701
1995 16,593 3,482 20,075
</TABLE>
* November 21, 1985 (commencement of operations) to March 31, 1986.
24
<PAGE>
<TABLE>
<CAPTION>
Navigator Shares
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
----------- ---------------------------- ---------------------- -----------
<S> <C> <C> <C>
1995* $10,203 $160 $10,363
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not
reinvested dividends and other distributions, the total value of the
hypothetical investment as of March 31, 1995 would have been $12,790, and
the investor would have received a total of $4,940 in distributions. If
the Adviser had not waived or reimbursed certain Fund expenses in the
1986-1995 fiscal years, returns would have been lower.
25
<PAGE>
<TABLE>
<CAPTION>
Special Investment Trust:
Primary Shares
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
----------- ---------------------------- ---------------------- -----------
<S> <C> <C> <C>
1986* $11,530 - $11,530
1987 13,051 $ 23 13,074
1988 11,107 113 11,220
1989 12,982 144 13,126
1990 14,890 253 15,143
1991 17,777 615 18,392
1992 21,249 905 22,154
1993 23,528 953 24,481
1994 28,511 1,197 29,708
1995 26,707 1,108 27,815
</TABLE>
* December 30, 1985 (commencement of operations) to March 31, 1986.
26
<PAGE>
<TABLE>
<CAPTION>
Navigator Shares
Value of Original Shares Value of Shares
Plus Shares Obtained Through Acquired Through
Reinvestment of Capital Gain Reinvestment of Income
Fiscal Year Distributions Dividends Total Value
----------- ---------------------------- ---------------------- -----------
<S> <C> <C> <C>
1995* $10,481 - $10,481
</TABLE>
* December 1, 1994 (commencement of operations) to March 31, 1995.
With respect to Primary Shares, if the investor had not
reinvested dividends and other distributions, the total value of the
hypothetical investment as of March 31, 1995 would have been $19,960, and
the investor would have received a total of $4,610 in distributions. If
the Adviser had not waived or reimbursed certain Fund expenses in the
1986-1995 fiscal years, returns would have been lower.
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) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at
least to the last day of the most recent quarter prior to submission of
the Performance Advertisements for publication. Total return, or "T" in
the formula above, is computed by finding the average annual change in the
value of an initial $1,000 investment over the period. In calculating the
ending redeemable value, all dividends and other distributions by a Fund
are assumed to have been reinvested at net asset value on the reinvestment
dates during the period.
From time to time each Fund may compare the performance of a Class of
Shares in advertising and sales literature to the performance of other
27
<PAGE>
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
28
<PAGE>
Security benefits, mortality statistics and other relevant information.
Each Fund may use other recognized sources as they become available.
Each Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets
and to show the value of a hypothetical investment in a capital market.
Ibbotson relies on different indices to calculate the performance of
common stocks, corporate and government bonds and Treasury bills.
Each Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is
represented by the performance of an appropriate market index, such as the
S&P 500 and the performance of bonds is represented by a nationally
recognized bond index, such as the Lehman Brothers Long-Term Government
Bond Index.
Each Fund may also include in advertising biographical information on
key investment and managerial personnel.
Each Fund may advertise examples of the potential benefits of
periodic investment plans, such as dollar cost averaging, a long-term
investment technique designed to lower average cost per share. Under such
a plan, an investor invests in a mutual fund at regular intervals a fixed
dollar amount thereby purchasing more shares when prices are low and fewer
shares when prices are high. Although such a plan does not guarantee
profit or guard against loss in declining markets, the average cost per
share could be lower than if a fixed number of shares were purchased at
the same intervals. Investors should consider their ability to purchase
shares through low price levels.
Each Fund may discuss Legg Mason's tradition of service. Since 1899,
Legg Mason and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason affiliates serve as investment advisers for private
accounts and mutual funds with assets of more than $17 billion as of March
31, 1995.
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
29
<PAGE>
Trust's total return ranked 273 among 1536 general equity funds it
measured during the one year ended June 30, 1995. For the five years
ended June 30, 1995, Value Trust's total return ranked 349 among 674
general equity funds and for the ten years ended June 30, 1995, Value
Trust's total return ranked 288 among 384 general equity funds. Of
course, there can be no assurance that results similar to those achieved
by Value Trust in the past will be realized in future periods. From time
to time, performance rankings and ratings as reported in national
financial publications such as Money Magazine, Forbes and Barron's may be
used in describing Value Trust's performance.
TAX-DEFERRED RETIREMENT PLANS
As noted in the Prospectus for Primary Shares, an investment in those
shares may be appropriate for IRAs, Keogh Plans, SEPs and other qualified
retirement plans. In general, income earned through the investment of
assets of qualified retirement plans is not taxed to the beneficiaries of
such plans until the income is distributed to them. Primary Share
investors who are considering establishing such a plan should consult
their attorneys or other tax advisers with respect to individual tax
questions. The option of investing in these plans with respect to Primary
Shares through regular payroll deductions may be arranged with a Legg
Mason or affiliated investment executive and your employer. Additional
information with respect to these plans is available upon request from any
Legg Mason or affiliated investment executive.
Individual Retirement Account -- IRA
Certain Primary Share investors may obtain tax advantages by
establishing IRAs. Specifically, if neither you nor your spouse is an
active participant in a qualified employer or government retirement plan,
or if either you or your spouse is an active participant and your adjusted
gross income does not exceed a certain level, you may deduct cash
contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. In
addition, if your spouse is not employed and you file a joint return, you
may establish a separate IRA for your spouse and contribute up to a total
of $2,250 to the two IRAs, provided that the contribution to either does
not exceed $2,000. If you and your spouse are both employed and neither
of you is an active participant in a qualified employer or government
retirement plan and you establish separate IRAs, you each may contribute
all of your earned income, up to $2,000 each and thus may together receive
tax deductions of up to $4,000 for contributions to your IRAs. If your
employer's plan permits voluntary contributions and meets certain
requirements, you may make voluntary contributions to that plan that are
treated as deductible IRA contributions.
Even if you are not in one of the categories described in the
preceding paragraph, you may find it advantageous to invest in Primary
Shares through IRA contributions, up to certain limits, because all
dividends and other distributions on your Fund shares are then not
immediately taxable to you or the IRA; they become taxable only when
distributed to you. To avoid penalties, your interest in an IRA must be
distributed, or start to be distributed, to you not later than the end of
the taxable year in which you attain age 70 1/2. Distributions made
30
<PAGE>
before age 59 1/2, in addition to being taxable, generally are subject to
a penalty equal to 10% of the distribution, except in the case of death or
disability or where the distribution is rolled over into another qualified
plan or certain other situations.
Self-Employed Individual Retirement Plan -- Keogh Plan
Legg Mason makes available to self-employed individuals a Plan and
Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. Primary Share investors have the right to use a bank of their
own choice to provide these services at their own cost. There are
penalties for distributions from a Keogh Plan prior to age 59 1/2, except
in the case of death or disability.
Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain
periodic payments) from the foregoing retirement plans (except IRAs and
SEPs), unless the recipient transfers the distribution directly to an
"eligible retirement plan" (including IRAs and other qualified plans) that
accepts those distributions. Other distributions generally are subject to
regular wage withholding at the rate of 10% (depending on the type and
amount of the distribution), unless the recipient elects not to have any
withholding apply.
THE FUNDS' DIRECTORS AND OFFICERS
Each Fund's officers are responsible for the operation of the Fund
under the direction of the Board of Directors. The officers and directors
of the Funds and their principal occupations during the past five years
are set forth below. An asterisk (*) indicates officers and/or directors
who are "interested persons" of the Funds as defined by the Investment
Company Act of 1940 ("1940 Act"). The business address of each officer
and director is 111 South Calvert Street, Baltimore, Maryland 21202,
unless otherwise indicated.
RAYMOND A. MASON* [58], Chairman of the Board and Director of each
Fund; 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.* [56], President and Director of each Fund; Vice
Chairman and Director of Legg Mason, Inc. and Legg Mason Wood Walker,
Incorporated; Director of Legg Mason Fund Adviser, Inc. and Western Asset
Management Company (each a registered investment adviser); Officer and/or
Director of various other affiliates of Legg Mason, Inc.; Chairman of the
31
<PAGE>
Board and Director of three Legg Mason funds; Chairman of the Board,
President and Trustee of one Legg Mason fund; Chairman of the Board and
Trustee of one Legg Mason fund.
RICHARD G. GILMORE [68], 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 manufacture and sale of decorative paper products, business
forms, and specialty metal packaging); Director of PECO Energy Company
(formerly Philadelphia Electric Company); Director of four other Legg
Mason funds; and Trustee of one Legg Mason fund. 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.
CHARLES F. HAUGH [69], Director of each Fund; 14201 Laurel Park
Drive, Suite 104, Laurel, Maryland. Real Estate Developer and Investor;
President and Director of Resource Enterprises, Inc. (real estate
brokerage); Chairman of Resource Realty LLC (management of retail and
office space); Partner in Greater Laurel Health Park Ltd. Partnership
(real estate investment and development); Director of four other Legg
Mason funds; and Trustee of two Legg Mason funds.
ARNOLD L. LEHMAN [51], Director of each Fund; The Baltimore Museum of
Art, Art Museum Drive, Baltimore, Maryland. Director of the Baltimore
Museum of Art; Director of four other Legg Mason funds; Trustee of two
Legg Mason funds.
JILL E. McGOVERN [50], Director of each Fund; 1500 Wilson Boulevard,
Arlington, Virginia. Chief Executive Officer of the Marrow Foundation.
Director of four other Legg Mason funds; Trustee of two Legg Mason funds.
Formerly: Executive Director of the Baltimore International Festival
(January 1991 - March 1993); and Senior Assistant to the President of The
Johns Hopkins University (1986-1991).
T. A. RODGERS [60], Director of each Fund; 2901 Boston Street,
Baltimore, Maryland. Principal, T. A. Rodgers & Associates (management
consulting); Director of four other Legg Mason funds; Trustee of one Legg
Mason fund. Formerly: Director and Vice President of Corporate
Development, Polk Audio, Inc. (manufacturer of audio components).
EDWARD A. TABER, III* [51], Director of each Fund; Executive Vice
President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice
Chairman and Director of Legg Mason Fund Adviser, Inc.; Director of one
other Legg Mason fund; President and Director of two Legg Mason funds;
Trustee of one Legg Mason fund; Vice President of Worldwide Value Fund,
Inc. Formerly: Executive Vice President of T. Rowe Price-Fleming
32
<PAGE>
International, Inc. (1986-1992) and Director of the Taxable Fixed Income
Division at T. Rowe Price Associates, Inc. (1973-1992).
The executive officers of the Funds, other than those who also serve
as directors, are:
MARIE K. KARPINSKI* [46], Vice President and Treasurer of each Fund;
Treasurer of the Adviser; Vice President and Treasurer of six other Legg
Mason funds; and Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice
President of Legg Mason.
KATHI D. GLENN* [30], Secretary and Assistant Treasurer of Special
Investment Trust; Secretary and Assistant Treasurer of two other Legg
Mason funds.
SUSAN T. LIND* [53], Secretary and Assistant Treasurer of Value
Trust, Inc.; Secretary of one other Legg Mason fund; Assistant Secretary
of Worldwide Value Fund, Inc.
BLANCHE P. ROCHE* [47], Assistant Secretary and Assistant Vice
President of each Fund; Assistant Secretary and Assistant Vice President
of five other Legg Mason funds; employee of Legg Mason since 1991.
Formerly: Manager of Consumer Financial Services, Primerica Corporation
(1989-1991).
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Haugh, Gilmore, Lehman, Rodgers and Dr. McGovern.
Officers and directors of a Fund who are "interested persons" of the
Fund receive no salary or fees from the Fund. Each Director of a Fund who
is not an interested person of the Fund ("Independent Directors")receives
a fee of $400 annually for serving as a director, and a fee of $400 for
each meeting of the Board of Directors attended by him or her. On April
30, 1995, the directors and officers of each Fund beneficially owned in
the aggregate less than 1% of that Fund's outstanding shares.
The following table provides certain information relating to the
compensation of the Funds' directors for the fiscal year ended March 31,
1995.
33
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or Retirement Total Compensation
Aggregate Benefits Accrued as Estimated Annual From Each Fund and
Name of Person and Compensation From Part of Each Fund's Benefits Upon Fund Complex Paid
Position Each Fund* Expenses Retirement to Directors**
------------------- ---------------- ---------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Raymond A. Mason -
Chairman of the Board
and Director None N/A N/A None
John F. Curley, Jr. -
President and Director None N/A N/A None
Edward A. Taber, III -
Director None N/A N/A None
Marie K. Karpinski -
Vice President and
Treasurer None N/A N/A None
Richard G. Gilmore -
Director $2,000 N/A N/A $21,600
Charles F. Haugh -
Director $2,000 N/A N/A $23,600
Arnold L. Lehman -
Director $2,000 N/A N/A $23,600
Jill E. McGovern -
Director $1,600 N/A N/A $23,200
T. A. Rodgers -
Director $2,000 N/A N/A $21,600
</TABLE>
* Represents fees paid to each director during the fiscal year
ended March 31, 1995.
** Represents aggregate compensation paid to each director during
the calendar year ended December 31, 1994.
34
<PAGE>
THE FUNDS' INVESTMENT ADVISER
The Adviser, a Maryland Corporation, is located at 111 South
Calvert Street, Baltimore, Maryland 21202. The Adviser is a wholly owned
subsidiary of Legg Mason, Inc., which is also the parent of Legg Mason.
The Adviser serves as each Fund's investment adviser and manager under an
Investment Advisory and Management Agreement ("Advisory Agreement"). The
Advisory Agreement for Value Trust originally became effective as of April
19, 1982 and was most recently approved by the shareholders of Value Trust
on July 20, 1984. The Advisory Agreement for Total Return Trust
originally became effective as of August 5, 1985 and was most recently
approved by the shareholders of Total Return Trust on July 17, 1986. The
Advisory Agreement for Special Investment Trust originally became
effective as of December 10, 1985 and was most recently approved by the
shareholders of Special Investment Trust on July 17, 1986.
The Advisory Agreement for each Fund was most recently approved
by the Fund's Board of Directors, including a majority of the directors
who are not "interested persons" of the Fund or the Adviser, on October
21, 1994.
Each Advisory Agreement provides that, subject to overall
direction by the Fund's Board of Directors, the Adviser manages the
investment and other affairs of the Fund. The Adviser is responsible for
managing each Fund consistent with the Fund's investment objective and
policies described in its Prospectuses and this Statement of Additional
Information. The Adviser also is obligated to (a) furnish the Fund with
office space and executive and other personnel necessary for the operation
of each Fund; (b) supervise all aspects of each Fund's operations; (c)
bear the expense of certain informational and purchase and redemption
services to each Fund's shareholders; (d) arrange, but not pay for, the
periodic updating of prospectuses, proxy material, tax returns and reports
to shareholders and state and federal regulatory agencies; and (e) report
regularly to each Fund's officers and directors. In addition, the Adviser
paid each Fund's organizational expenses and has agreed to reimburse Value
Trust and Special Investment Trust for auditing fees and compensation of
those Funds' independent directors. The Adviser and its affiliates pay
all compensation of directors and officers of each Fund who are officers,
directors or employees of the Adviser. Each Fund pays all of its expenses
which are not expressly assumed by the Adviser. 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
35
<PAGE>
obligation to indemnify its directors and officers with respect to
litigation.
The Adviser receives for its services to each Fund a management
fee, calculated daily and payable monthly. The Adviser receives a fee
from Value Trust at an annual rate of 1% of the average daily net assets
of that Fund for the first $100 million of average daily net assets, 0.75%
of average daily net assets between $100 million and $1 billion, and 0.65%
of average daily net assets exceeding $1 billion. The Adviser receives a
fee from Total Return Trust at an annual rate of 0.75% of the average
daily net assets of that Fund. The Adviser receives a fee from Special
Investment Trust 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 and
0.75% of average daily net assets exceeding $100 million. The advisory
fee for each Fund is higher than fees paid by most other funds to their
investment advisers. The advisory fee of each Fund may be reduced under
regulations of various states where Fund shares are qualified for sale
which impose limitations on the annual expense ratio of each Fund. The
most restrictive annual expense limitation currently requires that the
Adviser reimburse each Fund for certain expenses, including the advisory
fees received by it (but, excluding interest, taxes, brokerage fees and
commissions, distribution fees, certain other expenses and extraordinary
charges) in any fiscal year in which a Fund's expenses exceed 2.5% of the
first $30 million of that Fund's average net assets, 2.0% of the next $70
million of average net assets, and 1.5% of average net assets in excess of
$100 million. During the fiscal years ended March 31, 1995, 1994 and
1993, advisory fees of $7,519,155, $6,847,679 and $6,124,621, respectively
were received from Value Trust; $1,502,358, $1,219,883 and $677,278,
respectively were received from Total Return Trust; and $4,849,166,
$3,581,718 and $2,066,295, respectively were received from Special
Investment Trust.
Under each Advisory Agreement, the Adviser 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, 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 thereunder.
Each Advisory Agreement terminates automatically upon assignment
and is terminable at any time without penalty by vote of a Fund's Board of
Directors, by vote of a majority of the Fund's outstanding voting
securities, or by the Adviser, 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 both parties to the Agreement.
Under each Advisory Agreement, the Fund has the non-exclusive
right to use the name "Legg Mason" until that Agreement is terminated, or
until the right is withdrawn in writing by the Adviser.
36
<PAGE>
To mitigate the possibility that a Fund will be affected by
personal trading of employees, each Corporation and the Adviser 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, 1995 and 1994,
the portfolio turnover rates for Value Trust were 20.1% and 25.5%,
respectively; the portfolio turnover rates for Total Return Trust were
61.9% and 46.6%, respectively; and the portfolio turnover rates for
Special Investment Trust were 27.5% and 16.7%, respectively.
Under the Advisory Agreement with each Fund, the 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 the Adviser also takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below),
and any risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution,
the Adviser may give consideration to research, statistical and other
services furnished by brokers or dealers to the 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 the Adviser in connection with services to clients other than
the Fund whose brokerage generated the service. The Adviser'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
37
<PAGE>
"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, 1995, 1994 and 1993, Legg Mason received no brokerage
commissions from Value Trust, no brokerage commissions from Total Return
Trust, and $0, $2,000 and $0, respectively, from Special Investment Trust.
Value Trust paid total brokerage commissions of $397,268, $518,233 and
$520,231, respectively; Total Return Trust paid total brokerage
commissions of $360,860, $349,967 and $176,123, respectively; and Special
Investment Trust paid total brokerage commissions of $883,607, $410,115
and $262,020, respectively, during the fiscal years ended March 31, 1995,
1994 and 1993.
Except as permitted by SEC rules or orders, each Fund may not buy
securities from, or sell securities to, Legg Mason or its affiliated
persons as principal. Each Fund's Board of Directors has adopted
procedures in conformity with Rule 10f-3 under the 1940 Act whereby the
Fund may purchase securities that are offered in certain underwritings in
which Legg Mason or any of its affiliated persons is a participant. These
procedures, among other things, limit each Fund's investment in the amount
of securities of any class of securities offered in an underwriting in
which Legg Mason or any of its affiliated persons is a participant so
that: (i) a Fund together with all other registered investment companies
advised by the Adviser, may not purchase more than 4% of the principal
amount of the offering of such class or $500,000 in principal amount,
whichever is greater, but in no event greater than 10% of the principal
amount of the offering; and (ii) the consideration to be paid by a Fund in
purchasing the securities being offered may not exceed 3% of the total
assets of that Fund. In addition, a Fund may not purchase securities
during the existence of an underwriting if Legg Mason is the sole
underwriter for those securities.
Section 11(a) of the Securities Exchange Act of 1934 prohibits
Legg Mason from executing transactions on an exchange for its affiliates,
such as the Funds, unless the affiliate expressly consents by written
contract. The Advisory Agreement expressly provides such consent.
Among the brokers regularly used by each Fund during the fiscal
year ended March 31, 1995, Value Trust at that date owned shares of the
following parent companies: 1,201,000 shares of The Bear Stearns
Companies, Inc. at a market value of $22,218,500 and 415,000 shares of
Salomon, Inc. at a market value of $14,058,125; Total Return Trust at that
date owned shares of the following parent companies: 365,643 shares of
The Bear Stearns Companies, Inc. at a market value of $6,764,396; and
Special Investment Trust at that date owned shares of the following parent
companies: 367,500 shares of The Bear Stearns Companies, Inc. at a market
value of $6,798,750 and 318,800 shares of Piper Jaffray Incorporated at a
market value of $3,706,050.
38
<PAGE>
Investment decisions for each Fund are made independently from
those of other funds and accounts advised by the Adviser. 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
an 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.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason,
Inc., with principal offices at 200 Gibraltar Road, Horsham, Pennsylvania,
may act as a dealer for Navigator Shares pursuant to a Dealer Agreement
with Legg Mason. Neither Legg Mason nor Fairfield receives any
compensation from the Fund for its activities in selling Navigator Shares.
Each Fund has adopted a Distribution and Shareholder Services
Plan ("Plan") which, among other things, permits the Fund to pay Legg
Mason fees for its services related to sales and distribution of Primary
Shares and the provision of ongoing services to Primary Class
shareholders. Payments are made only from assets attributable to Primary
Shares. Under the Plans, the aggregate fees may not exceed an annual rate
of 1.00% of Total Return Trust's or Special Investment Trust's average
daily net assets attributable to Primary Shares or 0.95% of Value Trust's
average daily net assets attributable to Primary Shares. Distribution
activities for which such payments may be made include, but are not
limited to, compensation to persons who engage in or support distribution
and redemption of Shares, printing of prospectuses and reports for persons
other than existing shareholders, advertising, preparation and
distribution of sales literature, overhead, travel and telephone expenses,
all with respect to Primary Shares only. The Plan was most recently
approved by the shareholders of Value Trust on July 20, 1984 and on July
17, 1986 for both the Total Return Trust and Special Investment Trust.
The Plan has been 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
39
<PAGE>
Fund may not pay more in cumulative distribution fees than 6.25% of total
new gross assets attributable to Primary Shares, plus interest, as
specified in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Legg Mason may pay all or a portion of
the fee to its investment executives. Continuation of the Plans was most
recently approved on October 21, 1994 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").
In approving the continuation of the Plan, in accordance with the
requirements of Rule 12b-1, the directors determined that there was a
reasonable likelihood that each Plan would benefit the respective Fund and
its Primary Class shareholders. The directors considered, among other
things, the extent to which the potential benefits of the Plan to the
Fund's Primary Class shareholders outweighed the costs of the Plan; the
likelihood that the Plan would succeed in producing such potential
benefits; the merits of certain possible alternatives to the Plan; and the
extent to which the retention of assets and additional sales of each
Fund's Primary Shares would be likely to maintain or increase the amount
of compensation paid by that Fund to the Adviser.
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 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, in whole or in part, the additional expenses
incurred by each Fund in connection with its Plan. Furthermore, the
investment management of each Fund could be enhanced, as net inflows of
cash from new sales might enable its portfolio manager to take advantage
of attractive investment opportunities, and reduced redemptions could
eliminate the potential need to liquidate attractive securities positions
in order to raise the funds necessary to meet the redemption requests.
40
<PAGE>
Each Plan will continue in effect only so long as it is approved
at least annually by the vote of a majority of the Board of Directors,
including a majority of the 12b-1 Directors, cast in person at a meeting
called for the purpose of voting on the Plan. Each Plan may be terminated
by a vote of a majority of the 12b-1 Directors or by a vote of a majority
of the outstanding voting Primary Shares. Any change in a Plan that would
materially increase the distribution cost to a Fund requires shareholder
approval; otherwise the Plan may be amended by the directors, including a
majority of the 12b-1 Directors, as previously described.
In accordance with Rule 12b-1, each Plan provides that Legg Mason
will submit to the Fund's Board of Directors, and the directors will
review, at least quarterly, a written report of any amounts expended
pursuant to the Plan and the purposes for which expenditures were made. In
addition, as long as the Plan is in effect, the selection and nomination
of the Independent Directors will be committed to the discretion of such
Independent Directors.
For the fiscal years ended March 31, 1995, 1994 and 1993, Value
Trust paid Legg Mason $8,917,520, $7,351,819 and $8,243,638, 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 $1,964,257, $1,601,941 and $886,614 (prior to fees waived of
$100,984), respectively and Special Investment Trust paid Legg Mason
$5,917,557, $4,294,605 and $2,325,639, respectively.
During the year ended March 31, 1995, Legg Mason incurred the
following expenses with respect to Primary Shares:
<TABLE>
<CAPTION>
Special
Total Return Investment
Value Trust Trust Trust
----------- ------------ ----------
<S> <C> <C> <C>
Compensation to sales personnel $6,194,000 $1,362,000 $3,898,000
Advertising 948,000 224,000 387,000
Printing and mailing of prospectuses to
prospective shareholders 117,000 68,000 200,000
Other 1,185,000 418,000 1,977,000
Total expenses $8,444,000 $2,072,000 $6,462,000
</TABLE>
41
<PAGE>
The foregoing are estimated and do not include all expenses
fairly allocable to Legg Mason's or its affiliates' efforts to distribute
Primary Shares.
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of each Fund's assets. Boston
Financial Data Services, P.O. Box 953, Boston, Massachusetts 02103, serves
as transfer and dividend-disbursing agent, and administrator of various
shareholder services. Legg Mason assists BFDS with certain of its duties
as transfer agent and receives compensation from BFDS for its services.
Shareholders who request an historical transcript of their account will be
charged a fee based upon the number of years researched. Each Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
THE FUNDS' LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 M Street N.W., Washington, D.C.
20036, serves as counsel to each Fund.
THE FUNDS' INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore,
Maryland 21202, has been selected by the Directors to serve as each Fund's
independent accountants.
FINANCIAL STATEMENTS
The Statement of Net Assets (with respect to Value Trust and
Total Return Trust), and the Portfolio of Investments (with respect to
Special Investment Trust) as of March 31, 1995; the Statement of Assets
and Liabilities (with respect to Special Investment Trust) as of March 31,
1995; the Statement of Operations for the year ended March 31, 1995; the
Statement of Changes in Net Assets for the years ended March 31, 1995 and
1994; the Financial Highlights for all periods; the Notes to Financial
Statements and the Report of the Independent Accountants, all of which are
included in the respective Fund's annual report for the year ended March
31, 1995, are hereby incorporated by reference in this Statement of
Additional Information.
42
<PAGE>
Table of Contents
Page
Additional Information About
Investment Limitations and Policies 2
Additional Tax Information 12
Additional Purchase and Redemption
Information 15
Valuation of Fund Shares 17
Performance Information 18
Tax-Deferred Retirement Plans 23
The Funds' Directors and Officers 24
The Funds' Investment Adviser 28
Portfolio Transactions and Brokerage 29
The Funds' Distributor 31
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent 33
The Funds' Legal Counsel 33
The Funds' Independent Accountants 34
Financial Statements 34
No person has been authorized to give any information or to make
any representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the
Prospectuses and, if given or made, such information or representations
must not be relied upon as having been authorized by any Fund or its
distributor. The Prospectuses and the Statement of Additional Information
do not constitute offerings by the Funds or by the distributor in any
jurisdiction in which such offerings may not lawfully be made.
Legg Mason Wood Walker, Incorporated
--------------------------------------------------------------------------
111 South Calvert Street
P.O. Box 1476
Baltimore, Maryland 21203-1476
(410)539-0000 (800)822-5544
43
<PAGE>
Legg Mason Total Return Trust, Inc.
Part C. Other Information
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements: The financial statements of Legg Mason
Total Return Trust, Inc. for the year ended March 31, 1995 and
the report of the independent accountants thereon are
incorporated into the Fund's Statement of Additional Information
(Part B) by reference to the Annual Report to Shareholders for
the same period. The Fund's Financial Data Schedule appears as
Exhibit 27.
(b) Exhibits
(1) (a) Articles of Incorporation1/
(b) Articles of Amendment (dated April 24, 1992)6/
(c) Articles Supplementary (dated August 1, 1994)8/
(2) (a) By-Laws as Amended and Restated2/
(b) Amendment to By-Laws (effective February 19, 1992)6/
(3) Voting Trust Agreement - none
(4) Specimen Security1/
(5) (a) Investment Advisory and Management Agreement3/
(6) (a) Underwriting Agreement7/
(b) Dealer Agreement with respect to Navigator Shares (to be
filed)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement4/
(a) Addendum dated February 9, 19883/
(b) Addendum dated February 25, 19882/
(9) Transfer Agency and Service Agreement3/
(10) Opinion of Counsel4/
(11) Other opinions, appraisals, rulings and consents-
Accountant's consent -- filed herewith
(12) Financial statements omitted from Item 23 - none
(13) Agreements for providing initial capital4/
(14) (a) Prototype IRA Plan5/
(b) Prototype Corporate Simplified Employee Pension Plan5/
(c) Prototype Keogh Plan5/
(15) Plan pursuant to Rule 12b-1 7/
(16) Schedule for Computation of Performance Quotations -- filed
herewith
(18) Copies of Plans Pursuant to Rule 18f-3-none.
(27) Financial Data Schedule -- filed herewith
______________
1/Incorporated herein by reference to corresponding Exhibit of the initial
Registration Statement, SEC File No. 2-97908.
<PAGE>
2/Incorporated herein by reference to corresponding Exhibit of Post-
Effective Amendment No. 5 to the initial Registration Statement, SEC File
No. 2-97908.
3/Incorporated herein by reference to corresponding Exhibit of Post-
Effective Amendment No. 9 to the initial Registration Statement, SEC File
No. 2-97908.
4/Incorporated herein by reference to corresponding Exhibit of Pre-
Effective Amendment No. 1 to the initial Registration Statement, SEC File
No. 2-97908.
5/Incorporated herein by reference to corresponding Exhibit of Post-
Effective Amendment No. 8 to the Registration Statement of Legg Mason
Income Trust, Inc., SEC File No. 33-12092, filed April 28, 1991.
6/Incorporated herein by reference to corresponding Exhibit of Post-
Effective Amendment No. 12 to the Registration Statement, SEC File No. 2-
97908.
7/Incorporated herein by reference to corresponding Exhibit of Post-
Effective Amendment No. 11 to the Registration Statement, SEC File No. 2-
97908.
8/Incorporated herein by reference to corresponding Exhibit of Post-
Effective Amendment No. 15 to the Registration Statement, SEC File No. 2-
97908.
Item 25. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
None.
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Holders
Title of Class (as of June 30, 1995)
-------------- ------------------------
Shares of Capital Stock,
($.001 par value)
Legg Mason Total Return Trust, Inc. -
Primary Shares 17,983
Navigator Total Return Trust 2
C-2
<PAGE>
Item 27. Indemnification
---------------
This item is incorporated by reference to Item 27 of Part C of Pre-
Effective Amendment No. 1 to Registration Statement, SEC File No. 2-97908.
Item 28. Business and Other Connections of Manager and Investment
Adviser
--------------------------------------------------------
I. Legg Mason Fund Adviser, Inc. ("Adviser"), the Registrant's
investment adviser, is a registered investment adviser incorporated on
January 20, 1982. The Adviser is engaged primarily in the investment
advisory business. The Adviser serves as investment adviser or manager to
fifteen open-end investment companies or portfolios and as investment
consultant for one closed-end investment company. Information as to the
officers and directors of the Adviser is included in its Form ADV filed on
June 30, 1995 with the Securities and Exchange Commission (registration
number 801-16958) and is incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
(a) Legg Mason Cash Reserve Trust
Legg Mason Value Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal underwriter,
Legg Mason Wood Walker, Incorporated ("LMWW").
C-3
<PAGE>
<TABLE>
<CAPTION>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
------------------ ------------------ -------------
<S> <C> <C>
Raymond A. Mason Chairman of the Chairman of the
Board Board and Director
John F. Curley, Jr. Vice Chairman President and Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Richard J. Himelfarb Executive Vice None
President and
Director
Edward A. Taber III Executive Vice Director
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
C-4
<PAGE>
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
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
C-5
<PAGE>
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice None
President
Douglas C. Petty, Jr. Senior Vice None
1747 Pennsylvania President
Avenue, N.W.
Washington, D.C. 20006
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
E. Robert Quasman Senior Vice None
President
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
Peter J. Biche Vice President None
1735 Market Street
Philadelphia, PA 19103
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
C-6
<PAGE>
Robert Dickey, IV Vice President None
One World Trade Center
New York, NY 10048
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Seth J. Lehr Vice President None
1735 Market St.
Philadelphia, PA 19103
Edward W. Lister, Jr. Vice President None
Eileen M. O'Rourke Vice President None
and Controller
Marie K. Karpinski Vice President Vice President
and Treasurer
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
C-7
<PAGE>
</TABLE>
______________________
* All addresses are 111 South Calvert Street, Baltimore, Maryland
21202, unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not
an affiliated person of the Registrant or an affiliated
person of such an affiliated person.
Item 30. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services
-------------------
None.
Item 32. Undertakings
------------
Registrant hereby undertakes to provide each person to whom a
prospectus is delivered with a copy of its latest annual report to
shareholders upon request and without charge.
C-8
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Total Return
Trust, Inc. certifies that it meets all the requirements for effectiveness
of this Post-Effective Amendment No. 16 to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and 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 13th day of July, 1995.
LEGG MASON TOTAL RETURN TRUST, INC.
by:/s/ John F. Curley, Jr.
-------------------------------
John F. Curley, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 16 to the Registrant's Registration Statement
has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Raymond A. Mason Chairman of the Board July 13, 1995
Raymond A. Mason and Director
/s/ John F. Curley, Jr. President and Director July 13, 1995
John F. Curley, Jr.
/s/ Edward A. Taber, III Director July 13, 1995
Edward A. Taber, III
/s/ Richard G. Gilmore* Director July 13, 1995
Richard G. Gilmore
/s/ Charles F. Haugh* Director July 13, 1995
Charles F. Haugh
/s/ Arnold L. Lehman* Director July 13, 1995
Arnold L. Lehman
/s/ Jill E. McGovern* Director July 13, 1995
Jill E. McGovern
C-9
<PAGE>
/s/ T.A. Rodgers* Director July 13, 1995
T.A. Rodgers
/s/ Marie K. Karpinski Vice President July 13, 1995
Marie K. Karpinski and Treasurer
</TABLE>
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney,
dated May 18, 1992, incorporated herein by reference to Post-Effective
Amendment No. 12, SEC File No. 2-75766 filed June 2, 1992.
C-10
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
_________
To the Board of Directors of
Legg Mason Total Return Trust, Inc.:
We consent to the incorporation by reference in this
Post-Effective Amendment No. 16 to the Registration Statement of Legg
Mason Total Return Trust, Inc. (the "Trust") on Form N-1A (File No. 2-
97908) of our report dated April 28, 1995 on our audit of the financial
statements and financial highlights of the Trust which report is included
in the Annual Report to Shareholders for the year ended March 31, 1995,
which is incorporated by reference in the Registration Statement. We also
consent to the reference to our Firm under the caption "The Corporation's
Independent Accountants".
/s/ Coopers & Lybrand, L.P.P.
------------------------------
COOPERS & LYBRAND, L.L.P.
Baltimore, Maryland
July 11, 1995
<PAGE>
LEGG MASON TOTAL RETURN TRUST, INC. - PRIMARY SHARES
March 31, 1994 - March 31, 1995 (one year)
Cumulative Total Return
ERV = (12.79 x 1.5572181) - (13.54 x 1.4550332) x 1000 + 1000 = 1010.94
-----------------------------------------
(13.54 x 1.4550332)
P = 1000
C = 1010.94 - 1 = .01094 = 1.09%
------- ----
1000
Average Annual Return: Same
---------------------
March 31, 1990 - March 31, 1995 (five years)
---------------------------------
Cumulative Total Return
-----------------------
ERV = (12.79 X 1.5572181) - (10.03 x 1.2682481) x 1000 + 1000 = 1565.72
-----------------------------------------
(10.03 x 1.2682481)
P = 1000
C = 1565.72 - 1 = .56572 = 56.57%
------- -----
1000
Average Annual Return:
---------------------
1/5
(.56572 + 1) - 1 = 8.41%
----
November 21, 1985 - March 31, 1995 (life of fund)
------------------------------------
Cumulative Total Return:
-----------------------
ERV = (12.79 x 1.5572181) - (10.00 x 1.0) x 1000 + 1000 = 1991.68
-----------------------------------
(10.00 x 1.0)
P = 1000
C = 1991.68 - 1 = .99168 = 99.17%
------- -----
1000
Average Annual Return:
---------------------
1/9.35890
(.99168 + 1) - 1 = 7.64%
----
<PAGE>
LEGG MASON TOTAL RETURN TRUST, INC.
NAVIGATOR TOTAL RETURN TRUST
December 1, 1994 - March 31, 1995 (life of class)
---------------------------------
Cumulative Total Return
-----------------------
ERV = (12.83 x 1.0188370) - (12.78 x 1.0) x 1000 + 1000 = 1022.82
-----------------------------------
(12.78 x 1.0)
P = 1000
C = 1022.82 - 1 = .02282 = 2.28%
------- ----
1000
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> LEGG MASON TOTAL RETURN TRUST, INC. PRIMARY SHARES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 189,071,474
<INVESTMENTS-AT-VALUE> 197,948,449
<RECEIVABLES> 2,194,906
<ASSETS-OTHER> 12,894
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 200,156,249
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 566,525
<TOTAL-LIABILITIES> 566,525
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 190,949,615
<SHARES-COMMON-STOCK> 15,229,874
<SHARES-COMMON-PRIOR> 13,605,739
<ACCUMULATED-NII-CURRENT> 4,419,093
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,662,202)
<ACCUM-APPREC-OR-DEPREC> 8,883,218
<NET-ASSETS> 199,589,724
<DIVIDEND-INCOME> 7,161,125
<INTEREST-INCOME> 1,706,667
<OTHER-INCOME> 0
<EXPENSES-NET> 3,841,391
<NET-INVESTMENT-INCOME> 5,026,401
<REALIZED-GAINS-CURRENT> (1,890,373)
<APPREC-INCREASE-CURRENT> (1,746,188)
<NET-CHANGE-FROM-OPS> 1,389,840
<EQUALIZATION> 428,308
<DISTRIBUTIONS-OF-INCOME> (4,365,931)
<DISTRIBUTIONS-OF-GAINS> (8,620,396)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 51,354,718
<NUMBER-OF-SHARES-REDEEMED> (41,779,751)
<SHARES-REINVESTED> 12,173,593
<NET-CHANGE-IN-ASSETS> 15,305,604
<ACCUMULATED-NII-PRIOR> 3,380,939
<ACCUMULATED-GAINS-PRIOR> 5,881,178
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,502,358
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,841,391
<AVERAGE-NET-ASSETS> 198,792,009
<PER-SHARE-NAV-BEGIN> 13.54
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (0.19)
<PER-SHARE-DIVIDEND> (0.29)
<PER-SHARE-DISTRIBUTIONS> (0.60)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.79
<EXPENSE-RATIO> 1.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> NAVIGATOR TOTAL RETURN TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 189,071,474
<INVESTMENTS-AT-VALUE> 197,948,449
<RECEIVABLES> 2,194,906
<ASSETS-OTHER> 12,894
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 200,156,249
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 566,525
<TOTAL-LIABILITIES> 566,525
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 190,949,615
<SHARES-COMMON-STOCK> 376,585
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,419,093
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,662,202)
<ACCUM-APPREC-OR-DEPREC> 8,883,218
<NET-ASSETS> 199,589,724
<DIVIDEND-INCOME> 7,161,125
<INTEREST-INCOME> 1,706,667
<OTHER-INCOME> 0
<EXPENSES-NET> 3,841,391
<NET-INVESTMENT-INCOME> 5,026,401
<REALIZED-GAINS-CURRENT> (1,890,373)
<APPREC-INCREASE-CURRENT> (1,746,188)
<NET-CHANGE-FROM-OPS> 1,389,840
<EQUALIZATION> 428,308
<DISTRIBUTIONS-OF-INCOME> (21,713)
<DISTRIBUTIONS-OF-GAINS> (61,522)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,920,404
<NUMBER-OF-SHARES-REDEEMED> (195,179)
<SHARES-REINVESTED> 83,235
<NET-CHANGE-IN-ASSETS> 15,305,604
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,502,358
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,841,391
<AVERAGE-NET-ASSETS> 4,630,673
<PER-SHARE-NAV-BEGIN> 12.66
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 0.25
<PER-SHARE-DIVIDEND> (0.06)
<PER-SHARE-DISTRIBUTIONS> (0.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.83
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
</TABLE>
