<PAGE>
INVESTMENT ADVISER
Legg Mason Fund Adviser, Inc.
Baltimore, MD
BOARD OF DIRECTORS
Raymond A. Mason, Chairman REPORT TO SHAREHOLDERS
John F. Curley, Jr., President FOR THE YEAR ENDED
Richard G. Gilmore MARCH 31, 1996
Charles F. Haugh
Arnold L. Lehman THE
Dr. Jill E. McGovern LEGG MASON
T. A. Rodgers TOTAL
Edward A. Taber, III RETURN
TRANSFER AND SHAREHOLDER SERVICING AGENT TRUST, INC.
Boston Financial Data Services PRIMARY CLASS
Boston, MA
CUSTODIAN PUTTING YOUR FUTURE FIRST
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, DC
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR ACCOMPANIED BY A
PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
[RECYCLE LOGO] PRINTED ON RECYCLED PAPER [LEGG MASON FUNDS LOGO]
LMF-006
5/96
<PAGE>
TO OUR SHAREHOLDERS,
In the three months ended March 31, 1996, the Total Return Trust's net
asset value per share rose 7.6%, from $15.29 to $16.45. That gain compares
to total returns (appreciation plus reinvested dividends) of 5.4% and 4.9%
on Standard & Poor's 500 stock composite index and the Value Line index of
1700 stocks. In the twelve months ended March 31, the Trust's total return
was 33.2% compared to returns of 32.1% and 21.2% on the Standard & Poor
and Value Line indices.
The Trust continues to invest primarily in dividend-paying common
stocks which we believe are undervalued. Our objective is to earn
long-term returns which preserve and increase the purchasing power of your
investment after taxes and inflation. While there are no certainties in
investing, we believe that ownership of a diversified portfolio of value
stocks continues to offer good prospects of achieving that objective on a
long-term basis.
On the following pages, Bill Miller and Nancy Dennin, the Trust's
portfolio managers, comment on the investment outlook.
Coopers & Lybrand L.L.P., the Total Return Trust's independent
accountants, have completed their annual examination, and audited
financial statements for the fiscal year ended March 31, 1996 are included
in this report.
The Board of Directors has approved an ordinary income dividend of
$0.10 per share, payable on May 15 to shareholders of record on May 10.
Most shareholders will receive this dividend in the form of additional
shares credited to their accounts.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
President
May 10, 1996
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
Your fund's results for the three and twelve month periods ending March 31,
1996 are shown below with comparable data for the leading market indices:
<TABLE>
<CAPTION>
Lipper
Total Growth &
Return Income S&P Dow
Trust Index 500 Jones
<S> <C> <C> <C> <C>
3 months 7.59% 5.67% 5.37% 9.80%
1 year 33.23% 27.73% 32.09% 37.70%
</TABLE>
The Total Return Trust had a good first quarter, outperforming the Lipper
Growth & Income Index and the S&P 500, although the fund trailed the
economically sensitive Dow Jones Industrial Average.
The equity market performed remarkably well in the first quarter given the
backup in long-term interest rates. The 30-year treasury bond ended the quarter
at a 6.68% yield, up 72 basis points from the December 31, 1995 level (100 basis
points = 1%). The increase in Treasury yields, and concurrent decline in the
price of 30-year bonds, was the largest in history unaccompanied by Federal
Reserve Board tightening. The bond market sell-off was precipitated by inflation
concerns, fueled mainly by rising commodity prices. Oil, in particular, has been
exceptionally strong.
Spot oil prices have risen approximately 25% since last year, due to strong
demand, low inventories, and doubts about the resumption of Iraqi oil exports.
Oil analysts generally view the rise in oil prices as unsustainable, even if
Iraqi oil exports were not to resume. Analysts generally expect oil prices to
decline to the $18-20 level as oil supplies should be more than adequate to
replenish inventories during the spring and summer months of seasonally low
demand. Broader measures of commodity price inflation, such as the Journal of
Commerce Index, have not shown any significant industrial inflation pressure. If
oil prices decline, as we expect, commodity prices overall should fall,
alleviating inflationary pressure on the bond market. We think bond yields could
approach 6% later this year.
The strong performance of the equity market in the first quarter has been
accompanied by much commentary regarding the volatility of the market. So far
this year, "curbs" -- a curb prohibits program trading when the market moves 50
points up or down in a day -- on the New York Stock Exchange have been triggered
forty times, exceeding the number of times trading curbs were triggered all of
last year.
The U.S. economy is now five years into its economic expansion, one
characterized by slow, steady growth and subdued inflation. Many observers
believe this low economic volatility cannot continue. The volatility seen in the
market this year has been due in part to reactions to unexpected economic data.
As we entered 1996, the fear was that the economy was weak enough to crimp
corporate profits. As solid fourth quarter earnings were reported, and
managements discussed their upbeat outlook for 1996, the equity market rose, and
investors reassessed their forecast for corporate profits. Aggregate S&P 500
earnings are expected to be up about 5% this year, down from the unsustainable
20-30% pace of 1994 and the first half of 1995, but still quite respectable.
Now, after surprisingly strong labor market reports for February and March,
investors fear the economy is growing too rapidly, potentially leading to
troublesome inflation.
As we've detailed in prior reports, we continue to believe the economy will
grow at a slow, steady pace and inflation will remain subdued. Recent actions by
managements give us even greater confidence in our outlook. In March, the
Commerce Department reported that U.S. firms plan to increase their capital
spending by just 1.5% this year. If managements were expecting a sustainable
pick-up in the economy, they would adjust their capital spending plans
accordingly, in order to take advantage of the robust economy. Likewise, given
the rise in the price of oil, many oil companies are selling their excess
inventory into the marketplace. If managements believed the rise in oil prices
to be sustainable, they would not be aggressively selling their inventory, and
would wait for perhaps even higher prices. As the year progresses, we expect the
data will indicate an economy operating near equilibrium.
2
<PAGE>
As usual, we are agnostic about the near-term direction of the equity
market. Given the divergence of stock and bond returns in the first quarter,
quantitative work suggests the equity market is now fairly valued relative to
bonds. We think the decoupling of stocks and bonds seen in the first
quarter -- stock investors did well while bond holders lost money -- has just
about run its course. If bonds continue to decline, we think stocks will follow.
We also think that the fears of an overheating economy are way overdone and that
bond yields approaching 7% offer excellent value. As the year unfolds, we expect
the inflation worries plaguing bonds will dissipate as it becomes clear the
economy remains on a moderate growth path and that inflation is unlikely to
exceed 3% or so.
We continue to believe the long-term outlook for equities is unusually
favorable, and that low inflation and moderate, persistent growth will reward
the patient shareholder.
Portfolio activity was modest in the quarter. We bought IPC HOLDINGS, a
Bermuda-based property-catastrophe reinsurance company formed in 1993 by
American International Group. The global property-catastrophe reinsurance market
is growing at 8-10% per year, faster than global GDP. The stock is trading at 6x
1996 estimated earnings, with a 5.4% dividend yield.
We sold several of the fund's real estate investment trust (REIT) holdings
during the quarter while increasing several other REIT positions, keeping the
total REIT exposure to approximately 13% of the fund's assets. We continue to be
quite bullish on the prospects for many REITs. As we have mentioned in prior
reports, there have been few periods since the 1950s when an investor has had
the opportunity to purchase stocks of quality companies with growing dividends
and higher current yields than the yield on the 30-year Treasury bond. This is
one such period. The average yield on the fund's REIT holdings is 8.5%, compared
to 6.7% on the long bond. We estimate dividend growth to be about 5%, implying
an attractive total return near 14%.
As always, we appreciate your support and welcome your comments.
Nancy Dennin, CFA
Bill Miller, CFA
May 8, 1996
DJIA 5420.95
3
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON TOTAL RETURN TRUST, INC.
TOTAL RETURN FOR ONE, FIVE, TEN YEARS AND LIFE OF FUND, AS OF MARCH 31, 1996
The returns shown on this and the next page are based on historical
results and are not intended to indicate future performance. The
investment return and principal value of an investment in the fund will
fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Average annual returns tend to smooth
out variations in the fund's return, so they differ from actual
year-to-year results. No adjustment has
been made for any income taxes payable by shareholders.
The fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees and shareholder servicing expenses are determined
separately for each class and the Navigator Class does not incur Rule
12b-1 distribution fees.
The fund's total returns as of March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Cumulative Average Annual
Total Return Total Return
<S> <C> <C>
Primary Class:
One Year +33.23% +33.23%
Five Years +108.70 +15.85
Ten Years +146.16 +9.43
Life of Class(dagger) +165.36 +9.88
Navigator Class:
One Year +34.67% +34.67%
Life of Class(double dagger) +37.74 +27.12
</TABLE>
(dagger) Primary Class inception-November 21, 1985
(double dagger) Navigator Class inception-December 1, 1994
4
<PAGE>
TEN-YEAR PERFORMANCE COMPARISON OF A $10,000 INVESTMENT AS OF MARCH 31, 1996
[Graph here]
<TABLE>
<CAPTION>
Standard & Poor's 500
Total Return Trust Value Line Geometric Stock Composite
Years Ended March 31, Primary Class Average (2) Index (1)
<S> <C> <C> <C>
1986 10,000 10,000 10,000
1987 11,024 11,428 12,620
1988 9,902 10,007 11,569
1989 11,403 11,078 13,668
1990 11,800 11,341 16,302
1991 11,795 11,376 18,652
1992 14,578 12,753 20,711
1993 17,477 14,298 23,865
1994 18,277 14,950 24,216
1995 18,477 15,716 27,986
1996 24,616 19,046 36,915
</TABLE>
(1) An unmanaged index of widely held common stocks.
(2) An unmanaged index of approximately 1,700 common stocks.
The returns for the indexes do not include any expenses or transaction costs.
The returns for the Fund include such expenses.
5
<PAGE>
LEGG MASON TOTAL RETURN TRUST , INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The fund performed quite well over the last twelve months, rising over
33%, and outperforming the S&P 500. The fund and the equity market's
results were positively impacted by the rally in the bond market during
this period. The 30-year Treasury bond's yield at March 31, 1996 was 6.7%,
compared to 7.4% twelve months earlier. The long bond rallied as evidence
accumulated that the economy was continuing to grow at a slow, steady pace
and inflation remained well-controlled.
Many of the fund's financial holdings had solid performance over the
twelve month period. Banks in particular, were strong, benefitting from
the rally in the bond market, as well as takeover activity. The combined
Chase Manhattan -- one of the fund's largest holdings over the past twelve
months and Chemical Banking franchises will represent one of the truly
dominant financial services organizations in the United States over the
remainder of this decade.
The fund follows a value-driven approach emphasizing individual
securities analysis. The fund is primarily invested in securities with
above-market dividend yields and above-average dividend growth rates.
We continue to believe the long-term outlook for equities is unusually
favorable, and that assessing companies on the basis of value, not actual
or anticipated popularity, will deliver the best results for shareholders.
SELECTED PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
Biggest gainers for the 1st quarter 1996*
<S> <C>
1. The Bear Stearns Companies Inc. +24.5%
2. The Chase Manhattan Corporation +21.2%
3. International Business Machines
Corporation +21.1%
4. Witco Corporation +20.5%
5. BankAmerica Corporation +19.7%
6. duPont (E.I.) de Nemours +18.8%
7. Ford Motor Company +18.5%
8. Olin Corporation +17.2%
9. Williams Companies, Inc. +14.8%
10. PepsiCo, Inc. +13.2%
</TABLE>
<TABLE>
<CAPTION>
Biggest laggers for the 1st quarter 1996*
<S> <C>
1. John Alden Financial Corp. -15.6%
2. Washington Federal, Inc. -15.1%
3. Masco Corporation -7.6%
4. Lloyds TSB Group plc -6.8%
5. Great Western Financial Corporation -5.4%
6. Nordbanken Ab ADR -4.3%
7. RJR Nabisco Holdings Corp.
Series C Depositary Shares -3.9%
8. Philip Morris Companies Inc. -3.0%
9. Regency Realty Corporation -2.2%
10. American Financial Group Incorporated -1.2%
</TABLE>
* SECURITIES HELD FOR THE ENTIRE QUARTER.
PORTFOLIO CHANGES
<TABLE>
<CAPTION>
Securities Added
<S> <C>
Mexican Cetes 1-30-97
IPC Holdings Limited
</TABLE>
<TABLE>
<CAPTION>
Securities Sold
<S> <C>
Columbus Realty Trust
DeBartolo Realty Corporation
Grupo Mexicano de Desarrollo S.A. ADR
8.25% 2-17-01
Irvine Apartment Communities, Inc.
</TABLE>
6
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON TOTAL RETURN TRUST , INC.
MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
COMMON STOCKS AND EQUITY INTERESTS -- 89.5%
Automotive -- 5.8%
Chrysler Corporation 157 $ 9,773
Ford Motor Company 175 6,016
15,789
Banking -- 14.7%
BankAmerica Corporation 122 9,449
Bankers Trust New York
Corporation 78 5,528
Lloyds TSB Group plc 2,065 9,897
Nordbanken Ab ADR 101 3,333(A,B)
The Chase Manhattan Corporation 165 12,128
40,335
Chemicals -- 9.8%
duPont (E.I.) de Nemours 112 9,296
Olin Corporation 115 10,005
Witco Corporation 212 7,455
26,756
Computer Services and Systems -- 3.4%
International Business Machines
Corporation 85 9,446
Construction Materials -- 2.1%
Masco Corporation 200 5,800
Finance -- 6.3%
Federal National Mortgage
Association 252 8,032
The Bear Stearns Companies Inc. 369 9,131
17,163
Food, Beverage and Tobacco --6.1%
PepsiCo, Inc. 125 7,906
Philip Morris Companies Inc. 100 8,775
16,681
Gas and Pipeline Utilities --3.1%
Williams Companies, Inc. 170 8,564
Insurance -- 10.2%
American Financial Group
Incorporated 175 5,294
Cigna Corporation 61 6,923
Enhance Financial Services Group Inc. 305 8,434
IPC Holdings Limited 250 5,219
John Alden Financial Corp. 127 2,231
28,101
Oil Services -- 2.4%
Ultramar Corporation 230 6,641
</TABLE>
<TABLE>
<CAPTION>
(Amounts in Thousands) Shares Value
<S> <C> <C>
Real Estate -- 12.8%
National Golf Properties, Inc. 346 $ 8,780
Nationwide Health Properties,
Inc. 140 2,940
Regency Realty Corporation 373 6,286(C)
Resource Mortgage Capital
Corporation 297 6,051
Summit Properties, Inc. 223 4,466
Walden Residential Properties,
Inc. 300 6,563
35,086
Retail Sales -- 2.2%
J.C. Penney Company, Inc. 120 5,970
Savings and Loan -- 8.4%
Great Western Financial
Corporation 219 5,276
Standard Federal Bancorporation 247 10,498
Washington Federal, Inc. 331 7,189
22,963
Telecommunications -- 2.2%
Telefonos de Mexico S.A. ADR 180 5,918
Total Common Stocks and Equity
Interests
(Identified Cost -- $177,979) 245,213
PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK -- 2.7%
RJR Nabisco Holdings Corp.
Series C Depositary Shares
(Identified Cost -- $7,823) 1,205 7,380
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 7.4%
Repurchase Agreement -- 4.9%
Prudential Securities, Inc.
5.5% dated 3-29-96, to be
repurchased at $13,530 on
4-1-96 (Collateral: $14,583
Federal Home Loan Mortgage
Corporation, Mortgage-backed
securities, 6.5% due
4-1-24, value $13,927) $13,524 13,524
Sovereign Obligation -- 2.5%
Mexican Cetes 1-30-97 mxp 69,445 6,894
Total Short-term Investments
(Identified Cost -- $20,277) 20,418
Total Investments -- 99.6%
(Identified Cost -- $206,079) 273,011
Other Assets Less Liabilities -- 0.4% 1,057
NET ASSETS -- 100.0% $274,068
</TABLE>
7
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON TOTAL RETURN TRUST , INC.
MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
Net Assets Consisting of:
Accumulated paid-in capital
applicable to:
16,227 Primary Class shares
outstanding $ 204,021
427 Navigator Class shares
outstanding 5,496
Undistributed net investment
income 1,222
Accumulated net realized loss on
investments (3,601)
Unrealized appreciation of
investments 66,930
NET ASSETS -- 100.0% $274,068
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $16.45
NAVIGATOR CLASS $16.52
</TABLE>
(A) NON-INCOME PRODUCING
(B) RULE 144A SECURITY -- A SECURITY PURCHASED PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT OF 1933 WHICH MAY NOT BE RESOLD SUBJECT TO THAT RULE EXCEPT
TO QUALIFIED INSTITUTIONAL BUYERS.
(C) AFFILIATED COMPANIES -- AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AN "AFFILIATED COMPANY" REPRESENTS FUND OWNERSHIP OF AT LEAST 5% OF THE
OUTSTANDING VOTING SECURITIES OF THE ISSUER.
MXP MEXICAN PESO (NEW)
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
STATEMENT OF OPERATIONS
LEGG MASON TOTAL RETURN TRUST, INC.
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
(Amounts in Thousands)
INVESTMENT INCOME:
<S> <C> <C>
Dividends:
Affiliated companies $ 378
Other securities (net of foreign taxes withheld of $66) 7,630
Interest 4,250
Total investment income $ 12,258
EXPENSES:
Investment advisory fee 1,768
Distribution and service fees 2,297
Transfer agent and shareholder servicing expense 202
Custodian fee 100
Reports to shareholders 58
Legal and audit fees 44
Registration fees 37
Directors' fees 10
Other expenses 19
Total expenses 4,535
NET INVESTMENT INCOME 7,723
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments 928
Increase in unrealized appreciation of investments 58,047
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 58,975
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 66,698
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON TOTAL RETURN TRUST, INC.
<TABLE>
<CAPTION>
For the Years Ended March 31,
(Amounts in Thousands) 1996 1995
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 7,723 $ 5,026
Net realized gain (loss) on investments 928 (1,890)
Change in unrealized appreciation of investments 58,047 (1,746)
Increase in net assets resulting from operations 66,698 1,390
Net equalization credits -- 428
Distributions to shareholders from:
Net investment income:
Primary Class (7,831) (4,366)
Navigator Class (262) (22)
Net realized gain on investments:
Primary Class -- (8,620)
Navigator Class -- (61)
Increase in net assets from Fund share transactions:
Primary Class 15,144 21,748
Navigator Class 729 4,809
Increase in net assets 74,478 15,306
NET ASSETS:
Beginning of year 199,590 184,284
End of year (including undistributed net investment income of $1,222 and
$1,726, respectively) $274,068 $199,590
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON TOTAL RETURN TRUST, INC.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Primary Class Navigator Class
For the Years Ended March 31,
1996 1995 1994 1993 1992 1996 1995(A)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $12.79 $13.54 $13.61 $11.64 $9.64 $12.83 $12.66
Net investment income 0.48 0.33 0.36 0.39 0.34 0.62 0.15
Net realized and unrealized gain (loss) on
investments 3.69 (0.19) 0.24 1.89 1.91 3.72 0.25
Total from investment operations 4.17 0.14 0.60 2.28 2.25 4.34 0.40
Distributions to shareholders from:
Net investment income (0.51) (0.29) (0.33) (0.31) (0.25) (0.65) (0.06)
Net realized gain on investments -- (0.60) (0.34) -- -- -- (0.17)
Total distributions (0.51) (0.89) (0.67) (0.31) (0.25) (0.65) (0.23)
Net asset value, end of period $16.45 $12.79 $13.54 $13.61 $11.64 $16.52 $12.83
Total return 33.23% 1.09% 4.57% 19.88% 23.59% 34.67% 2.28%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.95% 1.93% 1.94% 1.95%(B) 2.34% 0.94% 0.86%(D)
Net investment income 3.2% 2.5% 2.7% 3.1%(B) 3.1% 4.2% 3.6%(D)
Portfolio turnover rate 34.7% 61.9% 46.6% 40.5% 38.4% 34.7% 61.9%
Net assets, end of period (in thousands) $ 267,010 $194,767 $184,284 $139,034 $52,360 $7,058 $4,823
</TABLE>
(A) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF NAVIGATOR CLASS) TO
MARCH 31, 1995.
(B) NET OF FEES WAIVED BY THE ADVISER IN EXCESS OF A VOLUNTARY EXPENSE
LIMITATION OF 1.95% FROM NOVEMBER 1, 1992 UNTIL MARCH 31, 1996.
(C) NOT ANNUALIZED
(D) ANNUALIZED
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON TOTAL RETURN TRUST, INC.
(Amounts in Thousands)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Total Return Trust, Inc. ("Fund") is registered under
the Investment Company Act of 1940, as amended, as an open-end,
diversified investment company.
The Fund consists of two classes of shares: Primary Class, offered
since 1985, and Navigator Class, offered to certain institutional
investors since December 1, 1994. Expenses of the Fund are allocated
proportionately to the two classes of shares except for 12b-1 distribution
fees, which are charged only on Primary shares, and transfer agent and
shareholder servicing expenses, which are determined separately for each
class.
Security Valuation
Securities traded on national securities exchanges are valued at the
last quoted sales price. Over-the-counter securities, and listed
securities for which no sales price is available are valued at the mean
between the latest bid and asked prices. Short-term securities are valued
at cost which, when combined with accrued interest receivable,
approximates current value.
Dividends and Distributions to Shareholders
Net investment income for dividend purposes consists of dividends and
interest earned, less expenses. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Net capital gain distributions
are declared and paid after the end of the tax year in which the gains are
realized.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
Equalization
In prior years, the Fund followed the practice of equalization by
which a portion of proceeds from sales and cost of redemptions of Fund
shares is credited or charged to undistributed net investment income. In
the current fiscal year ending March 31, 1996, the Fund discontinued the
practice of equalization, resulting in a reclassification from
undistributed net investment income of $2,736 to accumulated paid-in
capital -- Primary Class and $42 to accumulated paid-in
capital -- Navigator Class.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the year ended March 31, 1996 (excluding
short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $84,954
Proceeds from sales 75,225
</TABLE>
At March 31, 1996, the cost of securities for federal income tax
purposes was $206,079. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $69,694
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $2,903.
3. FUND SHARE TRANSACTIONS:
At March 31, 1996 there were 100,000 shares authorized at $.001 par
value for all classes of the Fund. On December 1, 1994, when the Navigator
Class became effective, 367 shares held in Legg Mason Profit Sharing Plan
accounts, with a value of
12
<PAGE>
$4,686, were transferred from Primary Class to Navigator Class.
Transactions in Fund shares were as follows:
(Amounts in Thousands)
<TABLE>
<CAPTION>
For the Years Ended March 31,
1996 1995
Primary Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 3,191 $47,587 3,969 $51,355
Reinvestment of
distributions 528 7,596 961 12,173
Repurchased (2,722) (40,039) (3,306) (41,780)
Net increase 997 $15,144 1,624 $21,748
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended March 31,
1996 1995(dagger)
Navigator Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 100 $1,483 385 $4,921
Reinvestment of
distributions 18 259 7 83
Repurchased (68) (1,013) (16) (195)
Net increase 50 $ 729 376 $4,809
</TABLE>
(dagger) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
CLASS) TO MARCH 31, 1995.
4. TRANSACTIONS WITH AFFILIATES:
The Fund has an investment advisory and management agreement with Legg
Mason Fund Adviser, Inc. ("Adviser"), a corporate affiliate of Legg Mason
Wood Walker, Incorporated ("Legg Mason"), a member of the New York Stock
Exchange and the distributor for the Fund. Under this agreement, the
Adviser provides the Fund with investment advi-sory, management and
administrative services for which the Fund pays a fee at an annual rate of
0.75% of average daily net assets, calculated daily and payable monthly.
At March 31, 1996, $172 was due to the Adviser.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.75% and an annual service fee of 0.25% of the
Primary Class' average daily net assets, calculated daily and payable
monthly. At March 31, 1996, $224 was due to the distributor. Legg Mason
also has an agreement with the Fund's transfer agent to assist with
certain of its duties. For this assistance, Legg Mason was paid $56 by the
transfer agent for the year ended March 31, 1996. No brokerage commissions
were paid to Legg Mason or its affiliates during the year ended March 31,
1996.
In November 1995, the Fund, along with certain other Legg Mason Funds,
entered into a $75 million line of credit ("Credit Agreement") to be
utilized as an emergency source of cash in the event of unanticipated,
large redemption requests by shareholders. Pursuant to the Credit
Agreement, each participating Fund is liable only for principal and
interest payments related to borrowings made by that Fund. Borrowings
under the line of credit bear interest at prevailing short-term interest
rates. For the year ended March 31, 1996, the Fund had no borrowings under
the line of credit.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF LEGG MASON TOTAL RETURN TRUST, INC.:
We have audited the accompanying statement of net assets of the Legg
Mason Total Return Trust, Inc. as of March 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1996, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Legg Mason Total Return Trust, Inc. as of March 31, 1996,
and the results of its operations, changes in its net assets, and
financial highlights for each of the respective periods stated in the
first paragraph, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 29, 1996
14
