TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 5
Performance Information 7
Investment Objectives and Policies 8
How You Can Invest in the Funds 19
How Your Shareholder Account is Maintained 20
How You Can Redeem Your Primary Shares 20
How Net Asset Value is Determined 21
Dividends and Other Distributions 21
Tax Treatment of Dividends and Other Distributions 22
Shareholder Services 23
The Funds' Management and Investment Advisers 24
The Funds' Distributor 25
Description of Each Corporation and its Shares 26
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953, Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036
INDEPENDENT ACCOUNTANTS/AUDITORS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, Maryland 21202
Ernst & Young LLP
One North Charles Street, Baltimore, Maryland 21202
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ANY FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY ANY FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
LMF-001
LEGG MASON
EQUITY
FUNDS
VALUE TRUST, INC.
TOTAL RETURN TRUST, INC.
SPECIAL INVESTMENT
TRUST, INC.
AMERICAN LEADING
COMPANIES TRUST
BALANCED TRUST
PRIMARY SHARES
PUTTING YOUR FUTURE FIRST
PROSPECTUS
JULY 31, 1997
REVISED: SEPTEMBER 9, 1997
[LEGG MASON LOGO]
FUNDS
<PAGE>
LEGG MASON EQUITY FUNDS -- PRIMARY SHARES
LEGG MASON VALUE TRUST, INC.
LEGG MASON TOTAL RETURN TRUST, INC.
LEGG MASON SPECIAL INVESTMENT TRUST, INC.
LEGG MASON AMERICAN LEADING COMPANIES TRUST
(A SERIES OF LEGG MASON INVESTORS TRUST, INC.)
LEGG MASON BALANCED TRUST
(A SERIES OF LEGG MASON INVESTORS TRUST, INC.)
This Prospectus sets forth concisely the information about the
funds that a prospective investor ought to know before investing. It
should be read and retained for future reference. A Statement of
Additional Information about the funds dated July 31, 1997 has been
filed with the Securities and Exchange Commission ("SEC") and, as
amended or supplemented from time to time, is incorporated herein by
reference. The Statement of Additional Information is available
without charge upon request from the distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers
listed below).
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES ARE
NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
July 31, 1997
Revised: September 9, 1997
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
The LEGG MASON VALUE TRUST, INC. ("Value Trust") is a diversified,
open-end management investment company seeking long-term growth of
capital. Value Trust invests principally in those equity securities which
its investment adviser, Legg Mason Fund Adviser, Inc. ("Adviser" or
"Manager"), believes are undervalued and therefore offer above-average
potential for capital appreciation. The Adviser believes that Value Trust
shares may be appropriate for investments by Individual Retirement
Accounts, Self-Employed Individual Retirement Plans, Simplified Employee
Pension Plans, Savings Incentive Match Plans for Employees and other
qualified retirement plans (collectively referred to as "Retirement
Plans") whose principal investment objective is capital appreciation.
Other investors who seek capital appreciation may also invest in Value
Trust shares.
The LEGG MASON TOTAL RETURN TRUST, INC. ("Total Return Trust") is a
diversified, open-end management investment company seeking capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk. In attempting to
achieve this objective, the Adviser selects a diversified portfolio
composed of dividend-paying common stocks and securities convertible into
common stock which, in the opinion of the Adviser, offer the potential for
long-term growth; common stocks or securities convertible into common
stock which do not pay current dividends but which offer prospects for
capital appreciation and future income; and debt instruments of various
maturities. The Adviser believes that Total Return Trust shares may be
appropriate for investments by Retirement Plans. Due to Total Return
Trust's investment objective, however, investors should not expect capital
appreciation comparable to funds devoted solely to growth, or income
comparable to funds devoted to maximum current income.
The LEGG MASON SPECIAL INVESTMENT TRUST, INC. ("Special Investment
Trust") is a diversified, open-end management investment company seeking
capital appreciation. Special Investment Trust invests principally in
equity securities of companies with market capitalizations of less than
$2.5 billion which, in the opinion of the Adviser, have one or more of the
following characteristics: they are not closely followed by, or are out of
favor with, investors generally, and the Adviser believes they are
undervalued in relation to their long-term earning power or asset values;
unusual developments have occurred which suggest the possibility that the
market value of the securities will increase; or they are involved in
actual or anticipated reorganizations or restructurings under the
Bankruptcy Code. Special Investment Trust also invests in the securities
of companies with larger capitalizations which have one or more of these
characteristics. Special Investment Trust may invest up to 35% of its
assets in debt securities rated below investment grade.
The LEGG MASON AMERICAN LEADING COMPANIES TRUST ("American Leading
Companies") is a professionally managed portfolio seeking long-term
capital appreciation and current income consistent with prudent investment
risk. American Leading Companies is a separate series of Legg Mason
Investors Trust, Inc. ("Investors Trust"), a diversified, open-end
management investment company. Under normal market conditions, American
Leading Companies will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion.
American Leading Companies' investment adviser, Legg Mason Capital
Management, Inc. ("LMCM"), defines a "Leading Company" as a company that,
in the opinion of LMCM, has attained a major market share in one or more
products or services within its industry(ies), and possesses the financial
strength and management talent to maintain or increase market share and
profit in the future. Such companies are typically well known as leaders
in their respective industries; most are found in the top half of the
Standard & Poor's Composite Index of 500 Stocks
2
<PAGE>
("S&P 500"). LMCM believes that American Leading Companies' shares may be
appropriate for investment by Retirement Plans.
The LEGG MASON BALANCED TRUST ("Balanced Trust") is a professionally
managed portfolio seeking long-term capital appreciation and current
income in order to achieve an attractive total investment return
consistent with reasonable risk. Balanced Trust is a separate series of
Investors Trust. Under normal conditions, Balanced Trust will invest no
more than 75% of its assets in equity securities. The term "equity
securities" includes, without limitation, common stocks and convertible
securities of domestic issuers, securities of closed-end investment
companies and U.S. dollar-denominated securities of foreign issuers,
including American Depositary Receipts ("ADRs") and Global Depositary
Receipts ("GDRs"). Balanced Trust will invest at least 25% of its
portfolio in fixed income securities. Bartlett & Co. ("Bartlett"), as
investment adviser, believes that Balanced Trust shares may be appropriate
for investment by Retirement Plans.
Value Trust, Total Return Trust, Special Investment Trust, American
Leading Companies and Balanced Trust (each a "Fund") each may invest a
significant portion of its assets in debt securities, and may invest to
some extent in securities rated below investment grade. Each Fund may
invest in foreign securities, which would expose it to the possibility of
currency fluctuations and other risks of foreign investing. Each Fund
(except American Leading Companies) may use futures contracts and/or
options for hedging or income purposes, which may expose it to the
potential for losses greater than the value of the Fund's investment in
such instruments.
Of course, there can be no assurance that any Fund will achieve its
objective. See "Investment Objectives and Policies," page 8, which also
includes a discussion of risks.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
INVESTMENT ADVISERS:
Legg Mason Fund Adviser, Inc. (for Value Trust, Total Return Trust and
Special Investment Trust)
Legg Mason Capital Management, Inc. (for American Leading Companies)
Bartlett & Co. (for Balanced Trust)
PURCHASE METHODS:
Send bank/personal check or wire federal funds. There is a $1,000
minimum, generally, for initial purchases, and a $100 minimum, generally,
for subsequent purchases. Lower minimums for initial and subsequent
purchases apply for automatic investments. See "How You Can Invest in the
Funds," page 19.
REDEMPTION METHODS:
Redeem by calling your financial advisor or service provider, or
redeem by mail. See "How You Can Redeem Your Primary Shares," page 20.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 23.
DIVIDENDS:
Declared and paid quarterly for Value Trust, Total Return Trust and
Balanced Trust. Declared and paid after the end of each taxable year of
Special Investment Trust and American Leading Companies. See "Dividends
and Other Distributions," page 21.
REINVESTMENT:
All dividends and other distributions are automatically reinvested in
Primary Shares unless cash payments are requested.
3
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth below are based on average net assets and annual Fund operating
expenses related to Primary Shares for the year ended March 31, 1997. For
Balanced Trust, which has a limited operating history prior to the date of
this Prospectus, other expenses are based on estimates for the current
fiscal year, and fees are adjusted for current expense limits and fee
waiver levels.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fees
(after fee
waivers) 0.72% 0.75% 0.78% 0.64% 0.00%
12b-1 fees
(after fee
waivers) 0.95% 1.00% 1.00% 1.00% 0.30%
Other expenses 0.10% 0.18% 0.14% 0.31% 1.55%
----------------------------------------------
Total operating
expenses
(after fee
waivers) 1.77% 1.93% 1.92% 1.95% 1.85%
==============================================
</TABLE>
(A) The Manager and Legg Mason have voluntarily agreed to waive management
and 12b-1 fees to the extent necessary to limit total operating expenses
relating to Primary Shares (exclusive of taxes, brokerage commissions,
interest and extraordinary expenses) as follows: for Total Return Trust
and American Leading Companies, 1.95% of each Fund's average daily net
assets attributable to Primary Shares indefinitely; and for Balanced
Trust, 1.85% of average daily net assets attributable to Primary Shares
until July 31, 1998. In the absence of such waivers, the management fee,
12b-1 fee, other expenses and total operating expenses relating to
Primary Shares would have been as follows: for Total Return Trust, the
same as described above; for American Leading Companies, 0.75%, 1.00%,
0.31% and 2.06% of average net assets; and for Balanced Trust, 0.75%,
0.75%, 1.55% and 3.05% of average net assets.
For further information concerning the Funds' expenses, please see
"The Funds' Management and Investment Advisers" and "The Funds'
Distributor," pages 24-26. Because each Fund pays 12b-1 fees with respect
to Primary Shares, long-term investors in Primary Shares may pay more in
distribution expenses than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. ("NASD").
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each time
period. The Funds charge no redemption fees of any kind.
<TABLE>
<CAPTION>
TOTAL SPECIAL AMERICAN
VALUE RETURN INVESTMENT LEADING BALANCED
TRUST TRUST TRUST COMPANIES TRUST
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 18 $ 20 $ 20 $ 20 $ 19
3 Years $ 56 $ 61 $ 60 $ 61 $ 58
5 Years $ 96 $104 $104 $105 N/A
10 Years $208 $225 $224 $227 N/A
</TABLE>
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
table and the assumption in the example of a 5% annual return are required
by regulations of the SEC applicable to all mutual funds. THE ASSUMED 5%
ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT THE PROJECTED
OR ACTUAL PERFORMANCE OF, PRIMARY SHARES OF THE FUNDS. THE ABOVE TABLE AND
EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The
actual expenses attributable to Primary Shares will depend upon, among
other things, the level of average net assets, the levels of sales and
redemptions of shares, the extent to which the Manager and/or Legg Mason
waive their fees and the extent to which Primary Shares incur variable
expenses, such as transfer agency costs.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables that follow has been audited
for Value Trust, Total Return Trust and Special Investment Trust by Coopers
& Lybrand L.L.P., independent accountants, and for American Leading
Companies and Balanced Trust, by Ernst & Young LLP, independent auditors.
Each Fund's financial statements for the year ended March 31, 1997 and the
report of Coopers & Lybrand L.L.P. or Ernst & Young LLP thereon are
included in their combined annual reports and are incorporated by reference
in the Statement of Additional Information. The combined annual reports are
available to shareholders without charge by calling your Legg Mason or
affiliated financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Year (Loss) Investments Operations Income Investments Distributions
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $26.99 $ .13 $ 8.68 $ 8.81 $(.16) $(1.53) $(1.69)
1996 20.21 .19 8.00 8.19 (.17) (1.24) (1.41)
1995 18.50 .10 1.70 1.80 (.05) (.04) (.09)
1994 17.81 .08 .92 1.00 (.11) (.20) (.31)
1993 15.69 .18 2.12 2.30 (.18) -- (.18)
1992 13.38 .25 2.34 2.59 (.28) -- (.28)
1991 14.19 .32 (.74) (.42) (.36) (.03) (.39)
1990 14.16 .33 .77 1.10 (.33) (.74) (1.07)
1989 12.14 .21 1.99 2.20 (.18) -- (.18)
1988 15.07 .21 (1.54) (1.33) (.20) (1.40) (1.60)
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $25.09 $(.23) $ 3.10 $ 2.87 $ -- $(1.41) $(1.41)
1996 19.96 -- 5.60 5.60 -- (.47) (.47)
1995 21.56 (.06) (1.31) (1.37) -- (.23) (.23)
1994 17.91 (.11) 3.93 3.82 (.03) (.14) (.17)
1993 17.00 .03 1.66 1.69 -- (.78) (.78)
1992 14.59 .12 2.83 2.95 (.14) (.40) (.54)
1991 13.58 .18 2.42 2.60 (.27) (1.32) (1.59)
1990 11.84 .12 1.70 1.82 (.08) -- (.08)
1989 10.14 .06 1.65 1.71 (.01) -- (.01)
1988 12.80 .13 (1.825) (1.695) (.075) (.89) (.965)
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Year
Year Return Net Assets Net Assets Rate Paid(E) (in thousands)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $34.11 33.59% 1.77% .4% 10.5% $.0557 $2,236,400
1996 26.99 42.09% 1.82% .8% 19.6% -- 1,450,774
1995 20.21 9.77% 1.81% .5% 20.1% -- 986,325
1994 18.50 5.65% 1.82% .5% 25.5% -- 912,418
1993 17.81 14.76% 1.86% 1.1% 21.8% -- 878,394
1992 15.69 19.53% 1.90% 1.7% 39.4% -- 745,833
1991 13.38 (2.88)% 1.90% 2.5% 38.8% -- 690,053
1990 14.19 7.74% 1.86% 2.2% 30.7% -- 808,780
1989 14.16 18.33% 1.96% 1.6% 29.7% -- 720,961
1988 12.14 (8.42)% 1.97% 1.5% 47.8% -- 665,689
SPECIAL INVESTMENT TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $26.55 11.58% 1.92% (.9)% 29.2% $.0514 $ 947,684
1996 25.09 28.47% 1.96% -- 35.6% -- 792,240
1995 19.96 (6.37)% 1.93% (.2)% 27.5% -- 612,093
1994 21.56 21.35% 1.94% (.6)% 16.7% -- 565,486
1993 17.91 10.50% 2.00% .2% 32.5% -- 322,572
1992 17.00 20.46% 2.10% .8% 56.9% -- 201,772
1991 14.59 21.46% 2.30% 1.4% 75.6% -- 106,770
1990 13.58 15.37% 2.30% 1.0% 115.9% -- 68,240
1989 11.84 16.99% 2.50% .7% 122.4% -- 44,450
1988 10.14 (14.18)% 2.50% 1.0% 158.9% -- 43,611
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
---------------------------------------- ------------------------
Net Asset Net Net Realized Total Net
Value, Investment and Unrealized From Net Realized
Beginning Income Gain (Loss) on Investment Investment Gain on Total
of Period (Loss) Investments Operations Income Investments Distributions
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $16.45 $.46 $ 3.47 $ 3.93 $(.43) $ (.56) $ (.99)
1996 12.79 .48 3.69 4.17 (.51) -- (.51)
1995 13.54 .33 (.19) .14 (.29) (.60) (.89)
1994 13.61 .36 .24 .60 (.33) (.34) (.67)
1993 11.64 .39 1.89 2.28 (.31) -- (.31)
1992 9.64 .34 1.91 2.25 (.25) -- (.25)
1991 10.03 .28 (.31) (.03) (.29) (.07) (.36)
1990 10.06 .21 .15 .36 (.21) (.18) (.39)
1989 8.86 .15 1.18 1.33 (.13) -- (.13)
1988 11.63 .18 (1.35) (1.17) (.21) (1.39) (1.60)
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1997 $12.23 $.01(F) $ 3.00 $ 3.01 $(.02) $ (.48) $ (.50)
1996 10.18 .07(F) 2.08 2.15 (.10) -- (.10)
1995 9.69 .12(F) .48 .60 (.11) -- (.11)
Sept. 1, 1993(A)-
Mar. 31, 1994 10.00 .06(F) (.34) (.28) (.03) -- (.03)
BALANCED TRUST
Oct. 1, 1996(B)-
Mar. 31, 1997 $10.00 $.09(G) $ .11 $ .20 $(.04) $ -- $ (.04)
<CAPTION>
Ratios/Supplemental Data
----------------------------------------------------------------------------
Net
Net Asset Investment Average Net Assets
Value, Expenses Income (Loss) Portfolio Commission End of
End of Total to Average to Average Turnover Rate Period
Period Return Net Assets Net Assets Rate Paid(E) (in thousands)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN TRUST
-- Primary Class
Years Ended Mar. 31,
1997 $19.39 24.33% 1.93% 2.6% 38.4% $.0528 $380,458
1996 16.45 33.23% 1.95% 3.2% 34.7% -- 267,010
1995 12.79 1.09% 1.93% 2.5% 61.9% -- 194,767
1994 13.54 4.57% 1.94% 2.7% 46.6% -- 184,284
1993 13.61 19.88% 1.95%(H) 3.1%(H) 40.5% -- 139,034
1992 11.64 23.59% 2.34% 3.1% 38.4% -- 52,360
1991 9.64 (0.05)% 2.50% 3.1% 62.1% -- 22,822
1990 10.03 3.48% 2.39% 2.0% 39.2% -- 26,815
1989 10.06 15.16% 2.40% 1.6% 25.7% -- 30,102
1988 8.86 (10.17)% 2.30% 1.9% 50.1% -- 35,394
AMERICAN LEADING COMPANIES
-- Primary Class
Years Ended Mar. 31,
1997 $14.74 24.73% 1.95%(F) .05%(F) 55.7% $.0640 $104,812
1996 12.23 21.24% 1.95%(F) .69%(F) 43.4% -- 76,100
1995 10.18 6.24% 1.95%(F) 1.21%(F) 30.5% -- 59,985
Sept. 1, 1993(A)-
Mar. 31, 1994 9.69 (2.86)%(C) 1.95%(D,F) 1.14%(D,F) 21.0%(D) -- 55,022
BALANCED TRUST
Oct. 1, 1996(B)-
Mar. 31, 1997 $10.16 2.02%(C) 1.85%(D,G) 2.52%(D,G) 5.1%(D) $.0622 $ 17,948
</TABLE>
(A) FOR THE PERIOD SEPTEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO MARCH
31, 1994.
(B) FOR THE PERIOD OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1997.
(C) NOT ANNUALIZED
(D) ANNUALIZED
(E) PURSUANT TO SEC REGULATIONS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THIS IS THE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD BY EACH FUND.
(F) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.95%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE MANAGER,
THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE
PERIOD SEPTEMBER 1, 1993 TO MARCH 31, 1994 AND FOR THE YEARS ENDED MARCH
31, 1995, 1996 AND 1997 WOULD HAVE BEEN 2.28%, 2.12%, 2.20%, AND 2.06%,
RESPECTIVELY.
(G) NET OF FEES WAIVED IN EXCESS OF A VOLUNTARY EXPENSE LIMITATION OF 1.85%
OF AVERAGE DAILY NET ASSETS. IF NO FEES HAD BEEN WAIVED BY THE MANAGER,
THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS FOR THE
PERIOD OCTOBER 1, 1996 TO MARCH 31, 1997 WOULD HAVE BEEN 3.03%.
(H) NET OF FEES WAIVED IN EXCESS OF AN INDEFINITE VOLUNTARY EXPENSE
LIMITATION OF 1.95%.
6
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of a class of
shares in advertisements or in reports or other communications to
shareholders. A mutual fund's total return is a measurement of the overall
change in value of an investment in the fund, including changes in share
price and assuming reinvestment of dividends and other distributions.
CUMULATIVE TOTAL RETURN shows the fund's performance over a specific
period of time. AVERAGE ANNUAL TOTAL RETURN is the average annual
compounded return that would have produced the same cumulative total
return if the fund's performance had been constant over the entire period.
Average annual returns, which differ from actual year-to-year results,
tend to smooth out variations in a fund's returns. For comparison
purposes, each Fund's total return is compared with total returns of the
Value Line Geometric Average, an index of approximately 1,700 stocks
("Value Line Index"), and the S&P 500, two unmanaged indexes of widely
held common stocks. No adjustment has been made for any income taxes
payable by shareholders.
The investment return and principal value of an investment in each
Fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Returns of each Fund would
have been lower if the Manager and/or Legg Mason had not waived certain
fees for the fiscal years ended March 31, as follows: 1989 through 1997
for Value Trust; 1986 through 1995 for Total Return Trust; 1986 through
1997 for Special Investment Trust; 1994 through 1997 for American Leading
Companies and 1997 for Balanced Trust.
Performance figures reflect past performance only and are not intended
to and do not indicate future performance. Further information about each
Fund's performance is contained in its Annual Report to Shareholders,
which may be obtained without charge by calling your Legg Mason or
affiliated financial advisor or Legg Mason's Funds Marketing Department at
800-822-5544.
Total returns as of March 31, 1997 were as follows:
<TABLE>
<CAPTION>
SPECIAL AMERICAN
TOTAL RETURN INVESTMENT LEADING
VALUE TRUST TRUST TRUST COMPANIES
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year +33.59% +24.33% +11.58% +24.73%
Five Years +152.62 +109.95 +79.97 N/A
Ten Years +242.48 +177.62 +204.97 N/A
Life of Class -- Value Trust(A) +1,198.81
Life of Class -- Total Return Trust(B) +229.92
Life of Class -- Special Investment Trust(C) +298.71
Life of Class -- American Leading Companies(D) +56.08
Life of Class -- Balanced Trust(E)
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C> <C>
Primary Class:
One Year +33.59% +24.33% +11.58% +24.73%
Five Years +20.36 +15.99 +12.47 N/A
Ten Years +13.10 +10.75 +11.80 N/A
Life of Class -- Value Trust(A) +18.70
Life of Class -- Total Return Trust(B) +11.08
Life of Class -- Special Investment Trust(C) +13.07
Life of Class -- American Leading Companies(D) +13.23
Life of Class -- Balanced Trust(E)
<CAPTION>
BALANCED VALUE LINE S&P STOCK
TRUST INDEX INDEX
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUMULATIVE TOTAL RETURN
Primary Class:
One Year N/A +10.12% +19.83%
Five Years N/A +64.47 +113.90
Ten Years N/A +83.53 +251.02
Life of Class -- Value Trust(A) +349.29 +985.96
Life of Class -- Total Return Trust(B) +142.88 +431.51
Life of Class -- Special Investment Trust(C) +138.53 +401.75
Life of Class -- American Leading Companies(D) +28.89 +78.61
Life of Class -- Balanced Trust(E) +2.02% +4.07 +11.24
AVERAGE ANNUAL TOTAL RETURN
Primary Class:
One Year N/A +10.12% +19.83%
Five Years N/A +10.46 +16.41
Ten Years N/A +6.26 +13.36
Life of Class -- Value Trust(A) +10.60 +17.34
Life of Class -- Total Return Trust(B) +8.14 +15.88
Life of Class -- Special Investment Trust(C) +8.03 +15.42
Life of Class -- American Leading Companies(D) +7.34 +17.57
Life of Class -- Balanced Trust(E) N/A -- --
</TABLE>
(A) INCEPTION OF VALUE TRUST -- APRIL 16, 1982.
(B) INCEPTION OF TOTAL RETURN TRUST -- NOVEMBER 21, 1985.
(C) INCEPTION OF SPECIAL INVESTMENT TRUST -- DECEMBER 30, 1985.
(D) INCEPTION OF AMERICAN LEADING COMPANIES -- SEPTEMBER 1, 1993.
(E) INCEPTION OF BALANCED TRUST -- OCTOBER 1, 1996.
The S&P 500 and Value Line Index figures assume reinvestment of
dividends paid by their component stocks. Unlike the figures presented for
the Funds, the S&P 500 and Value Line Index figures do not include
brokerage commissions and other costs of investing.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Fund's Board
of Directors without a shareholder vote. There can be no assurance that
any Fund will achieve its investment objective.
VALUE TRUST'S objective is long-term growth of capital. The Adviser
believes that the Fund's objective can best be met through the purchase of
securities that appear to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be
undervalued because of many factors, including market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the issuer of the security. Any or all of these
factors may provide buying opportunities at attractive prices compared to
historical or market price-earnings ratios, book value, return on equity,
or the long-term prospects for the companies in question.
The Adviser believes that the securities of sound, well-managed
companies that may be temporarily out of favor due to earnings declines or
other adverse developments are likely to provide a greater total return
than securities with prices that appear to reflect anticipated favorable
developments and that are therefore subject to correction should any
unfavorable developments occur.
The Fund's policy of investing in securities that may be temporarily
out of favor differs from the investment approach followed by many other
mutual funds with similar investment objectives. Such mutual funds
typically do not invest in securities that have declined sharply in price,
are not widely followed, or are issued by companies that have reported
poor earnings or that have suffered a cyclical downturn in business. The
Adviser believes, however, that purchasing securities depressed by
temporary factors will provide investment returns superior to those
obtained when premium prices are paid for issues currently in favor.
The Fund invests primarily in companies with a record of earnings and
dividends, reasonable return on equity, and sound finances. The Fund may
from time to time invest in securities that pay no dividends or interest.
Current dividend income is not a prerequisite in the selection of equity
securities.
The Fund normally invests primarily in equity securities. It may
invest in debt securities, including government, corporate and money
market securities, for temporary defensive purposes and, consistent with
its investment objective, during periods when or under circumstances where
the Adviser believes the return on certain debt securities may equal or
exceed the return on equity securities. The Fund may invest in debt
securities of both foreign and domestic issuers of any maturity without
regard to rating, and may invest its assets in such securities without
regard to a percentage limit. The Adviser currently anticipates that under
normal market conditions, the Fund will invest no more than 25% of its
total assets in long-term debt securities. Up to 10% of its total assets
may be invested in debt securities not rated investment grade, i.e., not
rated at least BBB by Standard & Poor's ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's") or, if unrated by those entities,
deemed by the Adviser to be of comparable quality.
TOTAL RETURN TRUST'S objective is to obtain capital appreciation and
current income in order to achieve an attractive total investment return
consistent with reasonable risk. The Adviser attempts to meet its
objective by investing in dividend-paying common stocks, debt securities
and securities convertible into common stocks which, in the opinion of the
Adviser, offer potential for attractive total return. The Fund also
invests in common stocks and securities convertible into common stocks
which do not pay current dividends but which, in the Adviser's opinion,
offer prospects for capital appreciation and future income.
The Fund may invest in debt securities, including government,
corporate and money market securities, consistent with its investment
objective, during periods when or under circumstances where the Adviser
believes the return on certain debt securities may equal or exceed the
return on equity securities. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers without regard to rating and
may invest its assets in such securities without regard to a percentage
limit. The Adviser currently anticipates that under normal market
conditions, the Fund will invest no more than 50% of its total assets in
intermediate-term and long-term debt securities, and no more than 5% of
its total assets
8
<PAGE>
in debt securities not rated investment grade, i.e., not rated at least
BBB by S&P or Baa by Moody's or, if unrated by those entities, deemed by
the Adviser to be of comparable quality.
SPECIAL INVESTMENT TRUST'S objective is capital appreciation. Current
income is not a consideration. The Fund invests principally in equity
securities, and securities convertible into equity securities, of
companies with market capitalizations of less than $2.5 billion which the
Adviser believes have one or more of the following characteristics:
1. The companies generally are not closely followed by, or are out of
favor with, investors, and appear to be undervalued in relation to their
long-term earning power or asset values. A security may be undervalued
because of many factors, including market decline, poor economic
conditions, tax-loss selling, or actual or anticipated developments
affecting the issuer.
2. The companies are experiencing unusual and possibly non-repetitive
developments which, in the opinion of the Adviser, may cause the market
values of the securities to increase. Such developments may include:
(a) a sale or termination of an unprofitable part of the company's
business;
(b) a change in the company's management or in management's
philosophy;
(c) a basic change in the industry in which the company operates;
(d) the introduction of new products or technologies; or
(e) the prospect or effect of acquisition or merger activities.
3. The companies are involved in actual or anticipated reorganizations
or restructurings under the Bankruptcy Code. No more than 20% of the
Fund's total assets may be invested in such securities.
The Fund also invests in debt securities of companies having one or
more of the characteristics listed above.
Investments in securities with such characteristics may involve
greater risks of loss than investments in securities of larger,
well-established companies with a history of consistent operating
patterns. However, the Adviser believes that such investments also may
offer greater than average potential for capital appreciation.
Although the Fund primarily invests in companies with the
characteristics described previously, the Adviser may invest in larger,
more highly-capitalized companies when circumstances warrant such
investments.
The Adviser believes that the comparative lack of attention by
investment analysts and institutional investors to small and mid-sized
companies may result in opportunities to purchase the securities of such
companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term
prospects. The Fund's policy of investing primarily in the securities of
smaller companies differs from the investment approach of many other
mutual funds, and investment in such securities involves special risks.
Among other things, the prices of securities of small and mid-sized
companies generally are more volatile than those of larger companies; the
securities of smaller companies generally are less liquid; and smaller
companies generally are more likely to be adversely affected by poor
economic or market conditions.
It is anticipated that some of the portfolio securities of the Fund
may not be widely traded, and that the Fund's position in such securities
may be substantial in relation to the market for such securities.
Accordingly, it may be difficult for the Fund to dispose of such
securities at prevailing market prices in order to meet redemptions.
However, as a non-fundamental policy, the Fund will not invest more than
10% of its net assets in illiquid securities.
The Fund may invest up to 20% of its total assets in securities of
companies involved in actual or anticipated reorganizations or
restructurings. Investments in such securities involve special risks,
including difficulty in obtaining information as to the financial
condition of such issuers and the fact that the market prices of such
securities are subject to sudden and erratic market movements and
above-average price volatility. Such securities require active monitoring.
The Fund invests primarily in equity securities and securities
convertible into equities, but also purchases debt securities including
government, corporate and money market securities. Up to 35% of the Fund's
net assets may be invested in debt securities not rated at least BBB by
S&P, or Baa by Moody's, and securities unrated by those entities,
9
<PAGE>
deemed by the Adviser to be of comparable quality.
When conditions warrant, for temporary defensive purposes, the Fund
also may invest without limit in short-term debt instruments, including
government, corporate and money market securities. Such short-term
investments will be in issuers whose long-term debt is rated in one of the
four highest rating categories by S&P or Moody's or, if unrated by S&P or
Moody's, deemed by the Adviser to be of comparable quality.
AMERICAN LEADING COMPANIES' investment objective is to provide
long-term capital appreciation and current income consistent with prudent
investment risk. The Fund seeks to provide fiduciaries, organizations,
institutions and individuals with a convenient and prudent medium of
investment, primarily in the common stocks of Leading Companies. The Fund
intends to maintain for its shareholders a portfolio of securities which
an experienced investor charged with fiduciary responsibility might select
under the Prudent Investor Rule, as described in the trust laws or court
decisions of many states, including New York. Under normal market
conditions, the Fund will invest at least 75% of its total assets in a
diversified portfolio of dividend-paying common stocks of Leading
Companies that have market capitalizations of at least $2 billion. LMCM
defines a "Leading Company" as a company that, in the opinion of LMCM, has
attained a major market share in one or more products or services within
its industry(ies), and possesses the financial strength and management
talent to maintain or increase market share and profit in the future. Such
companies are typically well known as leaders in their respective
industries; most are found in the top half of the S&P 500. Additionally,
LMCM's goal is to invest in companies having what LMCM believes is a
reasonable price/earnings ratio, and it will favor those companies with
well established histories of dividends and dividend growth rates. The
Fund may also invest in companies having capitalizations above or below $2
billion which LMCM believes show strong potential for future market
leadership, and in companies which LMCM believes, because of corporate
restructuring or other changes, are undervalued based on their potential
for future growth. There is always a risk that LMCM will not properly
assess the potential for an issuer's future growth, or that an issuer will
not realize that potential.
While the Fund may invest in foreign securities, the Fund under normal
market conditions intends to invest at least 65% of its total assets in
domestic Leading Companies. "Domestic" company, for this purpose, means a
company that has its principal corporate offices in the U.S. or that
derives at least 50% of its revenues from operations in the U.S.
The Fund's objective and policies require traditional investment
management techniques that involve, for example, the evaluation and
financial analysis of specific foreign and domestic issuers as well as
economic and political analysis. Under normal circumstances, the Fund
expects to own a minimum of 35 different securities. The Fund may also
invest in common stocks and securities convertible into common stocks
which do not pay current dividends but which offer prospects for capital
appreciation and future income. The Fund may invest in when-issued
securities, which may involve additional risks.
During periods when LMCM believes the return on certain debt
securities may equal or exceed the return on equity securities, the Fund
may invest up to 25% of its total assets in debt securities, including
government, corporate and money market securities, consistent with its
investment objective. The Fund may invest in debt securities of any
maturity of both foreign and domestic issuers. The debt securities in
which the Fund may invest will be rated at least A by S&P or Moody's, or
deemed by LMCM to be of comparable quality.
The Fund may invest up to 5% of its net assets in convertible
securities. Many convertible securities are rated below investment grade
or, if unrated, are considered comparable to securities rated below
investment grade. The Fund does not intend to invest in convertible
securities not rated at least Ba by Moody's or BB by S&P or, if unrated by
those entities, deemed by LMCM to be of comparable quality.
BALANCED TRUST'S investment objective is to seek long-term capital
appreciation and current income in order to achieve an attractive total
investment return consistent with reasonable risk.
10
<PAGE>
The Fund will invest in a combination of equity, debt and money market
securities in attempting to achieve its objective. Under normal
conditions, the Fund will invest no more than 75% of its assets in equity
securities. Bartlett will emphasize investments in dividend-paying equity
securities that, in the opinion of Bartlett, offer the potential for long-
term growth, and in common stocks or securities convertible into common
stock that do not pay current dividends but offer prospects for capital
appreciation and future income.
The Fund will invest at least 25% of its portfolio in fixed income
securities, including, without limitation, preferred stocks, bonds,
debentures, municipal obligations, and mortgage-related securities;
certificates of deposit; Treasury bills, notes, bonds and other
obligations of the U.S. Government, its agencies and instrumentalities;
commercial paper and other money market instruments rated not less than
A-1, P-1 or F-1 by Moody's, S&P or Fitch Investors Services ("Fitch"),
respectively; and repurchase agreements. No more than 5% of the Fund's
total assets may be invested in fixed income or convertible securities not
rated at least BBB or Baa at the time of purchase, or comparable unrated
securities. If an investment grade security purchased by the Fund
subsequently loses its investment grade rating, Bartlett will determine
whether to retain that security in the Fund's portfolio. The Fund may
invest in securities of any maturity, but, under normal circumstances,
expects to maintain its portfolio of fixed income securities so as to have
an average dollar-weighted maturity of between four and five years.
Balanced Trust is managed as a balanced fund and invests in equity and
debt securities. This approach attempts to "balance" the potential for
growth and greater volatility of stocks with the historically stable
income and more moderate average price fluctuations of fixed income
securities. The proportion of the Fund's assets invested in each type of
security will vary from time to time in accordance with Bartlett's
assessment of investment opportunities. It is currently anticipated that
the Fund will invest an average of 60% of its total assets in common and
preferred stocks and the remaining 40% in various fixed income securities.
These percentages may vary in attempting to increase returns or reduce
risk.
The Fund may also acquire securities on a when-issued and
delayed-delivery basis, and may purchase exchange-traded futures contracts
on stock indices and options thereon. The Fund may use derivatives, such
as options and futures, in its investment activities. No more than 15% of
the Fund's net assets may be invested in illiquid securities. The Fund may
also engage in reverse repurchase agreements.
At March 31, 1997, the annualized portfolio turnover rate for the
equity portion of the Fund's portfolio was 14.7% and the annualized
portfolio turnover rate for the fixed income portion was 5.4%. The Fund's
total annualized portfolio turnover rate at March 31, 1997 was 5.1%.
TYPES OF INVESTMENTS AND ASSOCIATED RISKS:
FOR EACH FUND:
When cash is temporarily available, or for temporary defensive
purposes, each Fund may invest without limit in repurchase agreements and
money market instruments, including high-quality short-term debt
securities. A repurchase agreement is an agreement under which either U.S.
government obligations or high-quality liquid debt securities are acquired
from a securities dealer or bank subject to resale at an agreed-upon price
and date. The securities are held for each Fund by a custodian bank as
collateral until resold and will be supplemented by additional collateral
if necessary to maintain a total value equal to or in excess of the value
of the repurchase agreement. Each Fund bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose
of the collateral securities, which may decline in value in the interim.
The Funds will enter into repurchase agreements only with financial
institutions determined by each Fund's adviser to present minimal risk of
default during the term of the agreement based on guidelines established
by the Funds' Boards of Directors. A Fund will not enter into repurchase
agreements of more than seven days' duration if more than 10% (for Value
Trust, Total Return Trust and Special Investment Trust) or 15% (for
American Leading Companies and Balanced Trust) of its net assets would be
invested in such agreements and other illiquid investments.
11
<PAGE>
The Funds may engage in securities lending. However, no Fund currently
intends to loan securities with a value exceeding 5% of its net assets.
For further information concerning securities lending, see the Statement
of Additional Information.
PREFERRED STOCK
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Shareholders may suffer a
loss of value if dividends are not paid. The market prices of preferred
stocks are subject to changes in interest rates and are more sensitive to
changes in the issuer's creditworthiness than are the prices of debt
securities.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established
in the convertible security's governing instrument.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, its adviser reviews and
monitors the creditworthiness of each issuer and issue. The adviser also
analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
U.S. GOVERNMENT SECURITIES
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA") ); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Bank
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Fannie Mae ("FNMA") securities); and (4) solely the
creditworthiness of the issuer (e.g., Federal Home Loan Mortgage
Corporation ("FHLMC") securities). Neither the U.S. Government nor any of
its agencies or instrumentalities guarantees the market value of the
securities they issue. Therefore, the market value of such securities can
be expected to fluctuate in response to changes in interest rates.
STRIPPED SECURITIES
Stripped securities are created by separating bonds into their
principal and interest components and selling each piece separately
(commonly referred to as IOs and POs). Stripped securities are more
volatile than other fixed income securities in
12
<PAGE>
their response to changes in market interest rates. The value of some
stripped securities moves in the same direction as interest rates, further
increasing their volatility.
ZERO COUPON BONDS
Zero coupon bonds do not provide for cash interest payments but
instead are issued at a significant discount from face value. Each year, a
holder of such bonds must accrue a portion of the discount as income.
Because each Fund is required to pay out substantially all of its income
each year, including income accrued on zero coupon bonds, a Fund may have
to sell other holdings to raise cash necessary to make the payout. Because
issuers of zero coupon bonds do not make periodic interest payments, their
prices can be very volatile when market interest rates change.
CLOSED-END INVESTMENT COMPANIES
Each Fund may invest in the securities of closed-end investment
companies. Such investments may involve the payment of substantial
premiums above the net asset value of such issuers' portfolio securities,
and the total return on such investments will be reduced by the operating
expenses and fees of such investment companies, including advisory fees. A
Fund will invest in such funds, when, in the adviser's judgment, the
potential benefits of such investment justify the payment of any
applicable premium or sales charge.
FOREIGN SECURITIES
Each Fund may invest in foreign securities. Investment in foreign
securities presents certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. These risks are intensified when investing in countries
with developing economies and securities markets, also known as "emerging
markets." Moreover, securities of many foreign issuers may be less liquid
and their prices more volatile than those of comparable domestic issuers.
In addition, with respect to certain foreign countries, there is the
possibility of expropriation, confiscatory taxation, withholding taxes and
limitations on the use or removal of funds or other assets.
The Funds may also invest in ADRs, which are securities issued by
banks evidencing their ownership of specific foreign securities. ADRs may
be sponsored or unsponsored; issuers of securities underlying unsponsored
ADRs are not contractually obligated to disclose material information in
the U.S. Accordingly, there may be less information available about such
issuers than there is with respect to domestic companies and issuers of
securities underlying sponsored ADRs. Although ADRs are denominated in
U.S. dollars, the underlying security often is not; thus, the value of the
ADR may be subject to exchange controls and variations in the exchange
rate. The Funds may also invest in GDRs, which are receipts, often
denominated in U.S. dollars, issued by either a U.S. or non-U.S. bank
evidencing its ownership of the underlying foreign securities.
Although not a fundamental policy subject to shareholder vote, the
advisers currently anticipate that Value Trust, Total Return Trust,
Special Investment Trust and American Leading Companies will each invest
no more than 25% of its total assets in foreign securities. Bartlett
currently anticipates that Balanced Trust will not invest more than 10% of
its total assets in foreign securities, either directly or through ADRs or
GDRs.
ILLIQUID SECURITIES
Value Trust, Total Return Trust, and Special Investment Trust may each
invest up to 10% of its net assets in illiquid securities. American
Leading Companies and Balanced Trust may each invest up to 15% of its net
assets in illiquid securities. Illiquid securities are securities that
cannot be expected to be sold within seven days at approximately the price
at which they are valued. Due to the absence of an active trading market,
a Fund may have difficulty valuing or disposing of illiquid securities
promptly. Securities whose sale is legally restricted are often considered
illiquid. Foreign securities that are freely tradable in their country of
origin or in their principal market are not considered restricted
securities even if they are not registered for sale in the U.S.
13
<PAGE>
WHEN-ISSUED SECURITIES
Each Fund may enter into commitments to purchase securities on a
when-issued basis. Such securities are often the most efficiently priced
and have the best liquidity in the bond market. When a Fund purchases
securities on a when-issued basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at
the time of receipt. However, a Fund does not have to pay for the
obligations until they are delivered to it. This is normally 7 to 15 days
later, but could be considerably longer in the case of some
mortgage-backed securities. Use of this practice would have a leveraging
effect on a Fund. To meet its payment obligation, a Fund will establish a
segregated account with its custodian and maintain cash or appropriate
liquid obligations in an amount at least equal to the payment that will be
due. A Fund may sell the securities subject to a when-issued purchase,
which may result in a gain or loss.
FUTURES AND OPTIONS TRANSACTIONS
VALUE TRUST, TOTAL RETURN TRUST, SPECIAL INVESTMENT TRUST AND BALANCED TRUST:
Each of Value Trust, Total Return Trust, Special Investment Trust and
Balanced Trust can invest in futures and options transactions, including
puts and calls. Because such investments "derive" their value from the
value of the underlying security, index, or interest rate on which they
are based, they are sometimes referred to as "derivative" securities. Such
investments involve risks that are different from those presented by
investing directly in the securities themselves. While utilization of
options, futures contracts and similar instruments may be advantageous to
a Fund, if its adviser is not successful in employing such instruments in
managing the Fund's investments, the Fund's performance will be worse than
if the Fund did not make such investments.
The Funds may engage in futures strategies to attempt to reduce the
overall investment risk that would normally be expected to be associated
with ownership of the securities in which each invests. For example, a
Fund may sell a stock index futures contract in anticipation of a general
market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a Fund's portfolio
correlates with a given stock index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. A Fund
may sell an interest rate futures contract to offset price changes of debt
securities it already owns. This strategy is intended to minimize any
price changes in the debt securities a Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the
futures contract would be expected to move in the opposite direction from
the value of the securities owned by the Fund.
Each Fund may purchase call options on interest rate futures contracts
to hedge against a market advance in debt securities that the Fund plans
to acquire at a future date. The purchase of such options is analogous to
the purchase of call options on an individual debt security that can be
used as a temporary substitute for a position in the security itself. The
Funds may purchase put options on stock index futures contracts. This is
analogous to the purchase of protective put options on individual stocks
where a level of protection is sought below which no additional economic
loss would be incurred by the Funds. The Funds may purchase and write
options in combination with each other to adjust the risk and return of
the overall position. For example, the Funds may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract.
The Funds may purchase put options to hedge sales of securities, in a
manner similar to selling futures contracts. If stock prices fall, the
value of the put option would be expected to rise and offset all or a
portion of the Fund's resulting losses in its stock holdings. However,
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option (in the form of premium and
transaction costs), a Fund would expect to suffer a loss in the put option
if prices do not decline sufficiently to offset the deterioration in the
value of the option premium.
The Funds may write put options as an alternative to purchasing actual
securities. If stock prices rise, a Fund would expect to profit from a
written put option, although its gain would be
14
<PAGE>
limited to the amount of the premium it received. If stock prices remain
the same over time, it is likely that the Fund will also profit, because
it should be able to close out the option at a lower price. If stock
prices fall, the Fund would expect to suffer a loss.
By purchasing a call option, a Fund would attempt to participate in
potential price increases of the underlying stock, with results similar to
those obtainable from purchasing a futures contract, but with risk limited
to the cost of the option if stock prices fell. At the same time, a Fund
can expect to suffer a loss if stock prices do not rise sufficiently to
offset the cost of the option.
The characteristics of writing call options are similar to those of
writing put options, as described above, except that writing covered call
options generally is a profitable strategy if prices remain the same or
fall. Through receipt of the option premium, a Fund would seek to mitigate
the effects of a price decline. At the same time, when writing call
options the Fund would give up some ability to participate in security
price increases.
The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities, and
also require different skills from the advisers in managing the Funds'
portfolios. While utilization of options, futures contracts and similar
instruments may be advantageous to the Funds, if the adviser is not
successful in employing such instruments in managing a Fund's investments
or in predicting interest rate changes, the Fund's performance will be
worse than if the Fund did not make such investments. It is possible that
there will be imperfect correlation, or even no correlation, between price
movements of the investments being hedged and the options or futures used.
It is also possible that a Fund may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to
do so, or that a Fund may need to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or
to segregate securities in connection with hedging transactions and that a
Fund may be unable to close out or liquidate its hedged position. In
addition, the Funds will pay commissions and other costs in connection
with such investments, which may increase each Fund's expenses and reduce
its yield. A more complete discussion of the possible risks involved in
transactions in options and futures contracts is contained in the
Statement of Additional Information. Each Fund's current policy is to
limit options and futures transactions to those described above. The Funds
may purchase and write both over-the-counter and exchange-traded options.
A Fund will not enter into any futures contracts or related options if
the sum of the initial margin deposits on futures contracts and related
options and premiums paid for related options the Fund has purchased would
exceed 5% of the Fund's total assets. A Fund will not purchase futures
contracts or related options if, as a result, more than 20% of the Fund's
total assets would be so invested.
AMERICAN LEADING COMPANIES:
Although American Leading Companies may not invest in futures
transactions, it may to a limited extent sell covered call options on any
security in which it is permitted to invest for the purpose of enhancing
income. American Leading Companies may not invest in any other form of
option transaction.
A call option is "covered" if, at all times the option is outstanding,
the Fund holds the underlying security or a right to obtain that security
at no additional cost. The risks of selling covered call options are
described above.
As a non-fundamental policy, the Fund will not sell a covered call
option if, as a result, the value of the portfolio securities underlying
all outstanding covered call options would exceed 25% of the value of the
equity securities held by the Fund.
FOR EACH FUND:
The Funds may also enter into forward foreign currency contracts. A
forward foreign currency contract is an obligation to purchase or sell a
specific amount of a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
foreign currency contract, a Fund "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration
of the contract. A Fund may enter into these contracts for the purpose of
hedging against risk arising from its investment in securities denominated
in foreign currencies or when it
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anticipates investing in such securities. Forward currency contracts
involve certain costs and risks, including the risk that currency
movements will not be accurately predicted, causing a Fund to sustain
losses on these contracts.
THE FOLLOWING DISCUSSION OF INVESTMENTS AND RISKS APPLIES ONLY TO BALANCED
TRUST:
MUNICIPAL OBLIGATIONS
Municipal obligations include obligations issued to obtain funds for
various public purposes, including constructing a wide range of public
facilities, such as bridges, highways, housing, hospitals, mass
transportation, schools and streets. Other public purposes for which
municipal obligations may be issued include the refunding of outstanding
obligations, the obtaining of funds for general operating expenses and the
making of loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") and private
activity bonds ("PABs") are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain
pollution control facilities, convention or trade show facilities, and
airport, mass transit, port or parking facilities.
Municipal obligations also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term debt obligations. Such notes may be issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of
bond placements or other revenues.
Municipal obligations also include municipal lease obligations. These
obligations, which are issued by state and local governments to acquire
land, equipment and facilities, typically are not fully backed by the
municipality's credit, and, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to the
Fund. "Certificates of Participation" are participations in municipal
lease obligations or installment sales contracts. Each certificate
represents a proportionate interest in or right to the lease purchase
payments made.
The two principal classifications of municipal obligations are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power.
"Revenue" bonds are payable only from the revenues derived from a
particular facility or class of facilities or from the proceeds of a
special excise tax or other specific revenue source such as the corporate
user of the facility being financed. IDBs and PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer.
The credit quality of IDBs and PABs is usually directly related to the
credit standing of the corporate user of the facilities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
Mortgage-related securities may be issued by governmental or government-
related entities or by non-governmental entities such as banks, savings
and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers.
Interests in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. The volume of prepayments of
principal on a pool of mortgages underlying a particular mortgage-
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related security will influence the yield of that security. Increased
prepayment of principal may limit the Fund's ability to realize the
appreciation in the value of such securities that would otherwise
accompany declining interest rates. An increase in mortgage prepayments
could cause the Fund to incur a loss on a mortgage-related security that
was purchased at a premium. On the other hand, a decrease in the rate of
prepayments, resulting from an increase in market interest rates, among
other causes, may extend the effective maturities of mortgage-related
securities, increasing their sensitivity to changes in market interest
rates. In determining the average maturity of the fixed income portion of
the Fund, Bartlett must apply certain assumptions and projections about
the maturity and prepayment of mortgage-related securities; actual
prepayment rates may differ.
GOVERNMENT MORTGAGE-RELATED SECURITIES
GNMA pass-through securities are considered to have a very low risk of
default in that (i) the underlying mortgage loan portfolio is comprised
entirely of government-backed loans and (ii) the timely payment of both
principal and interest on the securities is guaranteed by the full faith
and credit of the U.S. Government -- regardless of whether they have been
collected. GNMA pass-through securities are, however, subject to the same
market risk as comparable debt securities. Therefore, the effective
maturity and market value of the Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
FHLMC, a corporate instrumentality of the U.S. Government, issues
mortgage participation certificates ("PCs") which represent interests in
mortgages from FHLMC's national portfolio. The mortgage loans in FHLMC's
portfolio are not government-backed; rather, the loans are either
uninsured with loan-to-value ratios of 80% or less, or privately insured
if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S. Government,
guarantees the timely payment of interest and ultimate collection of
principal on FHLMC PCs.
FNMA is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of approved
seller/servicers, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
certificates issued by FNMA ("FNMA certificates") are guaranteed as to
timely payment of principal and interest by FNMA, not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, or GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Each
class of obligations is scheduled to receive periodic interest payments
according to the coupon rate on the obligations. However, all monthly
principal payments and any prepayments from the collateral pool are paid
first to the "Class 1" bondholders. The principal payments are such that
the Class 1 obligations are scheduled to be completely repaid no later
than, for example, five years after the offering date. Thereafter, all
payments of principal are allocated to the next most senior class of bonds
until that class of bonds has been fully repaid. Although full payoff of
each class of bonds is contractually required by a certain date, any or
all classes of obligations may be paid off sooner than expected because of
an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities, resulting in higher
risks.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
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THE FOLLOWING DISCUSSION OF RISKS APPLIES TO EACH FUND AS NOTED:
RISKS OF DEBT SECURITIES
The prices of debt securities fluctuate in response to perceptions of
the issuer's creditworthiness and also tend to vary inversely with market
interest rates. The value of such securities is likely to decline in times
of rising interest rates. Conversely, when rates fall, the value of these
investments is likely to rise. The longer the time to maturity the greater
are such variations.
RISKS OF LOWER-RATED DEBT SECURITIES
Generally, debt securities rated below BBB by S&P, or below Baa by
Moody's, and unrated securities of comparable quality, offer a higher
current yield than that provided by higher grade issues, but also involve
higher risks. Debt securities rated C by Moody's and S&P are bonds on
which no interest is being paid and which can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
However, debt securities, regardless of their ratings, generally have a
higher priority in the issuer's capital structure than do equity
securities.
Lower-rated debt securities are especially affected by adverse changes
in the industries in which the issuers are engaged and by changes in the
financial condition of the issuers. Highly leveraged issuers may also
experience financial stress during periods of rising interest rates.
Lower-rated debt securities are also sometimes referred to as "junk
bonds."
The market for lower-rated debt securities has expanded rapidly in
recent years. This growth has paralleled a long economic expansion. At
certain times in the past, the prices of many lower-rated debt securities
declined, indicating concerns that issuers of such securities might
experience financial difficulties. At those times, the yields on
lower-rated debt securities rose dramatically, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur.
The market for lower-rated debt securities is generally thinner and
less active than that for higher quality debt securities, which may limit
a Fund's ability to sell such securities at fair value. Judgment plays a
greater role in pricing such securities than is the case for securities
having more active markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of lower-rated debt securities, especially in a thinly
traded market.
The ratings of Moody's and S&P represent the opinions of those
agencies as to the quality of the debt securities which they rate. Such
ratings are relative and subjective, and are not absolute standards of
quality. Unrated debt securities are not necessarily of lower quality than
rated securities, but they may not be attractive to as many buyers. If
securities are rated investment grade by one rating organization and below
investment grade by the other, the adviser may rely on the rating that it
believes is more accurate. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed
by the adviser to determine, to the extent possible, that the planned
investment is sound.
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, can be changed only by a vote of the
holders of a majority of the outstanding voting 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." Fund policies, unless described as fundamental, can be changed
by action of its respective Board of Directors.
The fundamental restrictions applicable to each Fund include a
prohibition on investing 25% or more of its total assets in the securities
of issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U.S.
Government, its
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agencies or instrumentalities and repurchase agreements with respect
thereto).
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg Mason, with an affiliate that has an agreement with Legg
Mason, or with an unaffiliated entity having an agreement with Legg Mason
("Financial Advisor or Service Provider"). Your Financial Advisor or
Service Provider will be pleased to explain the shareholder services
available from the Funds and answer any questions you may have. Documents
available from your Financial Advisor or Service Provider should be
completed if you invest in shares of the Funds through a Retirement Plan.
Investors who are considering establishing a Retirement Plan may wish
to consult their attorneys or tax advisers with respect to individual tax
questions. Your Financial Advisor or Service Provider 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 a Financial Advisor or Service Provider.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds and investments in a Retirement Plan, is $1,000, and the minimum
investment for each purchase of additional shares is $100, except as noted
below. The minimum amount for subsequent investments in a Retirement Plan
will be waived if an investment will bring the investment for the year to
the maximum amount permitted under the Internal Revenue Code of 1986, as
amended ("Code"). For those investing through the Funds' Future First
Systematic Investment Plan, payroll deduction plans and plans involving
automatic payment of funds from financial institutions or automatic
investment of dividends from certain unit investment trusts, minimum
initial and subsequent investments are lower. Each Fund may change these
minimum amount requirements at its discretion.
You should always furnish your shareholder account number when making
additional purchases of shares.
There are three ways you can invest in Primary Shares of the Funds:
1. THROUGH A FINANCIAL ADVISOR OR SERVICE PROVIDER
Shares may be purchased through a Financial Advisor or Service
Provider. A Financial Advisor or Service Provider 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 an account, you can order shares from your Financial Advisor
or Service Provider in person, by telephone or by mail.
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Funds of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to transfer funds each month from
your checking account. Please contact a Financial Advisor or Service
Provider 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 a Financial Advisor
or Service Provider.
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Primary Share purchases will be processed at the net asset value next
determined after your Financial Advisor or Service Provider has received
your order; payment must be made within three business days to Legg Mason.
Orders received by your Financial Advisor or Service Provider before the
close of regular trading on the New York Stock Exchange ("Exchange")
(normally 4:00 p.m. Eastern time) ("close of the Exchange") on any day the
Exchange is open will be executed at the net asset value determined as of
the close of the Exchange on that day. Orders received by your Financial
Advisor or Service Provider after the close of the Exchange or on days the
Exchange is closed will be executed at the net asset value determined as
of the close of the Exchange on the next day the Exchange is open. See
"How Net Asset Value is Determined," page 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.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
established automatically for you. Any shares that you purchase or receive
as a dividend or other distribution will be credited directly to your
account at the time of purchase or receipt. Shares may not be held in, or
transferred to, an account with any brokerage firm that does not have an
agreement with Legg Mason. The Funds no longer issue share certificates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
There are two ways you can redeem your Primary Shares. First, you may
give your Financial Advisor or Service Provider an order for redemption of
your shares in person or by telephone. Please have the following
information ready when you call: the name of the Fund, the number of
shares (or dollar amount) to be redeemed and your shareholder account
number. Second, you may send a written request for redemption to: [insert
complete Fund name], c/o Legg Mason Funds Processing, P.O. Box 1476,
Baltimore, Maryland 21203-1476.
Requests for redemption received by your Financial Advisor or Service
Provider before the close of the Exchange on any day when the Exchange is
open, will be transmitted to BFDS, transfer agent for the Funds, for
redemption at the net asset value per share determined as of the close of
the Exchange on that day. Requests for redemption received by your
Financial Advisor or Service Provider 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
Financial Advisor or Service Provider may be treated as a request for
repurchase and, if it is accepted, 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 brokerage account
two business days after trade date. The proceeds of your redemption or
repurchase may be more or less than your original cost. If the shares to
be redeemed or repurchased were paid for by check (including certified or
cashier's checks), within 10 business days of the redemption or repurchase
request, the proceeds will not be disbursed unless the Fund can be
reasonably assured that the check has been collected.
Written requests for redemption must be in "good order." A redemption
request will be considered to be received in "good order" only if:
1. You have indicated in writing the number of Primary Shares (or
dollar amount) to be redeemed, the complete Fund name and your shareholder
account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock
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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 Financial
Advisor or Service Provider.
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 Financial Advisor or Service Provider for
further instructions.
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days to
make an additional investment to avoid having your account closed.
To redeem your Legg Mason Fund retirement account, a Distribution
Request Form must be completed and returned to Legg Mason Client Services
for processing. This form can be obtained from your Financial Advisor or
Service Provider or Legg Mason Client Services in Baltimore, Maryland.
Upon receipt of your form, your shares will be redeemed at the net asset
value per share determined as of the next close of the Exchange.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of
its adviser, the Fund could be adversely affected by immediate payment.
(The Statement of Additional Information describes several other
circumstances in which the date of payment may be postponed or the right
of redemption suspended.)
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Primary Share of each Fund is determined daily as
of the close of the Exchange, on every day that the Exchange is open, by
subtracting the liabilities attributable to Primary Shares from the total
assets attributable to such shares and dividing the result by the number
of Primary Shares outstanding. Securities owned by each Fund for which
market quotations are readily available are valued at current market
value. In the absence of readily available market quotations, securities
are valued at fair value as determined by each Fund's Board of Directors.
Where a security is traded on more than one market, which may include
foreign markets, the securities are generally valued on the market
considered by each Fund's adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Primary Shares out of its
investment company taxable income (which generally consists of net
investment income, any net short-term capital gain and any net gains from
certain foreign currency transactions) attributable to those shares. Value
Trust, Total Return Trust and Balanced Trust declare and pay dividends
from net investment income quarterly; they pay dividends from any net
short-term capital gains and net gains from foreign currency transactions
annually. Special Investment Trust and American Leading Companies declare
and pay dividends from investment company taxable income following the end
of each taxable year. Each Fund also distributes substantially all of its
net capital gain (the excess of net long-term capital gain over net
short-term capital loss) after the end of the taxable year in which the
gain is realized. A second distribution of net capital gain may be
necessary in some years to avoid imposition of the
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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 a 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.
If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to
having all dividends and other distributions reinvested in additional
shares. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Legg Mason
fund. Please contact your Financial Advisor or Service Provider for
additional information about this option.
If no election is made, both dividends and other distributions are
credited to your Fund account in Primary Shares of the distributing Fund
at the net asset value of the shares determined as of the close of the
Exchange on the reinvestment date. Shares received pursuant to any of the
first three (reinvestment) elections above also are credited to your
account at that net asset value. Shareholders electing to receive
dividends and/or other distributions in cash will be sent a check or will
have their Legg Mason account credited after the payment date. You may
elect at any time to change your option by notifying the applicable Fund
in writing at: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476. Your election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of federal
income tax on that part of its investment company taxable income and net
capital gain that is distributed to its shareholders.
Dividends from each Fund's investment company taxable income (whether
paid in cash or reinvested in Primary Shares) are taxable to its
shareholders (other than Retirement Plans and other tax-exempt investors)
as ordinary income to the extent of the Fund's earnings and profits.
Distributions of each Fund's net capital gain (whether paid in cash or
reinvested in Primary Shares), when designated as such, are taxable to
those shareholders as long-term capital gain, regardless of how long they
have held their Fund shares.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and other distributions paid (or deemed paid) during that year. Each Fund
is required to withhold 31% of all dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
A redemption of Primary Shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Primary Shares for shares of any other Legg Mason
fund generally will have similar tax consequences. See "Shareholder
Services -- Exchange Privilege." If Fund shares are purchased within 30
days before or after redeeming at a loss other shares of the same Fund
(regardless of class), all or part of
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that loss will not be deductible and instead will increase the basis of
the newly purchased shares.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to federal income tax, you may also be subject to state, local or foreign
taxes on distributions from the Funds, depending on the laws of your home
state and locality. A portion of the dividends paid by the Funds
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each Fund's annual notice to
shareholders regarding the amount of dividends identifies this portion.
Prospective shareholders are urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital gain
distributions and shares purchased through the Future First Systematic
Investment Plan or through automatic investments).
An account statement will be sent to you monthly unless there has been
no activity in the account or you are purchasing shares only through the
Future First Systematic Investment Plan or through automatic investments,
in which case an account statement will be sent quarterly. Reports will be
sent to each Fund's shareholders at least semiannually showing its
portfolio and other information; the annual report for each Fund will
contain financial statements audited by its respective independent
accountants/auditors.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan with respect to that Fund. Please contact your Financial
Advisor or Service Provider for further information.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge are made at the per share net asset value determined
on the same business day as redemption of the Fund shares you wish to
exchange. Investments by exchange into the Legg Mason funds sold with an
initial sales charge are made at the per share net asset value, plus the
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds from the redemption of Fund shares to be exchanged
that were originally purchased by exchange from a fund on which the same
or higher initial sales charge previously was paid. There is no charge for
the exchange privilege, but each Fund reserves the right to terminate or
limit the exchange privilege of any shareholder who makes more than four
exchanges from that Fund in one calendar year. To obtain further
information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your Financial
Advisor or Service Provider. To effect an exchange by telephone, please
call your Financial Advisor or Service Provider with the information
described in "How You Can Redeem Your Primary Shares," page 20. The other
factors relating to telephone
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redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders.
THE FUNDS' MANAGEMENT AND INVESTMENT ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of its Board of Directors.
ADVISER
Pursuant to separate advisory agreements with Value Trust, Total
Return Trust and Special Investment Trust (each an "Advisory Agreement"),
which were approved by each respective Fund's Board of Directors, the
Adviser, a wholly owned subsidiary of Legg Mason, Inc. (a financial
services holding company), serves as investment adviser to each of those
Funds. The Adviser administers and acts as the portfolio manager for each
Fund and has responsibility for the actual investment management of the
Funds, including the responsibility for making decisions and placing
orders to buy, sell or hold a particular security. The Adviser acts as
adviser, manager or consultant to eighteen investment company portfolios
which had aggregate assets under management of approximately $8.0 billion
as of June 30, 1997. The Adviser's address is 111 South Calvert Street,
Baltimore, Maryland 21202.
The Adviser receives for its services a management fee from each Fund,
calculated daily and payable monthly. The Adviser receives a fee at an
annual rate of 1.0% of Value Trust's average daily net assets for the
first $100 million of average net assets; 0.75% of average daily net
assets between $100 million and $1 billion; and 0.65% of average daily net
assets exceeding $1 billion. The Adviser receives from Total Return Trust
a management fee at an annual rate of 0.75% of the average daily net
assets of the Fund. The Adviser receives from Special Investment Trust a
management fee at an annual rate of 1.0% of the average daily net assets
of the Fund for the first $100 million of average net assets; 0.75% of
average daily net assets between $100 million and $1 billion; and 0.65% of
average daily net assets exceeding $1 billion. For Total Return Trust, the
Adviser has agreed to waive indefinitely its fees in any month to the
extent Total Return Trust's expenses related 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.
This agreement is voluntary and may be terminated by the Adviser at any
time. During the fiscal year ended March 31, 1997, Value Trust paid a
management fee of 0.72% of its average daily net assets, Total Return
Trust paid a management fee of 0.75% of its average daily net assets, and
Special Investment Trust paid a management fee of 0.78% of its average
daily net assets.
MANAGER
Pursuant to separate management agreements with American Leading
Companies and Balanced Trust (each a "Management Agreement"), which were
approved by Investors Trust's Board of Directors, Legg Mason Fund Adviser,
Inc. ("Manager") serves as the Funds' manager. The Funds pay the Manager,
pursuant to the respective Management Agreements, a management fee equal
to an annual rate of 0.75% of each Fund's respective average daily net
assets. Each Fund pays all its other expenses which are not assumed by the
Manager. The Manager has agreed to waive its fees for each Fund for
expenses related to Primary Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) as follows: for American Leading
Companies, 1.95% of average net assets attributable to Primary Shares
indefinitely; and for Balanced Trust, 1.85% of average net assets
attributable to Primary Shares until July 31, 1998. These agreements are
voluntary and may be terminated by the Manager at any time.
LMCM
LMCM, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to American Leading Companies pursuant to the terms of
an Investment Advisory Agreement with the Manager, which was approved by
Investors Trust's Board of Directors. LMCM manages the investment and
other affairs of the Fund and directs the
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investments of the Fund in accordance with its investment objectives,
policies and limitations. For these services, the Manager (not the Fund)
pays LMCM a fee, computed daily and payable monthly, at an annual rate
equal to 60% of the fee received by the Manager, or 0.45% of the Fund's
average daily net assets.
LMCM manages private accounts with a value as of June 30, 1997 of
approximately $1.1 billion. The address of LMCM is 111 South Calvert
Street, Baltimore, MD 21202.
BARTLETT
Bartlett, a wholly owned subsidiary of Legg Mason, Inc., serves as
investment adviser to Balanced Trust pursuant to the terms of an
Investment Advisory Agreement with the Manager, which was approved by
Investors Trust's Board of Directors. Bartlett manages the investment and
other affairs of the Fund and directs the investments of the Fund in
accordance with its investment objectives, policies and limitations. For
these services, the Manager (not the Fund) pays Bartlett a fee, computed
daily and paid monthly, at an annual rate equal to 66 2/3% of the fee
received by the Manager, or 0.50% of the Fund's average daily net assets.
Bartlett acts as adviser to individuals, corporations, pension and profit
sharing plans and trust accounts, as well as to three investment company
portfolios. Bartlett's aggregate assets under management totalled
approximately $2.6 billion as of June 30, 1997. The address of Bartlett is
36 East Fourth Street, Cincinnati, Ohio 45202.
PORTFOLIO MANAGEMENT
William H. Miller, III, President of the Adviser, co-managed Value
Trust from its inception in 1982 to November 1990, when he assumed primary
responsibility for its day-to-day management. Nancy T. Dennin, a Senior
Vice President of the Adviser, has primary responsibility for the
day-to-day management of Total Return Trust. Prior to April 1, 1997, Mrs.
Dennin and Mr. Miller were co-managers of Total Return Trust. Mr. Miller
has also been primarily responsible for the day-to-day management of
Special Investment Trust since its inception in 1985.
Effective September 8, 1997, a portfolio management team headed by Mr.
Miller became responsible for the day-to-day management of American
Leading Companies. Jay R. Leopold serves as assistant portfolio manager
for the Fund. Mr. Leopold served as the Fund's principal research analyst
from January 1995 to September 1997. From June 1986 to January 1995 he was
a securities analyst in the Research Department of Legg Mason.
Dale H. Rabiner, CFA and Woodrow H. Uible, CFA jointly manage Balanced
Trust. Both are senior portfolio managers of Bartlett. Mr. Rabiner has
been employed by Bartlett since 1983 and has served since then as Director
of its Fixed Income Group. Mr. Uible has been employed by Bartlett since
1980. He chairs Bartlett's Equity Investment Group, and is responsible for
Bartlett's equity investment processes. Mr. Rabiner and Mr. Uible are
members of Bartlett's Management Committee and Investment Policy
Committee.
BROKERAGE
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, a wholly owned subsidiary of Legg Mason, Inc., is the
distributor of each Fund's shares pursuant to a separate Underwriting
Agreement with each Fund. Each Underwriting Agreement obligates Legg Mason
to pay certain expenses in connection with the offering of shares,
including any compensation to its financial advisors, the printing and
distribution of prospectuses, statements of additional information and
periodic reports used in connection with the offering to prospective
investors, after the prospectuses, statements of additional information
and reports have been prepared, set in type and mailed to existing
shareholders at the Fund's expense, and for any supplementary sales
literature and advertising costs.
Legg Mason has an agreement with the Funds' transfer agent to assist
it with some of its duties. For this assistance, Legg Mason was paid the
following amounts by the transfer agent for the year ended March 31, 1997:
Value Trust, $262,000; Total Return Trust, $53,000; Special
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Investment Trust, $195,000; American Leading Companies, $22,000 and
Balanced Trust, $2,000.
The Board of Directors of each Fund has adopted a Distribution and
Shareholder Services Plan ("Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"). The Plan provides that as
compensation for its ongoing services to investors in Primary Shares and
its activities and expenses related to the sale and distribution of
Primary Shares, Legg Mason receives from each Fund an annual distribution
fee payable from the assets attributable to Primary Shares, of up to:
0.75% of the average daily net assets attributable to Primary Shares of
the Total Return Trust, Special Investment Trust and American Leading
Companies, 0.70% of the average daily net assets attributable to Primary
Shares of Value Trust and 0.50% of the average daily net assets
attributable to Primary Shares of Balanced Trust; and an annual service
fee equal to 0.25% of the average daily net assets attributable to Primary
Shares of each of the Funds. The distribution fee and service fee are
calculated daily and paid monthly. The fees received by Legg Mason during
any year may be more or less than its cost of providing distribution and
shareholder services for Primary Shares. Legg Mason has agreed to waive
indefinitely distribution fees in any month to the extent the Total Return
Trust's and American Leading Companies' expenses related to Primary Shares
(exclusive of taxes, interest, brokerage costs and extraordinary expenses)
exceed an annual rate of 1.95% each of Total Return Trust's and American
Leading Companies average daily net assets attributable to Primary Shares.
Legg Mason has also agreed to waive until July 31, 1998 distribution fees
in any month to the extent the Balanced Trust's expenses related to
Primary Shares (exclusive of taxes, interest, brokerage costs and
extraordinary expenses) exceed an annual rate of 1.85% of Balanced Trust's
average daily net assets attributable to Primary Shares.
NASD rules limit the amount of annual distribution and service fees
that may be paid by mutual funds and impose a ceiling on the cumulative
distribution fees received. Each Fund's Plan complies with those rules.
Legg Mason may enter into agreements with unaffiliated dealers to sell
Primary Shares of each Fund. Legg Mason pays such dealers up to 90% of the
distribution and shareholder service fees that it receives from a Fund
with respect to shares sold by the dealers.
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, Special Investment Trust and
Investors Trust were established as Maryland corporations on January 20,
1982, May 22, 1985, October 31, 1985 and May 5, 1993, respectively. Value
Trust has authorized capital of 300 million shares of common stock, par
value $0.001 per share. Total Return Trust has authorized capital of 100
million shares of common stock, par value $0.001 per share. Special
Investment Trust has authorized capital of 150 million shares of common
stock, par value $0.001 per share. The Articles of Incorporation of
Investors Trust authorize issuance of one billion shares of par value
$.001 per share of American Leading Companies and 250 million shares of
par value $.001 per share of Balanced Trust. Each corporation may issue
additional series of shares. Each Fund currently offers two Classes of
Shares -- Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two Classes represent interests in the same pool
of assets. A separate vote is taken by a Class of Shares of a Fund if a
matter affects just that Class of Shares. Each Class of Shares may bear
certain differing Class-specific expenses and sales charges, which may
affect performance.
Investors may obtain more information concerning the Navigator Class
from their financial advisor or any person making available to them shares
of the Primary Class, or by calling 1-800-822-5544.
The 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
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shares of the Funds are fully paid and nonassessable and have no
preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). Each Fund will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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